A Professional Corporation vs. an LLC

By Lee Hall, J.D.

A Professional Corporation vs. an LLC

By Lee Hall, J.D.

When considering what sort of business entity to form, many professionals consider either a professional corporation (PC) or a limited liability company (LLC). Not only are there major differences between the two, but you may be restricted by your choices depending on what state you do business in or requirements by your licensing board. Here's what you need to know.

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Professional Corporation

A professional corporation offers a traditional structure for a small business run by certain types of professionals, usually those that require a license to operate. Examples include lawyers, doctors, and architects, to name just a few. Note that the rapid rise in popularity of limited liability partnerships and limited liability companies among professionals has caused a decrease in interest in the more traditional PC model.

Limited Liability Company

The LLC is a relatively new business model. It is not a corporation but rather an organization that is highly flexible and simple to form. Its owners, called members, are not shareholders, as in a traditional corporation.

With a minimum of just one member needed to form an LLC, this model is a particular draw for the solo professional who prefers minimal paperwork and would like limited liability protection.

How is a professional corporation structured?

A corporation's creation relies on articles of incorporation, a document that contains the entity's vital information, including provisions for decision-making processes, the number of shareholders who own stock, and dissolution procedures.

Federal and state taxes apply to any profits. Shareholders also pay taxes individually on the income they earned from the corporation. Thus, corporations as legal, taxable entities are separate from the owners. The owners do not face personal liability in a legal action against the corporation—in such cases, the corporation itself is sued. This structure protects its owners from personal liability in tort, debt, or any other claims involving wrongful corporate actions.

A professional corporation, designated with the initials PC after its name, is a regular corporation consisting of one or more certain kinds of professionals. Lawyers in particular often look to the PC structure to protect them from tort liability. As state law governs the formation of business entities, you should determine the state's allowance for the PC in your line of business.

Generally, the owners of a PC must all be licensed in a single profession. States may require the approval of the licensing board for a PC formed around a particular profession. For example, the state's medical licensing board or the state bar may need to approve a new PC. Check state law, especially if your business involves financial planners, patent agents, or landscape architects, to ensure that the state permits them to form a PC.

What makes the LLC different?

A limited liability company is an unincorporated business organization that combines the benefit of corporate limited liability with the tax structure of a partnership. LLCs are typically managed by their members, who are protected from personal liability for the operations of the company. Unless its members elect taxation as an S corporation, an LLC, by default, pays taxes in the same manner as a partnership, with taxation flowing through the LLC to the individual members' personal income tax returns.

With the PC, in contrast, corporate profits are taxed and owners pay taxes individually on the income earned through the corporation.

Other Considerations

Citing malpractice reasons, some states have prohibited lawyers and other licensed professionals from starting LLCs. Professionals have then turned to other models, such as professional corporations and professional limited liability company (PLLCs) rather than the increasingly common LLC. Look at the provisions in your own state to know what is legally permitted before setting your sights on any business model, then compare them to decide which bests suits your business needs.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.