LLC and PLLC for Professional Services Firms

The formation advice aimed at licensed firms is usually written for businesses that have no licensing board. It tells an architect the same thing it tells a landscaping company. In several large states that advice produces an entity the board will not accept. The rule to work from is simple to state and awkward to apply. A licensing statute decides which forms a firm may use. It decides who may own the firm, and what the name may say. The Secretary of State only records the result.

This guide covers the entity question across law, public accountancy, architecture, engineering and land surveying. It names the states rather than averaging them. Clinical practice runs on a stricter version of the same doctrine. The medical practice guide covers it separately. The mechanics that follow the entity decision are in the formation guide.

Four Forms, and Not All of Them Are Open to You

A licensed firm chooses among four structures, not two. There is the professional corporation and the professional limited liability company. There is the registered limited liability partnership. And there is the general partnership or sole proprietorship the firm is trying to leave. Which of the four are available turns on the profession and the state. The variation is wider than most founders expect.

California is the sharp case. The Secretary of State publishes a limited liability company information sheet. It states that a domestic or foreign LLC may not render professional services. It cites Corporations Code section 17701.04. There, professional services means anything that may lawfully be rendered only under a license issued under the Business and Professions Code.

That closes the professional LLC entirely. California then restricts the limited liability partnership by naming the professions that may use it. The Secretary of State's entity types page defines an LLP as a partnership that engages in the practice of public accountancy, law, architecture, engineering or land surveying. It also covers a partnership that provides services or facilities to a California registered LLP practicing public accountancy or law, or to a foreign LLP.

A California marketing consultancy cannot register an LLP. A California engineering firm can. A California law firm has two workable choices, the professional corporation or the LLP, and no third.

Texas takes the opposite approach and consolidates. Chapter 301 of the Business Organizations Code covers the professional association, the professional corporation and the professional limited liability company together. Section 301.003 lists architects, attorneys, certified public accountants, dentists, physicians and veterinarians among the services it governs. Florida does the same work through chapter 621 of the statutes. There, section 621.051 authorizes the professional limited liability company.

So a firm operating in more than one state may need different entity forms for the same practice. That is a foreign qualification question as much as a formation one. The foreign qualification guide covers when the second registration becomes mandatory.

Who May Own the Firm, and What the Name May Say

Ownership is where generic operating agreements fail licensed firms. Texas section 301.007 sets a hard test. A person may own a professional entity, or govern a professional limited liability company, only if that person is an authorized person. That means a professional individual licensed to render that service, or a qualifying professional organization.

Florida section 621.09 restricts membership to a short list. That list is professional corporations, professional LLCs or individuals duly licensed to render the same specific professional service. Section 621.08 bars the entity from conducting any business other than the service it was organized to provide. Neither state has room for a passive investor. Neither has room for a spouse holding units for estate planning, or a non-licensed managing partner holding equity.

New York adds a filing layer and a scope rule. Professional practice may run through a professional service corporation under Business Corporation Law article 15. It may run through a design professional corporation, a professional service limited liability company, or a registered limited liability partnership. Engineering, land surveying and geology services also run through Certificates of Authorization.

Here is the scope rule. A professional service corporation may not be formed to practice more than one profession, unless a single shareholder is licensed in both. There is one deliberate exception. Engineering, architecture, landscape architecture, geology and land surveying may be practiced together in one entity. A multi-disciplinary design firm is workable in New York. A firm combining law and accountancy is not.

Names are regulated separately from entities. Most professional statutes require the entity designation to appear, and restrict what else may. That is why a firm's marketing name and its filed name often differ. Where the marketing name carries value, federal trademark registration protects it in a way the state filing never does. The naming guide covers the clearance sequence.

The Shield Stops at Your Own Work

A registered LLP and a professional entity both do the same core job. They stop one partner's negligence from reaching another partner's house. That is a real and valuable thing. It is the reason multi-partner firms convert. What neither does is protect the professional who did the work.

Texas section 301.010 makes the entity jointly and severally liable for an error, omission or negligent act committed by a professional acting on its behalf. It still leaves that individual liable for their own conduct. Florida section 621.07 says an individual remains personally liable for negligent or wrongful acts committed by that person.

Two practical consequences follow. The first is that professional indemnity cover is the operative protection, not the entity. Several states make that explicit by conditioning LLP registration on maintaining a stated level of insurance. California requires a registered LLP to carry specified insurance as a condition of the registration itself. That turns the policy into a filing requirement rather than a commercial choice. The second is that the partnership agreement has to carry a licensure clause.

A partner who is suspended stops being an authorized person under statutes like Texas section 301.007. A firm without a redemption mechanism is then left holding an ownership interest the statute says cannot be held. The operating agreement guide covers the general drafting. The suspension trigger and the tail cover obligation are the professional-firm additions.

Tax Classification Is a Separate Question From Entity Form

Entity form is state law. Tax classification is federal, set by the check-the-box regulation at Treas. Reg. 301.7701-3, and the two do not move together. A registered LLP files a partnership return. A professional LLC with several licensed members does the same by default. A professional LLC with a single member is disregarded. It reports on Schedule C unless it elects otherwise. A professional corporation is a corporation, and then either elects subchapter S or does not. The return-by-entity-type guide maps each form to its federal return. The tax guide covers the defaults.

For licensed firms the S election deserves a harder look than usual. Professional service income is earned income, and the IRS scrutiny is well documented. The Service treats corporate officers performing services as employees for FICA, FUTA and withholding.

It points to Tax Court decisions including Joseph M. Grey Public Accountant in 2002 and David E. Watson in 2012. The test applied there was whether payments represented true remuneration for services performed, rather than what the taxpayer labeled them. An accountancy firm is not a promising place to test an aggressive salary figure. The reasonable salary guide sets out the comparables that hold up. The switch guide covers the point where the election pays for its own administration.

Standing Up a Licensed Firm, in Order

Board steps carry the longest lead times, so they start first even when the client work is already booked.

Trust accounting deserves its own line for law firms. Commingling client funds is a disciplinary matter, however clean the entity is. The separation the board expects is stricter than the separation a bank requires. It starts on the day the operating account opens, not at the first retainer. The bookkeeping guide covers the ledger discipline that makes both the board review and the annual return straightforward.

The Penalty for Practicing Through a Form the Statute Does Not Allow

The exposure here is rarely a state filing fine. It is disciplinary, and it is contractual. New York states the underlying rule bluntly. It is a felony for an unlicensed person to practice a licensed profession. A general business corporation has no authority to employ licensees to provide professional services to the public. An entity that is not a permitted professional form is, on that reading, the unlicensed person.

Set that against the fee to file the correct form. The state fee file records $70 in California, $300 in Texas, $200 in New York and $125 in Florida. The calculation is not close. The expensive part of this mistake has never been the filing fee.

Three Licensed Firms in Practice

Five Mistakes Licensed Firms Make at Formation

Firms that hire independent professionals should read the classification question from the other side too. A board's view of supervision and the IRS view of control are not the same test. The classification guide covers the federal side. The consulting guide covers it from the individual practitioner's perspective. For the structural comparison between partnership forms, see LP against LLP against LLC.

Disclosure. File.Business is a private filing service, not a government agency and not a law firm. We prepare and submit filings at your direction, and nothing on this page is legal or tax advice. Filing fees, deadlines, and statutory references are current as of the last-updated date shown above and can change. Confirm current requirements with the relevant state or federal agency before you file.