What is a Texas PLLC?

PLLC stands for “professional limited liability company.” In fact, PLLCs are nothing more than LLCs (limited liability companies) that perform a professional service. Of course, this explanation is meaningless without first understanding the form and function of an LLC in Texas.

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.

***This article was prepared by Matt Lloyd and edited by Chloe Love.

Why do Texas businesses incorporate in other states?

Many businesses benefit from incorporation. Limited liability, an unlimited lifespan, and various tax breaks are advantages every corporation enjoys. All incorporation, however, is not created equal. Every state has its own laws governing the formation and operation of corporations.

A business may incorporate in any state it chooses, regardless of where it is physically located. It should come as no surprise, then, to learn that many businesses are incorporated out of state in order to take advantage of another state’s business laws. Of all such states, none has proven more alluring to corporations than Delaware. Nearly a million business entities have legal foundations in Delaware, and that includes over half of all the Fortune 500 corporations.

Why Delaware? There are three major reasons. First, its laws are among the least restrictive to corporate decision making. For example, while many states, including Texas, require a two-thirds shareholder vote to affect most extraordinary corporate transactions, Delaware requires only a simple majority. Second, its courts are viewed as efficient and sophisticated in the area of corporate law and finance. Perhaps Delaware’s most distinct advantage is its Court of Chancery, which can date its existence back to 1792. Over the years this court has compiled well-recorded case law in corporate matters. Combined with the fact that judges rather than juries sit as the decision makers, corporations have ample confidence in the courts of Delaware. Third, the public sentiment is generally pro-corporation. People and elected officials understand that a substantial amount of the state budget comes from fees and taxes associated with businesses incorporated there, so state laws are geared towards maintaining this reputation.

If you think this is why Texas businesses incorporate in other states, you are only partially right. In reality, many do not incorporate elsewhere. For smaller or purely local businesses, there are several reasons to incorporate right here in Texas. Perhaps the biggest reason is that businesses incorporated out of state must qualify as “foreign corporations” where they do business. Since there are fees and taxes associated with this process, it often becomes more of a financial burden than benefit for smaller businesses to incorporate out of state. Another reason is that businesses incorporated in Delaware can be subject to lawsuit there. As a result, business owners may be hauled into a courtroom hundreds of miles away from their place of business (and residence for that matter). Finding a lawyer locally licensed in Delaware, or familiar enough with Delaware corporations to advise on corporate structure changes (or the expense of hiring Delaware counsel in addition to Texas counsel), is also a reason to register locally and form under Texas laws.

It is also important to understand that Texas is arguably among the three most corporate friendly states in America (Delaware and Nevada being the other two). Texas and Nevada business laws are very similar to those of Delaware, if not preferable in many instances. Perhaps the only thing lacking in both Texas and Nevada is corporate confidence in the courts. Over time, however, it would not be surprising to hear one ask the question, “Why do so many businesses incorporate in Texas?”

**This article was prepared by Matt Lloyd, and edited by Chloe Love.