Deciding which business structure is best for your medical practice can be one of the most difficult and financially significant things you’ll do, besides treating patients. Set up your practice the right way and you’ll enjoy tax benefits while adding an extra layer of protection against liability judgments.
Unincorporated practices are easier and less expensive to set up than incorporated businesses, which is why some doctors favor them.
This is the simplest, cheapest way to get started in practice. Setting up a sole proprietorship involves minimal paperwork. When you die, so does the proprietorship. You and your business are treated as a single entity for tax purposes, so you simply report your practice’s profits on Schedule C of your Form 1040. You also pay its debts from your own bank account. The downside—and it’s a biggie—is that your personal assets can be claimed to settle any lawsuit against the business.
This is much like a sole proprietorship in structure and simplicity, though having multiple partners does necessitate a bit more paperwork. More important, each doctor is personally liable for any claim against the partnership collectively, or against one of the partners individually, regardless of who is to blame. This is known as “joint and several liability.”
Limited liability partnerships (LLP)
This is the only type of unincorporated practice that will protect you from personal liability for your partners’ or employees’ malpractice. Your investment in the business still could be at stake if someone successfully sues the practice and the award exceeds your insurance limits. But at least you’ll never have to worry about losing your house, savings, or personal investments because of the acts of another. An LLP can be organized where every partner participates in decision making, regardless of seniority or income distribution. Moreover, the LLP has the option to create multiple classes of partners, each with different voting rights.
Incorporated practices are more formal, costly, and involve more paperwork than unincorporated ones. But they also provide more benefits. In the setups that follow, the doctors’ personal assets are protected from judgments, which are considered business debts
This structure has three levels of authority: shareholders (owners), a board of directors, and officers. C corporations can issue stock, which means physicians can buy into the practice or sell their shares without dissolving the corporate structure. There are generally no restrictions on how many shareholders the corporation can have, or on the number of shares it can issue. C corporations can issue two types of shares: preferred, which have priority when the practice is liquidated, and common shares. C corps can also issue voting and nonvoting shares, to allow for differences in seniority.
The major downside of C corporations is that profits are taxed twice, first at the corporate level and again when the physician shareholders receive their cut.
Like a C corporation, an S corporation can issue stock. However, it’s limited to 75 shareholders and it can’t issue both common and preferred shares of stock. In addition, profits in an S corporation have to be distributed in proportion to each owner’s stake in the business.
The biggest advantage S corps have over C corps is that profits can flow directly to the owners’ personal tax returns. Because of this, an S corporation’s profits aren’t double taxed. In that respect, an S corp is similar to an LLP.
The major drawback of an S corporation is that, with the exception of health insurance premiums, you can’t write off the entire cost of benefits.
Limited liability companies
Limited liability companies are a sort of hybrid; they offer the liability protection of a corporation, but are taxed like a sole proprietorship, if you practice alone, or a partnership, if you have associates. LLCs are generally structured like S corporations, but with a couple of twists. For one, an LLC can have an unlimited number of owners, which is great for a growing, multi-specialty practice. There are also fewer restrictions on ownership of the practice. For instance, an LLC can be owned by another LLC, corporation, or a trust. Those aren’t options for an S corporation.