ASK MICKEY, CPA, CVA What is the difference between an LLC , PLLC , and a Partnership?

QUESTION: What is the difference between an LLC (Limited Liability Company), PLLC (Professional Limited Liability Company), and a Partnership?

ANSWER: The key differences between an LLC (Limited Liability Company), PLLC (Professional Limited Liability Company), and a Partnership lie in their structure, liability protection, management, and the nature of their business activities. Here’s a detailed comparison:

Limited Liability Company (LLC)

1. Structure:
   • An LLC is a flexible business structure that combines elements of both corporations and partnerships.
   • It can be owned by one or more individuals or entities, known as members.
2. Liability Protection:
   • Members of an LLC enjoy limited liability, meaning they are typically not personally responsible for the company’s debts and liabilities. Their assets are usually protected.
3. Management:
   • An LLC can be managed by its members (member-managed) or by appointed managers (manager-managed).
   • The operating agreement dictates the management structure and responsibilities.
4. Taxation:
   • By default, an LLC is treated as a pass-through entity for tax purposes, meaning profits and losses pass through to the members’ tax returns. However, an LLC can also elect to be taxed as a corporation.
5. Business Activities:
   • An LLC can engage in any lawful business activity and is not restricted to professional services.

Professional Limited Liability Company (PLLC)

1. Structure:
   • A PLLC is a type of LLC specifically designed for licensed professionals, such as doctors, lawyers, accountants, architects, etc.
   • It is owned by individuals who are licensed to provide professional services.
2. Liability Protection:
   • Like an LLC, members of a PLLC have limited liability protection. However, this does not protect against malpractice claims related to professional services rendered.
3. Management:
   • Management can be structured similarly to an LLC, with the option for member-managed or manager-managed arrangements.
   • Typically, all members must be licensed professionals in the field of the PLLC’s services.
4. Taxation:
   • Tax treatment is like an LLC, with the default being pass-through taxation unless an election is made to be taxed as a corporation.
5. Business Activities:
   • A PLLC is restricted to providing professional services that require a state license.

Partnership

1. Structure:
   • A partnership is an association of two or more individuals or entities to conduct business.
   • There are several types of partnerships, including general partnerships, limited partnerships (LP), and limited liability partnerships (LLP).
2. Liability Protection:
   • In a general partnership, partners have unlimited personal liability for the debts and obligations of the business.
   • In a limited partnership, general partners have unlimited liability, while limited partners have liability only up to their investment in the partnership.
   • In an LLP, partners typically enjoy limited liability protection, like that of an LLC.
3. Management:
   • In a general partnership, all partners typically share in the management and decision-making processes.
   • In an LP, general partners manage the business, while limited partners have no management authority.
   • In an LLP, all partners can participate in management without risking personal liability for the partnership’s debts.
4. Taxation:
   • Partnerships are generally treated as pass-through entities for tax purposes. Profits and losses pass through to the partners’ tax returns.
   • Each partner reports their share of the profits and losses on their tax returns.
5. Business Activities:
   • Partnerships can engage in a wide range of business activities, though certain professional services may require the formation of an LLP or PLLC.

Summary

• LLC: Flexible structure, limited liability for members, versatile in business activities.
• PLLC: Tailored for licensed professionals, limited liability for members (excluding malpractice), restricted to professional services.
• Partnership: Simple structure, varying degrees of liability protection (depending on the type), profits/losses pass through to partners’ tax returns.

Each of these entities serves different needs and provides varying degrees of liability protection and tax benefits, making them suitable for different types of businesses and professional practices.

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