Choosing between an LLP and a PC usually comes down to a tradeoff: a professional corporation electing S-corporation status can save you thousands each year in self-employment taxes, while a limited liability partnership gives you a simpler governance structure and a flexible partnership agreement instead of corporate formalities. Both entities shield your personal assets from a co-owner’s malpractice, both restrict ownership to licensed professionals, and neither one protects you from your own professional mistakes. Whether you actually get to choose depends on your state and your profession.
The Tax Difference That Usually Decides It
Self-employment tax is where the real money difference lives, and it’s often the deciding factor for high earners.
An LLP is a pass-through entity. The partnership files Form 1065 and issues each partner a Schedule K-1; partners then report their share on their personal returns.1Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income2Office of the Law Revision Counsel. 26 U.S.C. 1401 – Rate of Tax3Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security Partners can deduct half of that tax when calculating adjusted gross income, but the upfront bite is real.
A PC starts life as a C-corporation paying 21% at the entity level, then distributing after-tax profits as dividends taxed again at the shareholder level.4Office of the Law Revision Counsel. 26 U.S.C. 11 – Tax Imposed5Office of the Law Revision Counsel. 26 U.S.C. 301 – Distributions of Property That double taxation makes plain C-corp status unattractive for most practices, so most PCs file Form 2553 and elect S-corporation status. The election must be filed within two months and 15 days of the start of the tax year it’s meant to cover, and the corporation must have no more than 100 shareholders (all U.S. individuals or certain trusts and estates) and only one class of stock.6Office of the Law Revision Counsel. 26 U.S.C. 1361 – S Corporation Defined
Once the S-election is in place, owner compensation splits into two buckets: salary and distributions. The salary is subject to FICA (also totaling 15.3% between employer and employee shares), but distributions on top of that salary are not subject to employment tax. A physician earning $400,000 through an S-corp PC who pays herself a $250,000 salary and takes the remaining $150,000 as a distribution avoids roughly $4,350 in Medicare tax on the distribution portion alone (2.9% of $150,000). Below the Social Security wage cap, the 12.4% savings run larger still.
The catch: the IRS scrutinizes this arrangement. Shareholder-employees must receive a “reasonable salary” before taking distributions, and the agency has successfully challenged owners who paid themselves artificially low wages to duck employment taxes.7Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers Courts look at what comparable professionals earn in similar roles. Calling something a distribution doesn’t insulate it from employment tax if it was really pay for services.
One more wrinkle: self-employment income above $200,000 (or $250,000 for joint filers) triggers an additional 0.9% Medicare surtax.8Internal Revenue Service. Questions and Answers for the Additional Medicare Tax For LLP partners it applies to all self-employment income above the threshold. For S-corp PC owners it applies only to wages, giving the salary-plus-distribution split another edge.
What Each Structure Actually Protects
Neither entity shields you from your own malpractice. If you personally commit a professional error, you’re personally on the hook regardless of how the practice is organized. The value of both entities is protecting you from your co-owners’ mistakes.
In a PC, that protection is straightforward. If one surgeon in a four-physician practice gets sued for a surgical error, the other three shareholders’ personal assets are generally off-limits. The corporation itself may be liable, but the uninvolved shareholders’ homes and savings stay protected.
In an LLP, the answer depends on your state. Under the Revised Uniform Partnership Act, adopted by a majority of states, an LLP partner has no personal liability for any partnership obligation, whether it arises from a co-partner’s malpractice, a broken lease, or an unpaid vendor bill. These are the “full shield” states. A smaller number still use older statutes that protect partners from a colleague’s professional negligence but leave them exposed to ordinary business debts like equipment loans or office leases. Check which type your state follows before you commit.
One footnote catches people off guard. Liability protection evaporates the moment you sign a personal guarantee. Landlords, lenders, and equipment lessors routinely ask small-practice owners to guarantee commercial obligations personally, and once you sign, the entity shield stops mattering for that particular debt. Professional liability insurance stays essential for either structure.
How Each One Is Run Day-to-Day
An LLP runs on its partnership agreement. That document spells out who makes decisions, how profits get divided, and what happens when someone wants to leave. Partners can write nearly any arrangement they want: equal profit splits, seniority-based shares, managing-partner authority, unanimous-vote requirements. There’s no legal obligation to hold formal meetings, elect a board, or keep official minutes. Three accountants who want to run their firm by consensus and split profits based on the clients each one brings in can do exactly that.
A PC looks more like a traditional corporation. Shareholders elect a board of directors, and the board appoints officers. Even a two-person medical practice needs annual shareholder meetings, minutes of major decisions, and maintained corporate records. Skipping these formalities can expose owners to personal liability by undermining the entity’s legal standing. The tradeoff is a clear chain of authority, which matters more as a practice grows past a handful of owners.
In both structures, ownership is restricted to individuals holding the professional licenses required for the services the entity provides. A non-licensed office manager or outside investor generally cannot hold an ownership stake in either.
Bringing Partners In and Buying Them Out
Ownership transfers in a PC are tightly constrained. Shares can only go to someone who holds the appropriate professional license. A departing ophthalmologist in an eye-care PC can’t sell her shares to an outside investor, a family member, or even a licensed professional in a different field. The board or a specified majority of shareholders must approve the transfer, and most states require the restriction to be printed on each stock certificate. Shares that pass through inheritance or divorce create a problem: the new holder typically can’t vote them, and the corporation must redeem them within a set period.
In an LLP, transfers are governed by whatever the partnership agreement says. Partners can build in rights of first refusal, valuation formulas, mandatory buyouts on retirement or death, or almost any other arrangement. That flexibility is an advantage only if the partners actually think through the scenarios in advance. Without clear buyout provisions, a departing partner’s exit can trigger disputes or even dissolution.
What Happens When Someone Leaves for Good
A PC can exist indefinitely. Shareholders come and go, but the entity continues as long as it meets state filing requirements and maintains at least one licensed shareholder. That permanence makes succession planning simpler: a retiring owner sells shares and walks away while the entity carries on without interruption.
An LLP is more fragile. Under the partnership model adopted in most states, a partnership at will can dissolve when any partner gives notice of intent to withdraw. Even a term partnership can dissolve within 90 days of a partner’s death, bankruptcy, or wrongful departure if at least half the remaining partners vote to wind up. A well-drafted partnership agreement can override these defaults by specifying that one partner’s departure doesn’t kill the entity, but without those provisions the default outcome can be surprisingly disruptive, forcing the remaining partners to form a new entity or execute a continuation agreement while trying to hold client relationships together.
Formation and Ongoing Compliance
Forming an LLP is relatively simple. An existing general partnership files a statement of qualification (sometimes called a registration) with the state, declaring its election to become an LLP. The filing usually includes the firm’s name, office address, and a designated agent for service of process. Most states require annual renewal, and the entity’s name must include a designator like “LLP” or “Limited Liability Partnership.”
Forming a PC means incorporating under the state’s professional corporation statute. You file articles of incorporation specifying the professional services the entity will provide, appoint initial directors and officers, and in many states obtain a certificate from the relevant licensing board confirming that all shareholders hold active licenses. Filing fees vary by state but commonly fall in the $100 to $300 range. After formation, the PC must observe corporate formalities: annual meetings, recorded minutes, and periodic reports to the secretary of state. The name must include a designator like “P.C.,” “Professional Corporation,” or another abbreviation required by state law. Using the wrong designator, or omitting one, can create confusion about your liability status and may violate state naming rules.
State and Licensing Rules Come First
Before weighing tax savings against governance simplicity, confirm you have a choice at all. States control which entity types are available to which professions through their professional corporation acts and partnership statutes. In some states, attorneys are required to practice through an LLP and cannot form a PC. In others, physicians must incorporate as a PC. A few states give practitioners a genuine choice. There’s no universal rule.
Practicing without proper entity formation or without a valid license carries serious consequences. Most states classify unauthorized practice of a licensed profession as a criminal offense, with penalties ranging from misdemeanor to felony depending on the jurisdiction. Services rendered through an improperly formed entity may be unenforceable, and malpractice coverage may not respond to claims arising from unlicensed practice.
Check with your state licensing board and secretary of state to confirm which structures your profession can use. Once you know the options, the choice usually comes down to whether the self-employment tax savings of an S-corp PC are worth the corporate formalities, or whether the flexibility of a partnership agreement matters more to how you actually want to run the firm.