The Advantages of an LLP Over a PLLC in Texas

By Terry Masters

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.

Prestige

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.

National Recognition

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.

Ready to start your LLC? Start an LLC Online Now

State Taxation

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.

Ready to start your LLC? Start an LLC Online Now
Can Accountants Form an LLC?
 

References

Resources

Related articles

LLC Vs. PC Solo Practice

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.

How to Operate a Texas LLC

A limited liability company, or LLC, is a flexible form of business association that combines the limited liability protections of a corporation with the pass-through federal taxation of a partnership. Organizing as an LLC is popular with entrepreneurs due to these features. While forming a Texas LLC is a simple process, operating a Texas LLC as a small business requires registering with both state and federal government agencies.

What Are the Advantages of an LLC in Wyoming?

In 1977, the Wyoming legislature was the first in the country to permit individuals to create limited liability companies, or LLCs. An LLC combines the limited liability protections of a corporation with the pass-through federal taxation and flexibility of a partnership. Because of its status as the first state permitting the creation of LLCs, as well as the generous economic incentives provided by the state government, Wyoming is one of the major jurisdictions where individuals choose to create LLCs.

LLCs, Corporations, Patents, Attorney Help

Related articles

Comparison: LP and LLP

When forming a new business, it is important to select an appropriate business structure. You may consider a number of ...

Advantages & Disadvantages of an LLC in Iowa

A limited liability company, or LLC, is a form of business association that combines the limited liability benefits of ...

What Makes an LLC Different Than a PLLC?

When forming a new business, particularly if professional in nature, you should understand the difference between ...

What Is a Professional Limited Liability Company?

The exact definition of a professional limited liability company (PLLC) may vary from state to state. Some states ...

Browse by category
Ready to Begin? GET STARTED