Professional corporations (PCs) are specialized entities organized and operated solely by licensed professionals such as attorneys, accountants and doctors.
Unlike a business corporation, the officers, directors, and shareholders are generally all required to be licensed professionals.
There are substantial limitations on the limited liability protection for shareholders in a professional corporation. Many licensing agencies require licensees to provide malpractice insurance. Secondly, most, if not all, states have a public policy that every individual is legally responsible for damages that are caused by his or her personal negligence or other misconduct. No limited liability entity will provide a shield against personal liability in these circumstances.
Personal Service Corporations
Most professional corporations qualify as personal service corporations (PSC) for federal tax purposes, provided that they also qualify under state law. To qualify as a PSC under Internal Revenue Service (IRS) rules, a professional corporation must be organized under state law and then pass two federal tests: the function test and the ownership test. The function test requires that substantially all (95 percent) of the business activities of the professional corporation involve services within specific occupations in the fields of health, law, engineering, accounting, actuarial science, consulting, or performing arts. The ownership test requires that substantially all the professional corporation’s outstanding stock be held directly or indirectly by qualified people, either: 1) employees who are currently performing professional services for the corporation; 2) retired employees who did so prior to their retirement; 3) or their heirs or estates. If a professional corporation organized under state law does not qualify as a PSC, then it is treated as a general partnership for federal tax purposes.
Professional Limited Liability Company
Professional limited liability companies (PLLCs) are specialized entities organized and operated solely by licensed professionals such as attorneys, accountants and doctors.
There are substantial limitations on the limited liability protection afforded by a PLLC. Many licensing agencies require licensees who form a PLLC to provide malpractice insurance. Also, most, if not all, states have a public policy that every individual is legally responsible for damages that are caused by his or her personal negligence or other misconduct. No limited liability entity will provide a shield against personal liability in these circumstances.
A PLLC allows members considerably greater flexibility in determining the organization’s management structure than a corporation. This is accomplished through a written operating agreement among the members.
Because of the special requirements imposed on a PLLC for all members to be licensed professionals, it would not be common to have a manager‑managed PLLC for several reasons. Unlike a business LLC, the members in a PLLC would rarely have a passive role. Secondly, the licensee members would be very restricted on the duties and responsibilities that could be vested in any non‑licensee manager.
Nevada’s Professional Entities and Associations Act has provisions that suggest that all of the following—when properly licensed by the state—constitute professional services:
• Interior design.
• Residential design.
• Landscape architecture.
• Social work.
• Registered nursing.
• Marriage and family therapy.
• Clinical professional counseling, and
• Legal services (provided through attorneys).
A PLLC is Different From a Professional Corporation
A PLLC is not the same thing as a professional corporation (PC). A PLLC is a newer type of business entity than a PC. Here are some of the key differences:
• A PLLC, like other LLCs, is comprised of members, but a PC, like other corporations, is comprised of shareholders.
• A PLLC ownership consists of so‑called membership interests in the business, but PC ownership is based on shares of stock;
• And a PLLC, like other LLCs, is a so‑called pass‑through tax entity, meaning that in most states only the individual members have income tax obligations, while a PC, like other corporations, usually has its own income tax obligations.
The tax differences between PLLCs and PCs can become complicated. For example, a PC can elect a special tax status (S corporation status) that effectively makes it a pass‑through tax entity like a PLLC. And, meanwhile, PCs that don’t elect special status may be subject to double taxation—in other words, both the PC itself and its shareholders may have to pay taxes on business income. Because Nevada is one of just a very few states that has neither a personal income tax nor a corporate income tax, state tax differences between PLLCs and PCs may be less significant. However, you’ll still have to contend with federal tax issues.
Nevada allows professionals to form both PLLCs and PCs, and both PLLCs and PCs provide liability protection for, respectively, their members or shareholders. Because the protection is essentially the same for both PLLCs and PCs, but PLLCs are simpler to create and operate, many professionals prefer the PLLC structure.
If you’re considering forming a Nevada Professional LLC/Corporation…We Can Help!