When a group of licensed professionals (e.g., doctors, attorneys, psychologists, etc.) decide to start a business in Washington, their first thought is often to form a limited liability company (LLC). The LLC has become the most popular type of entity in recent years because it offers the liability protection of a corporation without the rigid managerial and economic structures imposed by a corporation. In short, it affords a business considerable flexibility without sacrificing security.
But for licensed professionals in Washington, there is a special type of LLC—the aptly, if unimaginatively, named professional limited liability company (PLLC). Today’s post will outline some of the key features of the PLLC.
Professionals Eligible To Form A PLLC
PLLCs are reserved for professionals who must be licensed to render professional services within the State of Washington. This includes, but is not limited to, the following professions:
- Certified public accountants
- Podiatric physicians and surgeons
Again, this is not an exhaustive list. The only requirement to be eligible to form a PLLC is being “duly licensed or otherwise legally authorized” to provide the professional services within Washington.
Tip: A manager, member, agent, or employee of a PLLC must be licensed at all times to render the professional service provided by the PLLC within at least one state in which the PLLC conducts business. In the event that one of these individuals ceases to meet this requirement, that person must immediately sever all employment with, and financial interests in, the PLLC. Failure to do so may subject the PLLC to dissolution by the secretary of state.
Requirements For Forming The PLLC
A Washington PLLC is formed by filing a single document—the certificate of formation—with the Washington Secretary of State. The certificate identifies basic information about the PLLC, including its name, address, and registered agent.
Overall, the process of forming a PLLC is quite similar to that of a regular LLC. But there are several important differences that must be observed in forming the PLLC.
Related: How To Form A Washington LLC [Step-by-Step]
Whereas most Washington companies can engage in any lawful business, PLLCs are limited to providing the professional service(s) for which they were formed. Consequently, it is important during the formation process that a PLLC accurately identify in its certificate of formation the specific professional service or services that it will provide.
Tip: A PLLC may provide more than one professional service; however, it must ensure its certificate of formation identifies each service it provides.
Another important requirement to observe during the formation process is that the certificate of formation be executed by an individual licensed to render the professional services for which the PLLC is organized. This is an easy requirement to overlook, especially since lawyers often execute the certificate of formation on behalf of their clients.
Requirements For Naming The PLLC
There are certain restrictions on the name of a PLLC that’s organized in Washington. That is, the name must include one of the following:
- “professional limited liability company”
- “professional limited liability Co.”
Note: A PLLC organized to provide dental services must contain the full names or surnames of all members and no other word than “chartered” or the words “professional services” or the abbreviation “P.L.L.C.” or “PLLC.”
Limits On Limited Liability
For many professionals, their primary exposure to liability is via malpractice claims. Some professionals believe, understandably, that practicing within a PLLC may limit their liability for malpractice. However, it must be emphasized that a PLLC will not protect individual members from liability for their own malpractice.
Example: David and Deirdre are dentists and have a PLLC. If David gets sued for malpractice, the PLLC won’t prevent him from being held personally liable for his malpractice.
This raises an important question: why form a PLLC if it doesn’t protect members from being liable for malpractice? Isn’t that the whole point?
There is still very good reason to form a PLLC: namely, limited liability for malpractice committed by other members of the PLLC. Although a PLLC will not protect individual members against liability for their own malpractice, it does protect the other members from being held personally liable for the malpractice of another member.
Example: David gets sued for malpractice. The plaintiff, David’s former patient, names not only David but also Deirdre as defendants in the lawsuit, despite Deirdre having had no interaction with the patient. While the PLLC wouldn’t protect David from being personally liable for malpractice, it would protect Deirdre from being held liable for David’s malpractice.
Even beyond malpractice, there are plenty of reasons limited liability protection is essential to have. For instance, it protects the members from being held personally liable for things like premises liability (e.g., a patient slips and falls entering your law office) and breach of contract (e.g., a commercial lease), to name just a few.
Professional Liability Insurance Requirements
On a related note, PLLCs are required by statute to maintain professional liability insurance for themselves and for every member practicing in Washington. The minimum amount of insurance that must be maintained is $1 million. (A greater amount may be required for certain professions or specialties, as established by the state’s insurance commissioner.)
Failure to maintain adequate insurance may jeopardize the members’ personal liability protection. If the PLLC fails to maintain adequate insurance for either the entity or the members, then the members are personally liable to cover the gap in insurance.
Example: A group of 3 psychologists has a professional liability insurance policy of only $500,000 covering the PLLC and each member. One of the members is sued for malpractice and recovers a $1 million award. In that case, all the members of the PLLC would be personally liable to cover the $500,000 gap in coverage.
The PLLC Operating Agreement
As mentioned earlier in this post, it’s fairly straightforward to form a PLLC (though there are traps for the unwary). The more complicated task, once the PLLC has been formed, is drafting the “operating agreement.”
The operating agreement is a private agreement among the members of the PLLC; it is not filed with the secretary of state. Its purpose is to establish rules governing management, capital contributions, profit allocation, tax treatment, and other key considerations for the members. Given the complexity of the operating agreement, most PLLCs enlist the help of a Washington business lawyer to draft the agreement.
Other Types Of Entities For Professionals
The PLLC, like the LLC, has become the preferred entity for professionals in recent years, for the reasons given above. However, it is not the only type of entity available to professionals in Washington. Professionals also have the option to form a Professional Service Corporation (known as a “PS” or “PC”) or a Limited Liability Partnership (LLP).
Making mention of these is as far as this post will go, focused as it is on the PLLC. With that said, there can be good reasons to opt for one of these types of entities rather than a PLLC, reasons which any good Washington business lawyer can walk you through.
The PLLC is a great choice for professional service providers looking to start their own business. It provides limited liability protection but also affords maximum flexibility for structuring the relationship between and among the members of the business.
If you need help with forming a Washington PLLC, please contact Mark to schedule a free consultation.
Related: Benefits Of S Corporation Tax Treatment For Washington LLCs