When medical professionals are seeking to form an entity for their practice, one of the most common inquiries is whether they should form a Professional Association or a Professional Limited Liability Company. The biggest difference between these entities comes down to which structure, control system, and tax treatment is preferred.
Professional Association (“PA”):
A PA can only be formed by about 20 different types of medical professionals in Texas such as Doctors of Medicine, Dentists, and Mental Health Professionals, for the purpose of rendering their professional service. The owners of a PA are its “members.” PAs may provide services only through individuals licensed by the State of Texas to provide the same service that the PA provides. A PA is governed by a Board of Directors or an executive committee elected by the members. They elect officers, which include a president and secretary. All officers and all members of the board or executive committee must also be members of the PA. PAs are limited from a tax perspective as they must be taxed as corporations, meaning they either default to C-corporation taxation or elect subchapter S-corporation taxation. PAs must maintain minutes from the annual meetings as well as adopt bylaws to be a controlling document. In that sense, it is very similar to a corporation. A PA does not provide limited liability protection to its members for their own errors, debts, obligations, etc. However, individual members do have limited liability against issues that arise from the actions of other members.
Professional Limited Liability Company (“PLLC”):
A PLLC may be owned by appropriately licensed individuals or by other professional entities that provide the same service as a PLLC. A PLLC can elect to be governed by its members or managers. Unlike a PA, a PLLC’s governing authority may include either appropriately licensed individuals, professional entities providing the same service as the PLLC, or both. PLLCs are not required to have officers. PLLCs are taxed like LLC’s with pass-through taxation of the members. PLLCs control with a company agreement. A single-member PLLC in which there is only one member (owner) would be taxed the same as a sole proprietor.
Are PLLCs and LLCs the same thing?
Both a PLLC and an LLC offer the same liability protection to their members. The main difference is that all members must be a licensed professional for the purpose that the PLLC was formed. A PLLC, like an LLC, will help protect personal assets in the event the business gets sued. However, if a licensed member is sued for malpractice, a PLLC will not offer personal asset protection, which is where malpractice insurance comes in.
Most medical professionals choose either a PLLC or a PA for their practice. PA’s are subject to more rules and regulations, making PLLCs the more flexible option of the two. If a medical professional will be working independently, a PLLC may be a better choice, if they can avoid the self-employment tax by filing for Subchapter S Election. This would change the PLLC’s tax status to an S Corporation.
Have any further questions or need assistance forming your new entity? Please contact The Gibson Law Group for more information.