The Advantages of a PLLC Over an LLP in Texas

A professional limited liability company (PLLC) is a type of limited liability company that is run by professional individuals or a professional organization. Here, the term “professional” means a licensed professional in a field such as medicine or law.

A limited liability partnership (LLP) is a general partnership (GP) or a limited partnership (LP), with a restricted amount of personal liability for its general partners. The primary advantage of a PLLC over an LLP is that a group of licensed professionals may have the option to conduct the business as a PLLC, but not the option to conduct the business as an LLP.

The Texas Secretary of State has prepared a guide as to what business entity a group of licensed professionals may form.

An LLC, and by extension, a PLLC, is not a partnership or a corporation. Under Texas law, it is a distinct business entity that has the powers of both a partnership and a corporation. The way an LLC functions depends on how it is structured. It is typically likened to a general partnership with limited liability.

Alternatively, it can function as a limited partnership where all the owners participate in management and all have limited liability. One benefit of an LLC in Texas is that it may provide additional legal and financial protection for its members.

An LLC functions similarly to an S corporation, without the ownership and tax restrictions of an S corporation imposed by the Internal Revenue Code. Owners of an LLC are called members. A member can be an individual, partnership, corporation, trust or any other legal or commercial entity. A PLLC can have just one member.

Typically, the liability of a PLLC’s members is limited to their responsibility at the business and their investment. This can be in terms of work, capital and resources. For example, if a doctor at a PLLC made a mistake in a procedure, a client of the PLLC could sue only that doctor. They could not sue other doctors at the PLLC.

That doctor would be personally liable for their actions and should have malpractice insurance to cover their assets. The exception would be if any other doctors assisted with the procedure. In that case, they would be at risk for a malpractice suit as well.

An LLC can be managed by managers or its members. It can hire managers to manage the business. An LLC must state its management structure in the certificate of formation. The Texas Secretary of State cannot give members advice about management structure.

A group creates a Texas LLC by filing a certificate of formation with the Texas Secretary of State. The secretary of state provides a form that meets the minimum state law requirements. The group can file a certificate of formation online through SOSDirect.

The options for licensed professionals vary by profession. Here are a few options that show some business entities licensed professionals can form:

• Attorneys can form a PLLC or for-profit corporation (FP), which may be an S corporation or a C corporation.
• Chiropractors can form an LLC, professional corporation (PC), PLLC, professional association (PA) or FP, which may be an S corporation or a C corporation.
• Dentists can form a PC, PLLC or PA.
• Medical doctors can form a PLLC or PA.
• Nurses can form a PC or PLLC.
• Psychologists can form a PLLC, PC or PA.
• Real estate agents can form a limited liability company (LLC), PC, PLLC, or FP, which can be an S corporation or a C corporation.

A professional corporation (PC) in Texas is a corporation organized for the purpose of offering a professional service. Both a standard (nonprofessional) corporation and a professional corporation can be a C corporation or an S corporation. An S corporation can have only domestic shareholders, meaning U.S. citizens or permanent residents.

An S corporation must have 100 or fewer shareholders and only one class of stock. A C corporation can have domestic and foreign shareholders and over 100 shareholders and multiple classes of stock.

A professional association in Texas is made up of licensed professionals who organize to offer their services. The option of forming a PA is limited primarily to professionals in the medical or medical-related fields, such as radiologists, with the exception of psychologists, social workers and therapists.

Members of an LLC, and by extension, a PLLC, enjoy the pass-through tax treatment that partners in a partnership possess. Pass-through tax treatment means that the business itself does not pay taxes; each member of the entity pays the business’ taxes through their own personal tax return.

A PLLC differs from an ordinary LLC in that businesses that engage in certain professions must register and operate as PLLCs. A professional individual or professional organization must own a PLLC. The governing person of a PLLC must be a professional individual or organization.

Only a professional individual can be an officer of a PLLC. For example, a PLLC that offers legal services can hire law clerks, receptionists and messengers who are not licensed and do not perform the role of attorneys, but only a lawyer can be an officer of the law firm, like the director.

‌The main benefits of a Texas PLLC are that the PLLC can conduct business that requires a license, members have limited liability and the business has pass-through tax status.‌

Individuals in licensed professions typically do not have the option of organizing as a general partnership (GP) or a limited partnership (LP). Licensed professionals should check the chart of professions created by the Texas Secretary of State to determine how they may organize.

A GP or LP can make the underlying company a limited liability partnership (LLP) by registering as an LLP with the secretary of state. There must be an underlying GP or LP in order for the business to register as an LLP. The advantage of registering as an LLP is that an LLP limits the personal liability of general partners in the partnership.

A GP does not need to file a certificate of formation with the secretary of state, but an LP does. A GP is composed of two or more people who act as general partners. Each general partner has full control of the business and can perform day-to-day operations for a partnership.

An LP is composed of both general partners and limited partners. Limited partners have restricted control of the business; they deal only with certain aspects of the business. A limited partner cannot perform day-to-day operations for a partnership.

The governing document that determines how a GP or LP will operate is its partnership agreement, which the partners craft. Both types of partnerships do not register their partnership agreement with the state, and there are no legal requirements for a partnership agreement.

A professional corporation can take the form of a C corporation or an S corporation. An S corporation passes corporate income, losses, deductions and credits to its shareholders for federal tax purposes.

Shareholders report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on corporate income.

When professionals establish an S corporation, they are considered the owners of the company, as shareholders, rather than members. They own stock in the corporation, are required to elect a board of directors, and hold director and shareholder meetings.

Certain financial institutions, insurance companies and domestic international sales corporations are not eligible to hold S corporation status.

In order to become an S corporation, the corporation must submit Form 2553, election by a small business corporation, to the IRS. This form must be signed by all the shareholders. Professionals create a C corporation or an S corporation by filing a certificate of formation with the Texas Secretary of State.

A PLLC, a GP/LP/LLP, and a professional corporation in the form of an S corporation share some similarities. For example, they all offer the advantage of pass-through taxation. But they have some differences as to liability and state fees. Review the table for more information.

As to cost for an LP that registers as an LLP, the LP must pay $750 to file its certificate of formation, plus $200 per partner. A GP that registers as an LLP does not pay a fee to file a certificate of formation, since it files no such certificate, but it pays $200 per partner to register.

A group of professionals should consult a business law attorney with knowledge of the various business structures in Texas about how to set up their company. They should present any agreements that they have reached to the attorney in writing, even if they cannot set up the company as a partnership with a partnership agreement.

The attorney can explain which type of entity the group can establish, the costs and obligations for the endeavor, and the pros and cons of the group’s options. The Texas Secretary of State can answer questions about costs and possibilities, but will not provide an opinion as to which choice the group should make.

A business, such as a PLLC, cannot get just a certificate of formation. It must also have all of the required city- or county-issued permits and licenses. First, a business should check the most recent state guide, such as the 2022 Texas business licenses and permits guide, to determine what state licenses and permits the staff and business may need.

For example, a medical practice requires an appropriate state license for each employee or independent contractor. A medical practice’s licenses and permits could include a medical license for a doctor, a registered nurse license for a RN, and a nurse aide certification for a nurse aide. Next, the business should check the city or county regulations to determine what local licenses and permits it may need.

A city can require that certain activities and equipment of a business be permitted. For example, a medical practice may need a plumbing permit for certain categories of medical gas and medical vacuum piping systems. The business and/or the professionals that run it must pay all the fees for state and local licenses and permits.