PLLC for licensed trades: when the regular LLC is the wrong form

This piece is for someone in August 2016 who already knows what an LLC is and is about to form one to hang a shingle. Attorneys, physicians, dentists, architects, engineers, CPAs, psychologists, veterinarians, and in some states a longer list — chiropractors, optometrists, nurses, therapists. The structure below applies to all of them, with state variation.

The form the state actually wants you to use

A PLLC is an LLC with three added constraints written into the state's LLC act or its professional-corporations code. First, the purpose clause must be limited to a specific licensed profession; you cannot form a PLLC "for any lawful purpose." Second, the owners (and usually the managers) must themselves be licensed in that profession in that state. Third, the name must carry a PLLC designator — "PLLC," "P.L.L.C.," "Professional Limited Liability Company," or a state-specific variant like "PLC" in some jurisdictions — instead of "LLC."

States fall into three buckets. A first group requires the PLLC for anyone practicing a licensed profession through an entity: New York, Texas, North Carolina, Florida, and most of the Southeast and Mid-Atlantic sit here. A second group permits a regular LLC for some professions but requires a PLLC or professional corporation for others; Illinois, Pennsylvania, and a handful of others draw the line profession-by-profession. A third group has no separate PLLC statute at all and lets licensed professionals form standard LLCs with board-level rules layered on top; Delaware is in this group, which is one reason Delaware is not the right state of formation for a practicing professional's operating entity even when it is the right state for a holding company above it.

California is its own category and deserves its own sentence. California does not have a PLLC statute, and for medicine, law, dentistry, and a long list of other board-licensed professions it prohibits practice through any form of LLC at all. Those practices must use a professional corporation. A California physician forming an LLC to run a medical practice is forming the wrong entity twice over — wrong form and wrong statute — and the Medical Board will notice before the Secretary of State does.

The board certificate gate

In most PLLC states the Secretary of State will not accept the organizational filing without a certificate or letter of good standing from the professional licensing board, issued in the name of the prospective entity and dated recently. New York's Department of State requires a certificate from the Education Department for most licensed professions before it will file the Articles of Organization. Texas requires the entity to be approved by its regulatory authority for the profession in question; in practice that means a letter from the Texas Medical Board, the State Bar, or the equivalent, filed with the Certificate of Formation. North Carolina, Tennessee, and several others work the same way.

The certificate requirement is the part first-time filers miss. The sequence is: confirm the name is available at the Secretary of State and is acceptable under the board's naming rules (many boards prohibit trade names and require surnames of licensees); apply to the board for the certificate, which usually costs between $25 and a few hundred dollars and takes two to six weeks; then file with the Secretary of State with the certificate attached. If you file with the Secretary first, you will get a rejection that refers you back to the board, and you will have burned a filing fee and, in expedited states, the expedite fee as well.

A related trap is the renewal cycle. Several states require a registration renewal with the licensing board separate from the Secretary of State's annual report — New York, for instance, asks professional entities to re-register with the Education Department on its own schedule. Missing that renewal can suspend the entity's right to practice even while its Secretary-of-State status stays current.

The shield has one hole, and it is the important one

A PLLC limits liability the way an LLC does, with one carve-out that matters more than the shield itself. The shield does not protect the practicing professional from liability for that professional's own malpractice. It never has, in any state, under any version of the professional-entity statutes. A surgeon who operates badly is personally liable for the malpractice. A lawyer who misses the statute of limitations is personally liable. The entity is a liability container for the business, not a liability container for the practitioner.

What the PLLC does protect against is the rest of the picture. If the practice signs a lease it cannot pay, the landlord sues the entity, not the owners' houses. If an employee slips on a wet floor and the practice is underinsured, the claim runs at entity assets. And — this is the useful part in a multi-owner practice — if your partner commits malpractice, the PLLC shields your personal assets from your partner's claim, the same way a regular LLC shields one member from the torts of another. The malpractice plaintiff can reach the offending partner and the entity's assets; they cannot generally reach the innocent partner's personal assets absent supervisory fault or piercing.

That is why the PLLC plus malpractice insurance is the standard stack. The insurance handles the practitioner's own exposure; the entity handles everything else. Dropping the insurance because "the PLLC protects me" is the single most common error in the category, and it is the one the plaintiff's bar relies on.

Failure modes

Four patterns recur. The first is forming a regular LLC in a state that requires a PLLC, discovering the mistake at the first board audit, and having to dissolve and re-form — sometimes with a gap in which the practice technically operated through an unauthorized entity. The second is filing the PLLC without the board certificate and losing the expedite window, which matters when a practice is closing a real-estate lease against a hard date. The third is taking on a non-licensed owner — a spouse, a silent investor, a practice manager — in a state where non-licensees cannot hold membership interests; this voids the entity's professional status and, depending on the state, exposes the whole ownership group. The fourth is the naming mistake, which sounds small and is not: a name that does not carry the PLLC designator, or that uses a trade name the board prohibits, will get the entity bounced back from the board's registration rolls even after the Secretary of State has accepted it.

If you are forming this month to practice a licensed profession, start with the board and the state's professional-entity statute, not with the Secretary of State's filing portal. The Secretary's filing is the last step, not the first, and in most states it will not accept you until the board has.