Physicians and other healthcare industry professionals should consider establishing their practices as legal business entities. Understanding the most significant features of these popular options will help you make the most appropriate decision for your practice.
Sole Proprietorship
Sole proprietors make their own decisions and pay for a license, permit, and business name registration, making this business entity easy and inexpensive to establish.
Owners record their practice’s net profits and losses on an IRS Schedule C form, which they use to calculate their individual income tax payments. Sole proprietors assume all liability for claims against their practices, not including medical malpractice, for which they must carry insurance policies.
Partnership
Healthcare professionals may choose to share expenses and can rely on each others’ expertise to achieve success. However, partners are responsible for their own and each other’s expenses and medical liability and sign legally binding agreements outlining the details of their arrangement and how to dissolve it.
Limited Liability Partnership
This entity may exempt any of the partners from specific responsibilities under certain circumstances. For example, one partner may give up some of the profits while having no liability for the partnership’s debts.
C Corporation
The percentage of ownership determines the financial and management rights of a C Corp’s members. For this reason, C Corps attract healthcare industry investors who can acquire a significant stake in the corporation from owners who may transfer their shares to anyone they choose.
This structure protects shareholders’ assets from various business liabilities. Still, shareholders must incur the expense of paying taxes on both corporate and personal income and file two separate tax returns.
S Corporation
A significant advantage of an S Corp over a C Corp is that it distributes income directly to shareholders and taxes them only once at the individual level. In addition, shareholders can deduct up to 20% of the business’s income and use business losses to offset their tax obligations.
S Corps may not have more than 100 shareholders who may not freely transfer their stock. All shareholders’ stock is valued equally, making preferential treatment of some shareholders impossible. Investors may find this arrangement less enticing than what they can obtain through a C Corp.
Limited Liability Company
In states that allow health professionals to form LLCs, members can combine the advantages of partnerships and corporations, including distributions of profits and protection of personal assets from creditors, legal judgments, and financial liability not associated with malpractice. For tax purposes, members must file IRS form 1065, showing their percentage of ownership and taxable income.
Healthcare industry professionals should carefully consider the pros and cons of multiple business entities before making a choice.