The Texas Business Code allows groups of professionals to operate their professional practices as a limited liability partnership (LLP) or a professional limited liability company (PLLC). An LLP is a general partnership that registers with the state and pays an annual fee. The advantage of this structure is that individual partners are not held liable for the malpractice of other partners in most instances. Traditionally, Texas professionals operated under this entity structure exclusively because they were prohibited by law from operating as an LLC. When the state enacted laws to allow the formation of PLLCs, this newer entity format became an alternate choice for Texas professionals. Even though the Texas PLLC offers significant benefits that may trump the use of the LLP for many professional groups, the LLP still offers advantages that may be highly relevant in certain circumstances.
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The PLLC is a Texas business entity option that has only been available to state professionals in the last decade. Prior to that time, the LLP was the only business entity option for Texas professionals who wanted to limit their liability. As a result, many of the oldest, largest and most prestigious professional practices in the state are organized as LLPs. Clients may have a perception that the most reliable and well-established professional practices are LLPs, while newer, lesser-known practices are PLLCs. While this distinction might not matter for most, if a firm wants to portray a certain image that is in line with the stalwarts of the profession in the state, adopting the same business format may be advantageous.
Not every state in the United States recognizes the PLLC. A professional firm that can operate in Texas may be precluded from operating as a PLLC in states that do not have a PLLC statute or that have a more restrictive list of professionals that can form such an entity. This may not matter for a practice that operates only within the state of Texas, but many professional firms aspire to expand nationally. The LLP is recognized in all 50 states.
An LLP may not have to pay any state taxes on its business income, unlike a PLLC. Texas does not assess state personal income tax on individuals. In most states, both an LLP and a PLLC would be treated as pass-through entities for state tax purposes, so income earned by these business entities would be passed through to the owners and taxed at the individual state income tax rate. Texas, however, taxes PLLCs in the same way as it taxes corporations, which means the PLLC effectively loses the pass-through tax benefits at the state level. Conversely, an LLP, which is a general partnership, still passes its income through to the partners, who do not have to pay state taxes on income.
Texas Margin Tax
LLPs may not have to pay the Texas Margin Tax. In 2006, Texas replaced its franchise tax that was assessed on corporations and LLCs with a Texas Margin Tax that is assessed on a broader category of business types. Previously, a LLP did not have to pay the franchise tax because it is a general partnership, while a PLLC did have to pay the tax just as a corporation would. As of 2012, the Texas Margin Tax is being challenged in the state supreme court, and there's significant dispute as to whether the tax was meant to apply to an LLP when it clearly does not apply to a general partnership. If the new tax is repealed or determined to not apply to LLPs, this entity form would continue to enjoy a significant state tax benefit over the PLLC.
References & Resources
- State of Texas: Texas Business Code: Title 7 - Professional Entities, Chapter 301. Provisions Relating To Professional Entities
- State of Texas: Texas Business Code: Chapter 304 - Provisions Relating to Professional Limited Liability Companies
- State of Texas: Texas Business Code: Subchapter H - Limited Partnership as Limited Liability Partnership
- Texas Secretary of State: Selecting a Business Structure
- Phyllis Lambert Attorney at Law: Entity Formation
- Business Owner's Toolkit: The Limited Liability Partnership (LLP)
- Thompson Coe: Summary of New Texas Margin Tax
- Sutherland: Be Ready to Pounce on a Texas Margins Tax Challenge
- Texas RioGrande Legal Aid, Inc.: Business Entities in Texas: What Form of Business Is Right for You
- The 'Lectric Law Library: Limited Liability Partnerships and Limited Liability Limited Partnerships
- USLegal.com: Limited Liability Partnership Law & Legal Definition