What is an Alabama Professional LLC?
This article originally appeared at: https://www.sarahsshepard.com/blog/alabama-pllc
Suppose you’re a budding entrepreneur in the state of Alabama. In that case, you’re probably trying to form a business entity that fits your brand and the type of business you plan to do. If your entrepreneurship involves explicitly operating in a profession that requires various certifications, then your Alabama business lawyer would likely advise you to form a professional limited liability company.
A professional limited liability company is a specialized form of the traditionally limited liability company, with a few significant differences. However, this specialized business entity isn’t suitable for all industries, certifications or not.
This article will explain everything you need to know about professional LLCs, including how to form your own right here in Alabama.
Keep reading to learn more.
A Traditional LLC vs. an Alabama Professional LLC So, what exactly is a professional limited liability company (PLLC), and how does it differ from a traditional LLC? First, let’s talk about what a conventional LLC is.
A traditional or standard LLC is a type of hybrid business structure that combines the flexibility of a sole proprietorship and the protections of a corporation. An LLC is typically owned and operated by one or several people, also called its “members,” and it’s an entity that essentially provides asset protection.
In other words, when you form an LLC, creditors and anyone pursuing your business in a lawsuit cannot go after your personal assets.
For example, your car, bank account, home, and anything of value separate from your business will be safe. Only your business-related assets can be accessed. This is primarily why LLCs are among the most popular business formations for entrepreneurs and small- to medium-sized business owners.
Additionally, LLCs save business owners a considerable amount of money on taxes since this type of entity operates under a “pass-through” taxation system. There’s no corporate-level tax, as business owners claim their business profits or losses on their personal tax returns.
A professional limited liability company , on the other hand, is a business entity designed for a much more specific purpose. PLLCs are meant for individuals who will provide licensed professional services in the state. Much like LLCs, Professional LLCs can protect their members from creditor claims, lawsuits, personal injuries, and other liens.
Other Similarities and Differences As you may have already assumed, PLLCs maintain the traditional LLC as their foundation, with several customized layers for the licensed professional. Many states, including Alabama, require that businesses form a PLLC instead of an LLC if they operate within specific industries. (We’ll talk about that in just a moment)
Concerning the similarities between an LLC and a Professional LLC, they have in common that both provide personal asset protection for the business owners, and both operate via a pass-through tax. But, of course, business owners can still pay taxes like an S Corp , C Corp, or partnership.
Both formations also allow business owners to choose their own management structure. The owners can manage the business themselves or designate a manager for a specific role. Lastly, both give owners the option to split up their financial distributions and contributions as they see fit.
As for the differences between LLCs and Professional LLCs, the primary thing that sets them apart is the designation of PLLCs for state-certified professionals.
Additionally, the formation process for a Professional LLC is slightly different from that of an LLC. This process also varies from state to state. Generally speaking, most states require proof that each company member is also a licensed professional. The PLLC is being registered within the industry.
If you’re forming an LLC for a law firm in Alabama, you’ll need to prove that all your members are licensed attorneys within the state.
What Defines a Professional Service in Alabama? Alabama’s current LLC law does not define a “professional service.” Instead, it simply states that only an LLC can render professional services if each member is licensed or registered under the state’s applicable law.
According to older Alabama laws relating to professional corporations (PCs), a professional service is “Any type of service that may lawfully be performed only according to a license issued by a state court, state regulatory licensing board, or other like agency under state laws.”
Generally speaking, the following job descriptions would be considered professional services according to the above definition:
Certified public accountants (CPAs)
However, it should be noted that the above list does not cover all possible professional services that would need a PLLC business structure.
It should also be noted that while the PLLC business structure protects business owners’ personal assets, it does not offer any protections for malpractice suits. Therefore, if you’re a licensed professional in an industry associated with malpractice — medical, pharmaceutical, psychiatric, etc. — You’ll also be legally required to obtain malpractice insurance for your practice.
How Do You Form an Alabama PLLC? Forming an Alabama PLLC isn’t that different from forming a traditional LLC in the state. However, aside from mainly following the same steps of forming an LLC — choosing a name with “PLLC” in it, assigning a registered agent, handling all the necessary tax obligations, etc. — there are a few other specific things you’ll have to do.
To form your PLLC in Alabama, here’s a brief overview of the extra steps you would have to follow:
Ensure that each PLLC member or employee involved has an up-to-date state license for the professional services being offered
Check with the Alabama state licensing board for your specific profession to see if any prior approvals are required. If so, you’ll need to obtain the necessary documentation showing approval
File a certificate of formation with your county’s probate court
It should also be noted that while traditional LLCs require an operating agreement, PLLCs do not. However, it’s still essential to have an official operating agreement so that any members of your PLLC and outside companies and businesses can know your company’s internal rules.
Are the Benefits of a PLLC? Forming a PLLC for your business comes with its own set of advantages and specific restrictions. However, keep in mind that as a certified professional in particular industries, forming a PLLC for your business is mandatory in the State of Alabama and most other states.
The primary benefits of forming a PLLC include:
Protection from personal liability for any financial debts, lawsuits, or other liens against the business. This would include any personal injuries that occur in connection to your PLLC, such as someone slipping and falling on your office floor
Protection from the malpractice of other PLLC members
Members of the PLLC can collectively choose to be taxed as a pass-through entity or as a corporation
PLLC is easier to set up compared to corporations and other business structures
Having PLLC in your company name demonstrates that you’re certified as a specialist within your industry, which adds value and credibility to your business
What Are the Restrictions? While forming a PLLC comes with asset protection and better options for taxation, it also comes with certain restrictions.
For example, regarding liability protection for the malpractice of other PLLC members, each member must have the minimum amount of malpractice insurance required by the state. Otherwise, they won’t be considered eligible for these specific protections.
Additionally, you’ll be personally liable as a PLLC member if:
You personally guarantee the repayment of a specific business loan
You directly engage in professional malpractice, such as mishandling a client’s case, information, patient treatment, etc.
You intentionally or unintentionally harm someone on your company’s property
Is a PLLC Different From a PC? Another common question about PLLCs is whether they’re similar to PCs — professional corporations.
A PLLC is not the same structure as a PC. A PC is a variation of a corporation available to entrepreneurs who plan to provide personal, professional services . This would also include doctors, lawyers, accountants, consultants, architects, etc. While this might sound very similar to a PLLC, there are some key differences, including:
A PLLCs is comprised of members, while a PC is comprised of shareholders
PLLC ownership consists of membership interests, while PC ownership is based on stock shares
PLLCs offer pass-through taxation, while PCs tend to have corporate tax obligations
The tax differences between the two structures separate them the most and can become complicated, especially here in Alabama. PCs can elect a special tax status, similar to an S corporation, which can effectively turn into a pass-through entity. However, PCs can also be subject to double taxation if they choose the wrong tax status. The shareholders would have to pay taxes on business and personal income.
Alabama allows certified professionals to form either type of entity, as they both provide the same liability protections. However, PLLCs are simpler to create and operate. As a result, many certified professionals choose to form a PLLC over a PC (as one or the other is legally required for such specialized professionals to run their practice or operations in the state).
Is a PLLC Right for My Business? Suppose you’re looking to start a business that offers specialized services that require specific certifications. In that case, you will need to form a PLLC business structure. This is especially true if you plan to run a medical or law practice.
However, not all specialized services will require a PLLC, so it’s necessary to consult with your Alabama business lawyer to ensure you choose the right type of entity for your business.
That’s where we come in. Contact us today to schedule a consultation with Sarah S. Shepard or another experienced Huntsville corporate attorney. We can help you determine whether or not you need a PLLC for your business and how to get it started and remain compliant with the state laws.