Professional Association (PA) vs. LLC: What's Better for Your Business?

Before you can decide between PA vs. LLC, you need more answers: What is a PA in business? What’s an LLC? And how are they different?

What is a professional association?

A professional association (PA) is a business entity designed for businesses offering a professional service. Generally, the shareholders in a PA (the people who own and run it, also called members) must be licensed in their profession. Laws governing PAs are typically established by state statutes and are often tied to state licensing boards.

Some jurisdictions require that PAs mirror the structure of a corporation, including appointing a board of directors and filing an operating agreement form and articles of incorporation. Other laws and regulations might outline requirements for ethical practices, ongoing education, and compliance with industry standards.

PAs are considered a legal entity independent of the people who participate in the PA. This provides the PA’s members with limited liability protection, meaning that personal assets remain separate from business debts.

Common PAs

PAs are commonly used in fields where professional licensing is mandatory. In some jurisdictions, only certain service professions can form a PA. Common professions that utilize the PA designation include:

• Medical doctors, dentists, and pharmacists. These professions are highly regulated and require ongoing education, making them good candidates for PAs.
• Veterinarians. Veterinary licensees must pass the North American Veterinary Licensing Examination (NAVLE) and meet requirements set by the board in each state.
• Lawyers. Attorneys commonly use PAs to structure law practices. Each member must typically maintain an active law license through the American Bar Association.
• Architects and engineers. These professions must meet safety standards and licensing requirements, and forming a PA can give them credibility.

What is an LLC?

A limited liability company (LLC) is a business entity operated by one or more people. One of the many attractions of an LLC is that it provides a simple, flexible business structure. LLCs have fewer formal requirements compared to PAs and don’t have to be owned or managed by licensed professionals.

Another benefit of LLCs is that they can have a broad range of members, including individuals, corporations, and even other LLCs. This versatility makes them popular across many industries, from small startups to large enterprises.

Like PAs, LLCs also offer liability protection for personal assets and are governed by state laws. The laws vary by state but typically involve filing articles of organization, creating an operating agreement, and maintaining compliance with annual reporting and taxes.

PA vs. LLC: Key differences

PAs and LLCs both offer limited liability protection, but they also have plenty of differences. Before you decide, learn more about the rules that will affect your business.

Ownership and membership

Owners and members of PAs must be licensed professionals who share a common field. For example, if you’re forming a PA for a medical practice, every shareholder must hold an active medical license. They’re ideal for professions that are already tightly regulated.

LLCs allow a much broader range of members. Anyone—licensed or not—can own or join an LLC. This makes LLCs more versatile, as they are not restricted to a single ownership structure, industry, or profession.

Management structure

PAs typically follow a corporate-style management system, with a board of directors and corporate officers. It’s a more formal structure, but makes it easier to maintain corporate governance and compliance, which are systems that help protect the business.

LLCs, on the other hand, offer flexible management options. One person can form a single member LLC. The business can also be member-managed, where owners run it directly, or manager-managed, where designated individuals handle day-to-day operations. 

Taxation

After determining which business structures your planned business may qualify for, take time to consider the tax implications. A PA is taxed as either a C corporation or S corporation. A C corporation may be subject to double taxation, where profits are taxed at the corporate level and then again when distributed to members. However, S corporation status can help avoid this by passing income through to shareholders.

LLCs are generally taxed as pass-through entities, which means owners pay taxes through their personal tax return. However, LLCs can choose to be taxed as an S corporation, which can have tax benefits like avoiding self-employment taxes on pass-through profits.

Formation and naming requirements

Before you can register the company with the state, you must select a name that complies with state laws and ensure no other business in the state has the same name. State laws often require PAs to include specific terms like “Professional Association” or “P.A.” in their names.

LLCs must also include specific terms, such as “Limited Liability Company” or “LLC,” in their names. However, LLCs typically have more flexibility when choosing a business name, as long as it’s not already in use or misleading.

State considerations

In addition to different rules for different types of business structures, the requirements for the same business structure may vary between states. For example, LLCs in California can’t provide professional services. Professionals must form limited liability partnerships (LLPs) or professional corporations (PCs).

On the other hand, in Texas, professionals can form a professional corporation, professional association, or professional limited liability company (PLLC), with different requirements for each. You should contact your state to determine what options are available for your specific business.

PA vs. LLC pros and cons

Considering the pros and cons of PAs vs. LLCs can help you decide which structure is best for you.

PA advantages

PAs offer a structured framework that adds professional credibility and creates clear boundaries between business and personal assets. PAs may also provide tax benefits, depending on how they’re structured.

PA disadvantages

PAs are restricted to professionals licensed in specific fields, which can limit ownership options. They also have stricter operational and legal requirements than LLCs.

LLC advantages

LLCs allow for a broader range of members and are easier to set up and manage compared to corporations. LLCs also benefit from pass-through taxation, which simplifies income tax filings.

LLC disadvantages

LLCs may lack the professional recognition associated with PAs in certain fields—and in some states, professional entities can’t form LLCs. State-specific rules for LLCs can also vary widely.

How to choose the right entity for your business

If you’re starting a new business, you have many things to consider. To determine the best business structure, consider your profession, management preferences, tax flexibility, and state laws. Write down the benefits and drawbacks of a PA vs. LLC based on your business needs.

 If you offer professional services, keep in mind that some states will allow you to form a professional limited liability company (PLLC). This type of business works substantially the same as an LLC, but requires proof of professional licensure. In other states, you can form a professional corporation (PC). If you’re just one person, you could also form a sole proprietorship (SP).

The journey to setting up a PA, LLC, PLLC, or another type of business, like a C corporation or S corporation, doesn't stop with identifying your preferred business structure. Speak with a legal advisor or tax professional to get advice on which structure aligns with your goals and legal requirements.

FAQs

Who can own a professional association?

Only licensed professionals in the same field can own a PA. For example, all members of a legal professional association must hold active law licenses in their state. The rules ensure the business upholds ethical and professional standards.

Can PAs and LLCs operate in multiple states?

Yes, but both must comply with registration and licensing rules in every state where they do business. This may include filing as a foreign business entity and meeting state licensing requirements. Consulting an attorney familiar with multi-state operations is recommended.

Can I convert a PA to an LLC?

This depends on your state’s laws and the nature of your business. Some states allow PAs to transition to PLLCs or LLCs, but the process may involve reapplying for licenses and updating documents. Get legal advice and work with a certified public accountant to make sure everything is in order.