Choosing a business form is one of the most critical decisions that a fledgling business must make. There is no shortage of options: the sole proprietorship, general partnership, limited liability partnership (LLP), limited liability company (LLC), and corporation are just a few of the many business forms available to choose from.
Yet among this myriad of choices, one business form has skyrocketed in popularity in the last decade: the LLC. Relatively speaking, the LLC is a recent business innovation. It was created by legislatures to combine three highly desirable characteristics of businesses: (1) limited liability to owners; (2) pass-through tax treatment; and (3) flexible management structure.
Limited liability to owners is a characteristic that LLCs share with limited liability partnerships (LLPs) and corporations. This means that one owner of the business cannot automatically be held liable for another owner’s wrongdoing. Depending on the nature of that wrongdoing, the suing party may be able to recover from the LLC’s assets, or personally from the business owner at fault, but he or she cannot automatically recover personally from a business owner who was not involved. This may seem intuitive, but sole proprietorships and general partnerships—even today—do not shield innocent business owners in this way.
Pass-through tax treatment is a characteristic shared by nearly all business forms except for the Subchapter C Corporation. This is only to say that LLCs are not “double-taxed.” LLC business owners only pay income tax on their own income—they do not need to pay an additional tax on the LLC’s overall income.
Flexible management structure is the hallmark of the LLC. Most other business forms in Texas are bound by numerous statutory requirements. And while many of these requirements are “subject to agreement otherwise,” some provisions cannot be contracted around. In contrast, LLCs experience virtually complete freedom of contract regarding which terms they can dictate for their business. They are even able to disclaim the fiduciary duty of loyalty that would otherwise exist between business partners.
So how is a PLLC any different from a regular LLC? The only essential difference is that PLLCs are founded by “professionals” to conduct business within their profession. Texas law considers the term “professional” to include areas in which a license is necessary to practice (such as physicians, architects, and attorneys). But why would professionals chose a PLLC instead of an LLC? Simply put: Texas law says they have to.
The distinction is perhaps because lawmakers thought it necessary to reign in the near-absolute freedom of contract possessed by LLCs. Professionals are generally held to a higher standard than other occupations, and so it would seem counterintuitive to allow them to disclaim fiduciary duties to other partners or to clients.
The formation of a PLLC is governed by a separate provision of the Texas Business and Commerce Code than that of an LLC. Aside from this fact, the precise difference between a PLLC and LLC in practice is not obvious. It bears reemphasizing that LLCs and PLLCs are relatively recent business innovations, and case law—as well as statutory provisions—will likely continue to develop over the next several years.