PLLC vs LLC vs Professional Corporation: Which, and S Corp Tax

PLLC vs PC vs LLC: which can a licensed professional use?

Your state's law decides, not the IRS. Some states require a licensed professional who practices through an entity to use a professional LLC (PLLC) or professional corporation (PC), and some, such as California, do not let an LLC render professional services at all. Once the state allows a form, federal tax follows the IRS classification of that form. The "P" in the name changes nothing federally; the kind of work does, for a few C corporation and QBI rules below.

Sources: IRS LLC classification; Publication 542; Form 2553 instructions.

Any of these can elect S corporation tax with Form 2553. That can lower self-employment tax, but only on profit above a reasonable salary for your own work.

The case stops being simple when two or more licensed owners share profit, the practice is licensed or works in more than one state, an existing PC that filed as a C corporation wants S status, or a Form 2553 deadline was missed. Gather your license and state, your board's entity rules, each owner's license, expected net profit and a payroll plan before you form anything.

Do I need a PLLC, or can I use an ordinary LLC?

It depends on your state: its entity laws may treat licensed professions separately, and the licensing board may have a say. Two examples:

• New York: professionals form a professional service LLC under LLC Law section 1203. The Department of State says "profession" includes attorneys, physicians and the occupations in Title Eight of the Education Law. The articles must attach a certificate issued by the licensing authority, and within 120 days of filing the PLLC must publish them or a notice in two newspapers for six weeks and file proof, or its authority to do business is suspended (LLC Law section 1203).
• California: an LLC may not render professional services: work that only someone licensed, certified or registered under the Business and Professions Code or certain other state acts may do (Secretary of State). In a 2004 opinion under the earlier LLC Act, the Attorney General said that work may go through a professional corporation, while a business needing only a nonprofessional, occupational license may still be an LLC. A law practice with two or more owners may instead be a limited liability partnership certified by the State Bar, taxed as a partnership (State Bar Rule 3.171); other professions should ask their board whether that route is open.

Other states have their own lists and rules. Check your state's professional entity statute and ask your board before filing; not every license is on a state's list. Real estate agents have their own guide: real estate agent LLC or S corporation.

PLLC vs professional corporation: what differs legally and for tax?

Legally, a PLLC is an LLC with members and an operating agreement; a PC is a corporation with shares, directors and officers. For federal tax, a PLLC follows the LLC default rules, while a PC is a corporation from the day it is formed.

The IRS treats a one-member LLC as disregarded and a two-or-more-member LLC as a partnership unless it elects corporate tax on Form 8832. A business formed under a state law that calls it a corporation is taxed as a corporation (Publication 542). A PLLC can skip Form 8832 and file Form 2553 directly; the IRS treats it as a corporation from the S election's effective date. For a PLLC with two or more owners, that switch counts as the partnership putting all its assets and liabilities into a new corporation for stock and then liquidating, at the close of the day before (26 CFR 301.7701-3(g)); see LLC taxed as a C corporation for the final partnership return. For more on LLC tax status, see how LLCs are taxed.

Who may own a PLLC or professional corporation?

State law usually limits owners to people licensed in the profession, which can shut out a spouse without the license or an outside investor. In New York, LLC Law section 1207 lists who may be a member, requires each member of a medical and several other kinds of PLLC to hold the license, and voids voting trusts or proxies that hand control to anyone outside that group.

Rules differ by state and profession; read your own statute. An S election adds federal limits on top: no more than 100 shareholders, generally individuals only, no nonresident aliens and one class of stock (26 USC 1361). See S corporation eligibility for visas, trusts and other owners.

Does a PLLC or PC protect me from my own malpractice?

Generally no. New York, for example, makes each member of a PLLC and each shareholder of a PC personally and fully liable for their own negligent acts and for those of people under their direct supervision and control while rendering professional services (LLC Law section 1205; Business Corporation Law section 1505).

The entity form does not replace malpractice insurance. What it does shield depends on your state's statute, so ask a lawyer licensed there.

If the PC stays a C corporation, how is it taxed?

A PC that does not elect S status pays the flat 21% federal corporate rate on its profit. Publication 542 applies that rate to qualified personal service corporations too. Salary the PC pays you for work you actually do is deductible (26 USC 162(a)(1)) and taxed as wages instead. Profit left after salaries is taxed in the PC and again when paid out as dividends, which the IRS calls a double tax.

Rules that apply to a professional practice taxed as a C corporation:

For the full return and payment calendar, see how C corporations are taxed. To compare the two corporate tax types for a new entity, see C corporation or S corporation.

PLLC vs S corp: should a PLLC or PC elect S corporation status?

An S corporation is a tax status, not a type of entity, so the real question is whether your PLLC or PC should file Form 2553. Once it does, the company must pay you a reasonable salary through payroll before taking other distributions, and the IRS says receipts generated by the owner's own services should be paid as wages. In a practice where you produce most of the fees, that pushes the salary close to what the work earns.

The possible saving is self-employment tax: in an S corporation, Social Security and Medicare taxes apply only to the owner's salary, not to the rest of the profit. Above the $184,500 Social Security wage base only Medicare tax is at stake, so for high earners the saving grows slowly (IRS). Payroll filings, a separate return and state tax eat into it.

• Break-even math: should you elect S corporation status.
• Salary for doctors, dentists and therapists: reasonable salary by profession.
• Form 2553, signed by an officer with every owner's consent, is generally due 2 months and 15 days after the tax year the election is to take effect begins (instructions); for a new entity, see S corporation from day one.
• Whether your state follows the election: state S corporation election.

An existing PC that has filed as a C corporation faces built-in gains and old-earnings rules when it switches; see switching a C corporation to an S corporation.

How does the QBI deduction treat health, law, accounting and consulting practices?

Specified service businesses include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage (26 USC 199A(d)(2); 26 USC 1202(e)(3)). Treasury regulations count physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and similar healthcare professionals as health (26 CFR 1.199A-5(b)(2)(ii)). Engineering and architecture are carved out, so they are not specified services.

The qualified business income (QBI) deduction is up to 20% of the practice's qualified income. For a specified service business it depends on your taxable income, not on whether you use a PLLC, a partnership or an S corporation:

Your own S corporation salary and a partner's guaranteed payments are not QBI (26 USC 199A(c)(4)), and a C corporation gets no QBI deduction at all. For how salary and QBI interact, see QBI deduction for S corporation owners.

Can a PLLC own another practice or a management company?

Check your state's statute first: professional entity laws can limit what the entity may do, and New York's articles must name the profession the PLLC will practice (LLC Law section 1203). For the QBI deduction, a management, staffing or building company that serves a health, law, accounting or consulting practice with 50% or more common ownership is treated as a specified service for that part (26 CFR 1.199A-5(c)(2)). For structuring a second business or a management company, see running more than one business.

What does a PLLC or PC file each year?

The federal return follows the tax classification; the state adds its own filings.

Sources: Publication 3402; Publication 542.

If the practice withholds payroll tax and does not pay it over, an owner or officer responsible for paying it who willfully fails to can personally owe the full unpaid withheld income tax and employee Social Security and Medicare tax (26 USC 6672; behind on payroll taxes). Clients generally send no Form 1099 to a corporation, except for medical and health care payments and attorneys' fees (IRS), so a PC or S corporation in those fields still receives them.

At the state level, expect an annual or biennial report and fee (by state), any state income or franchise tax return, and whatever your licensing board requires of the entity. Ask the board whether the entity itself needs a registration or renewal.

Example

These examples are illustrative; figures are in US dollars and ignore income tax effects.

A therapist in New York, one owner

A therapist forms a PLLC under New York's professional rules and has $120,000 of net profit. As a disregarded entity, the profit goes on Schedule C, and self-employment tax is about $17,000. If the PLLC elects S status and $70,000 is a supportable salary, Social Security and Medicare taxes on the salary come to about $10,700 (both halves), and the rest of the profit is free of them. The difference of about $6,200 shrinks with every dollar of extra salary her work may require, and must still cover payroll and the 1120-S. New York State needs its own election on Form CT-6, filed in the year before or by the fifteenth day of the third month of the tax year (instructions). If the practice is in New York City, the City taxes both routes: unincorporated business tax on the Schedule C practice (a liability of $3,400 or less is credited in full, one up to $5,400 in part), general corporation tax on the S corporation, since the City does not recognize the S election (UBT; GCT).

Two physicians form a PC

Two physicians form a PC that, after paying their salaries, keeps $300,000 of profit as a C corporation. It pays about $63,000 of federal corporate tax, and what is left is taxed again when paid out as dividends. Earnings kept above $150,000 need a business reason, or the accumulated earnings tax may apply. If the PC elects S status instead, the profit passes through to both physicians in proportion to their shares, and each must be paid a reasonable salary first.

High income: physician versus engineer

A physician and an engineer each file jointly with $600,000 of taxable income, above the joint phase-in range. The physician's practice is a specified service, so it gives no QBI deduction whatever the entity. The engineer's practice is not a specified service, so a deduction may remain, but capped by the W-2 wages the business pays (an S corporation owner's salary counts) and its property; a one-person practice with neither keeps only the $400 minimum deduction for an owner who materially participates (26 USC 199A(i)).

Different for you?

• Two or more licensed owners, or adding one: owner rules, profit splits and a single class of stock all need checking; get corporate tax help.
• You practice or are licensed in more than one state: see business income tax in other states and get corporate tax help.
• Your PC has filed as a C corporation and wants S status: read switching a C corporation to an S corporation and get corporate tax help.
• You missed the Form 2553 deadline: see late S corporation election relief and get corporate tax help.
• An owner is not a US citizen or lives outside the US: a nonresident alien owner rules out an S election; see S corporation eligibility and get cross-border tax help.
• You are a real estate agent: see real estate agent LLC or S corporation.
• You practice in Canada: see professional corporations in Canada.
• You are adding a management company or a second practice: see running more than one business.