The What, Why and How of PCs and PLLCs
December 8, 2020
Professional Corporations and Professional Limited Liability Companies
One of the first considerations entrepreneurs must make is which entity type to form. For licensed professionals, one of the many options available is a “professional” entity, meaning a professional corporation or professional limited liability company.The What: The “professional” designation provides a statutory overlay to the existing corporation and limited liability statutes. This means that where the professional statute is silent, the underlying corporate or LLC statute governs. This also means that where there is a conflict between the underlying entity statute and the professional statute, the professional statute controls. One of the most prominent examples of how the professional statute works concerns investors. PCs and PLLCs have restrictions on who can be owners. In Iowa, owners, directors, managers and officers must be licensed professionals, as defined in the statute, such as doctors, lawyers, accountants, engineers, architects, therapists, social workers, etc. Practically speaking, this impacts how and why one might invest in the entity. Professional entities do not lend themselves to passive investment. The pool of investors excludes entities and non-licensed individuals entirely, thus, limiting marketability and resale. In addition, even licensed professionals who are not licensed in the same profession or a complimentary professions (such as medicine and surgery) are prevented from investing.The Why: So, why do licensed professionals choose to form PCs and PLLCs? Though the PC or PLLC designation carries with in some level of esteem in the eyes of the public, three of the most significant reasons for forming a PC or PLLC are:Malpractice “Buffer”. In addition to the protection afforded to owners’ personal assets from the debts of a traditional corporation or LLC, a PC or PLLC also insulates other owners from the malpractice of another owner.“Active” investors. While deterring passive investment may make professional entities unattractive to some entrepreneurs, it is very attractive to others. For professional entity investors, this means “skin in the game” is very literal. Investor risk or reward is not merely financial, but also professional, social, mental and emotional. Therefore, owners’ decisions are based on financial and personal impacts on the owners. Succession. Active investment creates additional benefits from a succession planning perspective. Because successors are generally active in the practice, there is some additional assurance about the long-term health of any income stream of the original owner from the PC or PLLC, such as a lease with the original owner for the building or a promissory note with the original owner in connection with the purchase of the original owner’s equity.The How: As mentioned, professional entity statutes add a layer of regulation to the underlying corporation or LLC statutes. This means that the general formalities of formation are the same (e.g., articles of incorporation or certificate or organization filed with the Secretary of State, etc.). However, the incorporator or organizer must be a licensed professional, and the articles of incorporation or certificate of organization must specify the type of professional services for which the entity was formed.Questions: If you are interested in forming an entity, or have questions about PCs or PLLCs, you may contact Joseph M. Miller at JMM@shuttleworthlaw.com or (319) 365-9461.
Joseph M. Miller
Joseph Miller is an Attorney at Shuttleworth. His work primarily focuses on representing both companies and individuals in matters relating to business and health care. Some of the health law services he provides include compliance training and programs, HIPAA compliance planning (Business Associate Toolkit, Stark and anti-kickback analysis, CHOW analysis for business transactions, and review of employment and recruitment agreements). Joseph’s business law services include M&A, securities and venture capital, and corporate formation (nonprofits, commercial contract review and outside general counsel). Helping people is the central focus of Joseph’s career. He is licensed to practice in Iowa and Arizona, and is fluent in Spanish.