Medical professionals are in the business of helping people by administering various treatments. Whether it’s assessing symptoms to identify the best way to heal, managing an existing illness or providing specialized medical care for physical or psychological afflictions, the focus is on patient care. This focus is so prominent that other issues such as practice management and accounting issues fall to the bottom of the list. While most don’t start a medical practice for the thrill of business management, there are important decisions that need to be made. In the early stages of starting a practice, one of the most important decisions that must be made is the selection of a business entity. The entity type will determine how the business (and its owners) are taxed along with exposure to liabilities. To help clients, clients, prospects and others understand the entity structure options available, Hanson & Co has provided a summary of information on the most common types of structures used.
Business Entity Types
- Sole Proprietorship – This is the easiest business entity to form when establishing a new medical practice. Don’t let the ease of formation fool you into thinking this is the best option for your practice. Sole Proprietorships are not a separate legal entity from the owner and therefore leave them exposed to the risk and liabilities assumed by the company. The financial, legal and other obligations of the business are extended to the individual business owner. Given the nature of medical services and needed for protection from malpractice and other liabilities, this entity structure is not recommended for most medical practices.
- Limited Liability Companies (LLC) – This entity type tends to offer the best fit for medical professionals going into private practice because it offers more liability protection than other entity types and is less complex to manage. In most states, the business doesn’t pay taxes because the profit and loss are passed through to individual business owners – also known as a pass-through entity. These companies can have multiple owners and Employer Identification Numbers (EIN) while maintaining separate assets and liabilities. Owners or members of an LLC are like shareholders under the corporate structure and can be involved in the day-to-day management or turn to managers to run the business. This is attractive for many medical practices because of the limited exposure of a separate legal entity combined with the minimization of tax issues prominent in other entity types.
- Professional Limited Liability Company (PLLC)/ Professional Corporation (PC) – These entity structures are used in states where businesses requiring professional licensing and credentials are prohibited from forming LLCs. Although rules vary by state, generally it is required that all owners be licensed in the same profession, require proof of licensing with the state and have restrictions on the business name which can be selected (requiring entity-specific endings in the name). It’s important to note that PC’s are taxed differently than PLLC’s. PC’s are required to pay tax at the corporate rate whereas PLLC’s have are pass-through entities as discussed above.
- S-Corporation (S-Corp) – S-Corp’s are one of two types of corporations and it offers owners (called shareholders) the opportunity to be taxed on a pass-through basis. In other words, like LLC’s the business doesn’t pay tax but the profits and losses are passed on to individual shareholders. There are some formalities that must be followed under this entity type including the creation of articles of incorporation, regular and formal meetings of shareholders and corporate resolution authorizing certain actions. They are also considered a separate legal entity which offers limited exposure to liability that’s essential to medical professionals.
Choosing the right business entity structure for your medical practice can be a difficult decision. There are many considerations that need to be made whether it’s a new practice making the selection for the first time or an existing practice considering a change for tax reasons. Whatever the situation it’s important to consult a qualified advisor who can review your situation and determine the best structure for you. If you have questions about business entity selection or need assistance with a tax issue, Hanson & Co can help. For additional information please call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.