When Texas physicians are looking to form an entity for their practice, one of the most common questions is whether to form a professional association (“PA”) or professional limited liability company (“PLLC”). While both entities accomplish the primary entity goal of providing a strong liability shield for its owner, the corporate structural and operational differences between the PA and PLLC provide for a contrast to choose between.
The PA is the older of the two entity choices and is more rigid in its operation, as it structurally resembles a corporation and is broadly governed by the same provisions of the Texas Business Organizations Code (“TBOC”) applicable to for-profit corporations. The owners of a PA, called members, form the entity and will elect directors to govern and operate the entity. Like a corporation, the directors must appoint at least a president and secretary as officers to manage the day-to-day operations of the entity. A key restriction in the operation of the PA is the TBOC requirement the directors must be members, and the president must be a director. If there is concern about outside parties becoming involved in your practice, this can be a benefit of the PA to prevent that influence and involvement.
In keeping with its corporate heritage, PAs must maintain minutes from the annual meeting of its members and meetings of its directors, as well as adopt bylaws to be the controlling document of the entity. Historically, PAs were also required to file annual reports with the Texas Secretary of State, but that requirement was removed in 2016. Finally, PAs are limited from a tax perspective as they must be taxed as corporations, meaning they either default to C-corporation taxation or elect subchapter S-corporation taxation.
While the PA is based on corporation law, the PLLC is generally governed by the TBOC’s limited liability company provisions. As a result, a key distinction between the PA and PLLC is flexibility. The PLLC is organized by its owners, also called members, who can be either licensed individuals or other professional entities (as long as the professional entity is also organized by physicians). From an operational standpoint, PLLCs can be run by their members or through appointed managers. While the managers typically are also members, unlike the PA, there is no requirement that they have to be. Further, PLLCs have the option to elect officers and maintain annual meetings, but neither is required. With this flexibility, it is critically important that the PLLC company agreement, its controlling document, is well drafted in order to properly identify and assign the powers that belong to each party. This avoids confusion and reliance on the TBOC. PLLCs also have flexibility in choosing a tax structure with the default treatment being a disregarded entity or partnership (based on the number of members) or it can elect to be taxed as a C-corporation or S-corporation.
With both options providing an equally strong liability shield, the decision between the PA and PLLC comes down to which structure, control system, and tax treatment is preferred. By looking at the ownership makeup, purpose of the entity, desired rigidness of structure, and preferred tax treatment, a decision can be made regarding which entity form would be best. Further, while this article focused on Texas physicians, these entity forms, along with others, can be utilized by other types of licensed professionals, including non-physician health care professionals.
If you would like more information or assistance in forming a PA, PLLC, or any other entity structure, please schedule a consult at email@example.com.