Many doctors, dentists, CPAs, and other licensed professionals hang their shingle without giving much thought to how to structure their business. We find that this is typically because they are busy being a doctor or dentist and not a business owner. However, taking the time to properly set up or convert your entity is beneficial from both a liability and a tax standpoint.
While there are many different entity structures including sole proprietorships, general partnerships, and professional corporations, LLCs have become the shining star over the last decade. LLCs were created by legislation to combine three highly desirable characteristics of businesses: (1) limited liability to owners, (2) pass-through tax treatment; and (3) flexible management structure.
Limited liability to owners means that one of the owners of the business cannot automatically be held personally liable for the entity's debts and obligations, another owner's or employee's wrongdoing, or injury on property owned by the entity (i.e. the proverbial "slip and fall"). This protection is not granted to sole proprietors or general partners. However, no entity, including an LLC, will shield you from personal liability for your own acts of negligence.
Secondly, an LLC allows for flexible tax planning. An LLC can choose to be taxed by the IRS as a sole proprietor/partnership, S Corporation, or C Corporation, depending on the owners' financial situation. With successful planning, this allows owners to minimize their overall tax liability.
Finally, an LLC provides for a flexible management. While other entity structures are governed by numerous statutory requirements, an LLC's management structure and requirements can be set up in a manner that best suits its owners; whether that means minimal formalities or rigid formalities is for the owners to determine.
A professional limited liability company (PLLC) is a limited liability company (LLC) for those providing professional services such as those rendered by an architect, attorney, certified public accountant, dentist, physician, or veterinarian, since these professionals are required to obtain a license in order to render services. Because of the licensing requirements, only professionals licensed to render the same professional service can own an interest in the PLLC. More importantly, those same licensing requirements require professionals wanting to take advantage of the LLC entity structure, to do so through a PLLC.
Professionals should speak to both an attorney and CPA to determine what entity structure and taxation method is best for a specific situation.