A professional association (PA) is a type of corporation made up of individuals who belong to a licensed, certified or registered occupation. For example, a PA may be composed of attorneys or accountants. A limited liability company (LLC) is a type of company in which taxes “flow through,” so the members, rather than the company, pay taxes on the profit. Although the IRS provides some guidance on definitions, PAs and LLCs are business structures defined by state laws. The definitions, requirements and powers of PAs and LLCs vary by state.
Understanding Professional Associations
Some states, such as California, treat PAs like other types of corporations. In many ways, they do not distinguish PAs from professional corporations. Other states, such as Texas, define a PA as similar to, but distinguished from, other types of PCs.
Texas provides that a PA is a professional entity for the purpose of providing a professional service relating to health care. A PA may offer health care services such as medicine, osteopathy, podiatry, dentistry, chiropractic care, optometry, therapeutic optometry, veterinary care or mental health treatment. In Texas, only a person who is licensed to practice the same professional service as the professional association may be a governing person, managerial official, owner or member of the professional association.
IRS View on LLCs
The Internal Revenue Service (IRS) provides that an LLC is a business structure whose owners are known as members. Members may include individuals, corporations, other LLCs and foreign entities. Most states permit LLCs to have one single member. State laws limit when a business entity may not be an LLC. For example, banks and insurance companies cannot be LLCs. There are special rules for foreign LLCs.
The LLC and the number of its members determine whether the IRS treats the LLC as a corporation, a partnership or simply part of the income tax return of the LLC's owner. A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless the LLC files IRS Form 8832 and requests to be treated as a corporation.
An LLC with only one member is treated as an entity disregarded as separate from its owner. The exception is if the single-member LLC files Form 8832 and elects to be treated as a corporation. For purposes of employment tax and certain excise taxes, an LLC with just one member is considered a separate entity.
State Views on LLCs
In California, an LLC combines the characteristics of a corporation and a partnership. Members of an LLC have limited liability for the actions of the company, as do shareholders of a corporation. This means their personal assets are protected if the LLC is sued. The LLC structure offers its members liability protection. The members are taxable at the member level like partners in a partnership.
New York defines an LLC similarly to California. It sees the LLC as having limited liability for the contractual obligations and other liabilities of the business. The LLC has a flexible management style similar to that of a partnership.
Federal tax law provides that an LLC may be classified as a C corporation or an S corporation. A C corporation is recognized as a distinct taxpaying entity; an S corporation passes corporate income, losses, deductions and credits through to shareholders for federal tax purposes.
Is a PA an LLC?
In some states, a professional association (PA) can be an LLC. An individual who has a question as to whether a PA can be an LLC should check their state’s corporations code, its business and professions code, and regulations on their department of state or secretary of state website. The individual can also consult an attorney experienced in corporate law.
California does not allow a PA to be an LLC. Specifically, California provides that a domestic or foreign LLC may not render professional services. Professional services are those rendered pursuant to a license, certification or registration authorized by the California Business and Professions Code, the Chiropractic Act, the Osteopathic Act or the Yacht and Ship Brokers Act.
How to Form the Company
A single business owner or group of owners forms a business entity like a PA at the state level. They file the required documents, such as a certificate of incorporation, with their secretary of state or department of state. They also pay the appropriate fee to register the business entity.
For example, a group of doctors in New York could form an entity similar to a PA called a professional service corporation by filing a certificate of incorporation with the New York Department of State. In California, a group of doctors would form a professional corporation by filing the articles of incorporation with the California Secretary of State.
The terms “professional service limited liability company” and “professional limited liability company” (PLLC) refer to a company made up of licensed professionals who organize as an LLC. Most states call such a business entity a professional limited liability company. New York calls such a company a professional service limited liability company, yet gives it the acronym “PLLC.”
A PLLC is Not Protected Against Malpractice
Members of a PA organized as an LLC or PLLC are not protected against malpractice claims and lawsuits that allege that the members were negligent or reckless. Each member of a PA organized as an LLC or PLLC should carry their own malpractice insurance. Members of a PA organized as an LLC or PLLC are not allowed to ask patients, clients or customers to sign contracts that limit a person’s ability to sue a licensed professional for malpractice.
Piercing the Corporate Veil
There are certain situations in which members of a PA organized as an LLC or PLLC can be held personally liable for the debts of the company. A court will find the members liable if the LLC or PLLC engages in fraudulent actions that the members engaged in with the intent to deceive patients, clients or customers.
Situations in which the “corporate veil” of liability may be pierced include instances where there is no formal legal separation between the business and the members; the business engaged in wrongful or fraudulent actions, such as recklessly taking out a loan; or where there was a unfair result, such as the business acted in a deceitful manner leaving a creditor with a large unpaid bill. When the corporate veil has been pierced, creditors can pursue individual members’ assets, including real property, bank accounts and investments.
- California Tax Service Center: Limited Liability Companies
- California Secretary of State: Form ARTS-PC
- IRS.gov: Limited Liability Company (LLC)
- New York Department of State: Certificate of Incorporation Professional Service for Domestic Corporations
- IRS.gov: Forming a Corporation
- Texas Secretary of State: Form 204, General Information (Certificate of Formation – Professional Association)
- California Secretary of State: Business Entities, Forms, Samples and Fees
- IRS.gov: Form 8832, Entity Classification Election
- IRS.gov: S Corporations
- California Secretary of State: Limited Liability Companies, California Tax Information
- University of the State of New York, New York State Education Department: Corporate Entities for Professional Practice
- New York Department of State: Forming a Limited Liability Company
- University of the State of New York, New York State Education Department: Section VI Professional Service Limited Liability Companies (PLLC)
Jessica Zimmer is a journalist and attorney based in northern California. She has practiced in a wide variety of fields, including criminal defense, property law, immigration, employment law, and family law.