Limited liability companies and professional corporations are two forms of business structure available in most states to individuals starting a solo practice in professions such as law or medicine. Differences in how LLCs and PCs are taxed and the different liability protections they provide mean that either an LLC or a PC may be more advantageous to a particular individual depending on her business goals and needs.
Limited liability companies are authorized in most states for almost all kinds of businesses, and most states allow a sole practitioner to form an LLC. If your state does not permit single-owner LLCs or if the filing costs for an LLC in your state are high, you may be able to form an LLC in a different state. Professional corporations are limited only to certain licensed professionals defined by state statute. These typically include attorneys and doctors, and may also include architects, accountants or engineers. If you are not a qualifying licensed professional under your state's business formation laws, a PC is not a business form available to you.
A PC is a corporation and gets taxed as a corporation. For a sole practitioner, this means that his income gets taxed first at the corporate level of his PC, and then as personal income for whatever money the PC pays to him in salary. The corporation may deduct corporate expenses such as life and health insurance, payroll taxes, disability insurance and other payroll expenses for salary paid to the owner, staff and employees. Owners of an LLC can select whether they want to be taxed as a corporation, partnership or sole proprietorship. For a sole practitioner, the option to be taxed as a sole proprietor means that all the income passes through the LLC and is taxed to to the owner once as ordinary self-employment income.
Both a PC and an LLC can help protect the owners against some forms of liability. Neither business form will protect a licensed professional such as a lawyer or doctor from liability for individual malpractice. A professional corporation has the advantage of protecting any one professional in the corporation from the malpractice liability of the other owners. For a sole practitioner, however, this advantage is of no avail unless the owner intends to add other professional members to the business in the future. Both a PC and LLC can purchase and hold liability insurance for its owners, and both forms help insulate the owners' personal assets against collection by creditors of the business. In some states, however, sole proprietor LLC owners do not have any creditor protection.
An LLC is a very flexible business form that can be used for a variety of purposes including real estate holding. LLCs can become partners with other businesses to allow for a wide variety of project management configurations, although some professionals may be restricted by their state professional conduct rules from entering into certain types of businesses with non-professionals. PCs are usually more strictly limited by state statute, and may not be able to join with other non-professional businesses to form other ventures.