When forming a business, one of the many decisions you must make relates to how you will structure it. A business' structure has tax implications for the owners and/or partners. Consequently, you must give careful thought to the structure selected.
If you're starting a business that provides a professional service, you could consider both a professional association (PA) or a limited liability company (LLC). If, on the other hand, you're starting a business selling goods, such as a hardware store, you do not have the option of a PA. Rather, you may open your hardware store as an LLC or one of several other options, such as a sole proprietorship or professional limited liability company (PLLC).
Understanding Professional Associations
A PA is an entity designed for businesses offering a professional service. In some jurisdictions, only certain service professions can form a PA. Common professions that utilize the PA designation include:
- Medical doctors
Generally, people who own and run PAs must be licensed in their profession. Some jurisdictions require that PAs mirror the structure of a corporation, including appointing a board of directors. PAs are considered a legal entity, independent of the people who participate in the PA.
Understanding LLCs and PLLCs
An LLC provides a business structure for businesses operated by one or more people. One of the many attractions of an LLC is that it provides a simple business structure. It offers pass-through taxes, limits on an individual's personal liability, and legal protection for an owner's personal assets. There are no residency requirements for an LLC.
For persons interested in establishing a PA who live in a state that doesn't allow the creation of a PA, they may wish to consider establishing a PLLC. This type of business structure works substantially the same as an LLC, however, most jurisdictions require additional proof of professional licensure.
Check with the State
For people considering establishing a business structure, you can contact the state to determine what options are available. Each state also has information on the limits of different types of business structures. After determining which business structures your planned business may qualify for, take time to consider the tax consequences of one structure over another.
The journey to setting up a PA, an LLC, a PLLC, or some other business structure doesn't stop with identifying your preferred approach to business. You must select a name for the business. Next, you must register the company name with the state, after ensuring no other business in the state has the same name. Depending on the type of business structure, you may need to file an operating agreement and articles of incorporation. In addition to different rules for different types of business structures, the requirements for the same business structure may vary between states.
If you are starting a new business, you have many things to consider. In determining the best approach to structuring your business, consider your options. Before forming the first type of organizational structure you research, write down the benefits and drawbacks of each kind coupled with 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.