Rupert had opportunities to join dental practices right after graduation from dental school. But his father had always had his own dental practice, and Rupert could see the advantages of practicing solo. He knew he’d need a business entity through which to operate his solo dental practice, and so he began investigating the proper entity form.
Professionals
Licensed professionals in certain professions owe special duties of loyalty to their clients or patients not to allow other interests influence their professional service. Physicians and lawyers are examples. They must not allow undisclosed others to direct their professional services to an individual patient or client. You might not want your mother-in-law directing your medical care or your creditor directing your legal affairs. Professions with these duty-of-loyalty concerns restrict professional practice ownership to the licensed professionals. Non-physician investors can’t partner with a physician in a medical practice. A lawyer, plumber, or electrician can’t partner with a dentist in a dental practice. Only physicians can join together to own a medical practice. Only lawyers can join together to own a law firm. In that way, these professionals eliminate the conflicts of interest that could arise from ownership or investor pressures.
PLLCs
To accommodate the special duty-of-loyalty restriction on ownership of professional practices, your state’s LLC act or other business entity laws may recognize a professional limited liability company (PLLC). More than half of states do, including New York, Texas, and Pennsylvania but not including California. In those states recognizing PLLCs, professionals all holding the same license may join together to form, own, and operate a PLLC. They may not allow any unlicensed individual to join them as members in their PLLC. A banker who wants to invest in a medical practice, for instance, cannot do so directly as an owner member. The banker could loan funds like any other lender but must not make contributions in exchange for a membership interest. If one of a PLLC’s licensed members loses their license, that member must withdraw from the PLLC. Also, no unlicensed person may provide professional services through the PLLC. Just because licensed members own the PLLC does not change the rules against unlicensed practice. Only the PLLC’s licensed members may provide licensed services through the PLLC. Check your state’s corporations bureau for the form for articles of organization for a PLLC, like the form at the end of this book.
Professions
States recognizing PLLCs may offer them to only certain licensed professionals. Check your state LLC act or other business entity laws. The laws tend to restrict PLLCs to only those professions that have the duty-of-loyalty concern, like physicians, dentists, other medical professionals, lawyers, and accountants. But PLLCs may also be available in your state to architects, engineers, surveyors, optometrists, and veterinarians. If your professional standards and code of ethics prohibit your licensed profession from ownership by non-licensed individuals, then you may well have a PLLC available to you. Trades may not face the same restriction and thus may find that PLLCs are not available to them. Plumbers may be able to associate as LLC owners in a construction business with electricians and masons. Check your state and profession.
Services
States recognizing PLLCs generally restrict PLLCs to offering only the professional service for which its members hold a license. A PLLC of physicians operating a medical practice may not include dental services in their offering, only medical services. A PLLC of engineers may not offer law services or financial services through their PLLC, only engineering services. Certain professions in their standards and ethical codes prohibit offering professional services in a multi-discipline practice. You won’t find accounting services at a law firm or architectural services at a medical practice. Licensing laws, professional codes of ethics, and business laws all tend to keep the professions apart, each to their own practices, for confidentiality, competence, conflict of interest, and similar reasons.
Liability
Limiting liability is one of the big advantages of an LLC. But in the case of professional liability and PLLCs, that limitation of liability isn’t quite so limited. Professional codes of ethics and standards generally prohibit a professional from limiting the professional’s own malpractice liability. For example, if a physician violates a professional custom, causing a patient injury, the physician’s malpractice insurance should pay for the injury. The physician cannot claim immunity through the fine print of a professional-service contract. So, if you have a PLLC, you’ll still pay for your own malpractice liability, through your insurance. The PLLC can’t protect you from your own malpractice liability. But the PLLC does generally protect you from the malpractice liability of other professionals in the same PLLC. PLLCs thus provide some liability protection but not as much liability protection as LLCs.
Reports
If your state recognizes PLLCs, the law authorizing PLLCs may require additional information in your PLLC’s annual report. The annual report may have to list each professional providing service through your PLLC, while attesting that those professionals all have valid licenses to do so. States don’t want unlicensed individuals exposing patients, clients, or the public to risk of harm through incompetent service, even if provided through a PLLC owned and managed by competent licensed professionals.
Articles
If your state recognizes PLLCs, the law authorizing PLLCs will require that your articles of organization restrict the PLLC’s purpose to offering professional services only within your specific licensed field. If, for example, you are forming a PLLC to provide engineering services, then your articles must restrict the PLLC’s purpose to engineering. Your articles of organization should also include PLLC or PLC in the name of your entity, with or without periods or other punctuation, by abbreviation as shown or spelled out as Professional Limited Liability Company.
Restrictions
If your state recognizes PLLCs, the law authorizing PLLCs will restrict PLLC members from selling, giving, or otherwise transferring member interests to unlicensed individuals. The law will also restrict the PLLC from merging with another entity that includes owners who do not hold the same license. You could merge your PLLC with another PLLC providing services in the same licensed field but not in another field through individuals licensed in another profession.
Key Points
Professionals in some states may form a PLLC for professional practice.
PLLCs may only include members all holding the same license.
PLLCs may only provide the one professional service for which formed.
PLLCs do not limit the professional’s own malpractice liability.