Formation for Professional Limited Liability Companies in Texas is much the same as the Formation of a regular LLC. There a couple of requirements that stand out for those that looking to form PLLCs, however, and we’ll make sure to cover those specifically.
1. Identify your professionally licensed founding members and managers.
The founding member of a PLLC in Texas must be a professional licensed to perform the “professional services” that the PLLC offers. In fact, all members and managers of the PLLC MUST be licensed to perform those professional services. This does not prevent the business from later employing individuals in their practice that may not be licensed to perform those services, but they may never actually become members without being licensed.
Your PLLC may start as a single member and grow from there; adding members or managers later on is not a difficult process to undertake once you decide to take on additional partners in your practice.
Click Here – How Does A PLLC Protect A Professional From Malpractice In Texas?
2. Draft your Operating Agreement
Your Operating Agreement is a contract between you and your business— You are making certain promises to run, maintain, and operate your business in compliance with the rules in your Agreement. This is why consulting an attorney to draft your PLLC Operating Agreement is so crucial.
Your operating agreement is the contract between the members and the PLLC. In essence, it is a list of obligations and promises that the members and managers make to the business about how the business will be run. I often advise my clients to think of the operating agreement like a contract, and that if they were to fail to follow the operating agreement, they would be in breach of that contract and could be held liable.
Proper adherence to whatever operating agreement you use is absolutely crucial to maintaining the limited liability status that your PLLC will afford you. This is why most attorneys will advise against just using an operating agreement from your friend or brother in law or even from some form site on the internet—You need to fully understand the obligations you are undertaking and the promises you are making if you are going to run your business correctly and within the applicable law.
Your operating agreement will spell out the processes and guidelines for taking certain actions, how many of the members must vote on changes to the business, and the procedure for distributions of profit, or when distributions of funds are prohibited. The guidelines in the operating agreement exist to protect the business from owners that may put the PLLC at risk, and exist as a check on the membership.
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3. File your Articles of Organization
Filing your Articles of Organization is actually fairly simple: using the Secretary of State’s website, you will inform the SoS of Texas that you are forming a PLLC and give them the required information: the name of the company, the names and address of the members and managers, the name and address of the registered agent, the business the PLLC will be conducting, etc. Once the form is filed, it is usually about 10 days before the Certificate of Good Standing is sent back to the person who filed the Articles of Organization.
4. Obtain your EIN and open your accounts
The final step in formation of your PLLC is to obtain an Employer Identification Number. The EIN is like the social security number for your business and will be essential in the conduct of business and opening bank accounts. This number is obtained from the IRS using an online process where you will receive your EIN the same day.
The Benefits of Forming a Professional Limited Liability Company (PLLC) in texas
Forming a Professional Limited Liability Company (PLLC) offers several advantages over other business structures, making it an attractive choice for licensed Texas professionals in various fields. Here are some of the key benefits of forming a PLLC:
- Limited Liability Protection: One of the primary advantages of a PLLC is that it provides limited liability protection for its members. This means that the personal assets of the individual professionals are shielded from the debts and liabilities of the business, except in cases of professional negligence or malpractice. This protection can safeguard the members’ personal wealth, such as their homes, cars, and personal bank accounts, from potential legal claims or lawsuits related to the business.
- Tax Benefits: PLLCs are by default, taxed as pass-through entities, similar to sole proprietorships or partnerships. This means that the profits and losses of the business are passed through to the individual members, who then report their share of income on their personal tax returns. This structure offers potential tax advantages, as members may be able to deduct business expenses and avoid double taxation that corporations face. Importantly, any elections of the company for other tax structures should be thoroughly discussed with a CPA.
- Professional Credibility: Forming a PLLC can enhance the credibility and professional image of a business. Clients and customers often perceive PLLCs as more established and trustworthy compared to sole proprietorships or general partnerships, as they require members to be licensed professionals and adhere to stricter regulations and standards.
- Flexible Management Structure: PLLCs offer flexibility in their management structure, allowing members to decide how the company will be managed and operated. This can be outlined in the company’s operating agreement, which serves as a contract among the members, defining their roles, responsibilities, and decision-making processes.
- Continuity of Existence: Unlike sole proprietorships or general partnerships, PLLCs have a perpetual existence, meaning they can continue to operate even if one or more members leave or pass away. This continuity can provide stability and ensure the uninterrupted provision of professional services.
Professions Eligible to Form a PLLC
PLLCs are specifically designed for licensed professionals who provide services that require specialized knowledge and expertise. Here are some examples of professions that commonly form PLLCs:
- Attorneys and Law Firms: Lawyers and law firms frequently establish PLLCs to provide legal services while benefiting from the limited liability protection and credibility associated with this business structure.
- Accountants and Accounting Firms: Certified Public Accountants (CPAs) and accounting firms often form PLLCs to offer accounting, tax preparation, and financial advisory services.
- Architects and Architecture Firms: Licensed architects and architecture firms commonly utilize the PLLC structure to provide architectural design, planning, and consulting services.
- Healthcare Professionals: Medical professionals such as physicians, dentists, chiropractors, and psychologists may choose to form PLLCs to operate their practices while limiting their personal liability.
- Engineers and Engineering Firms: Professional engineers and engineering firms can establish PLLCs to provide various engineering services, including civil, mechanical, electrical, and environmental engineering.
Forming a PLLC is altogether a straightforward process, but can have many pitfalls if you are not familiar with the common issues facing PLLC owners in Texas. This is the foundation of your business and you don’t want to find out there’s a problem five years down the road. Texas Business Formation Attorney Nathaniel Gilbert assists professionals in starting and running their PLLCs in an efficient and effective manner, setting them up for success for years to come. To learn more about PLLCs and Business Law in Texas, Click Here. To contact Nate directly, Click Here.
