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Which Business Structure is Best for my Medical Practice?

Which Business Structure is Best for my Medical Practice?

Over the years many providers have come to my office expressing an interest in owning a medical practice, healthcare facility, or healthcare business. During these meetings, it is important to obtain pertinent background information about the healthcare entity followed by a discussion about some of the regulatory and licensing issues that may arise. Equally important is determining how the healthcare entity should be structured for asset protection and tax purposes. A corporate healthcare attorney like myself can determine whether it is best for you to create a corporation, LLC, or an LLP. Admittedly, some of the more complex tax issues should be discussed with an attorney that specializes in tax law. Here is an overview of some of the basic differences between the different business entities.

Sole Proprietorship

An individual who does not create an entity.

  • No taxes are imposed on the entity. Instead, the individual owner reports the income and pays the income taxes.

Professional Corporation (a/k/a “P.A.”):

A corporation in which one or more shareholders must be licensed professionals (or entities that themselves are wholly-owned by licensed professionals). The P.A. can be taxed either as an S Corporation or as a C Corporation.

 

Corporation:

A corporation whose owner is not limited solely to licensed professionals. The corporation can be taxed either as an S Corporation or as a C Corporation.

  • C Corporation: Unless it elects otherwise, a corporation must report its own income and pay its own income taxes, under Subchapter C of the Internal Revenue Code.
    • A C Corporation is also subject to Florida’s state corporate income tax at a rate of 5.5%. Any distributions of its earnings to its shareholders requires the shareholders to recognize dividend income, resulting in a second layer or taxation.
    • Many professional C Corporations attempt to avoid distributing dividends by paying all income as compensation (because although it is still taxable to the recipient employee/shareholder, the C corporation gets a deduction for such compensation, resulting in one-layer of taxation).
    • If a C corporation pays excessive compensation, the IRS may try to treat some of the compensation as a dividend distribution and deny the deduction to the corporation with respect to such imputed dividend.

LLLP

A limited liability limited partnership comprised of at least one general partner and at least one limited partner, which is created by filing a Certificate of Limited Partnership and indicated LLLP status in such certificate. The status provides a general liability shield for all of the general partners.

S Corporation

No tax generally imposed on a corporation that elects to be treated as an “S Corporation” under Subchapter S of the Code. Rather, the tax consequences flow-through to the shareholder(s).

  • Each shareholder reports his or her pro rata share of the tax consequences based on his or her ownership in the S corporation and pays the income tax at his or her effective personal income tax rate.
  • Any distribution to the shareholder(s) is not treated as a dividend, but rather first is a return of basis and then excess is capital gain: provided, however, if the S corporation was formerly a C corporation within the past 10 years and had earnings and profits, then a portion of the distributions of the S corporation could be subject to tax as a dividend (Rather than a return of basis).
  • Shareholder distributions:
    • must be made in the ratio or ownership;
    • can be abused to “save” payroll taxes applicable to compensation; and
    • lack the asset protection potential of compensation payable to the head of a family under Florida law.
    • A P.A. generally should elect to be taxed as an S corporation, preferably from inception.
    • If a corporation has already been taxed as a C corporation, then conversion to S Corporation status must be carefully considered to ensure that the “built-in gains” tax on unrealized receivables can be handled through proper accrual and payment of accounts payable and compensation.

Professional Limited Liability Company (a/k/a “P.L.”)

A limited liability company in which one or more members must be licensed professionals (or entities that themselves are wholly-owned by licensed professionals). The P.L. can be taxed either as a disregarded entity (if there is only one member), as a partnership (if there is more than one member), or an S Corporation (whether it has one or more members.)

LLC

A limited liability company whose ownership is not limited solely to licensed professionals. The LLC can be taxed either as a disregarded entity, a partnership or an S corporation.

General Partnership

An entity that is comprised of two or more general partners. No written document is necessary to create a general partnership.

LLP

A limited liability partnership is comprised of two or more general partners, which registers with the state by filing a Statement of Qualification. The registration provides a general liability shield for all of the partners.

Limited Partnership

An entity comprised of at least one general partner and at least one limited partner, which is created upon the filing of a Certificate of Limited Partnership with the state.

There are many factors to consider when deciding how to structure your medical practice or healthcare entity. You should obtain an in-depth analysis of the various business structures so that you can choose the best one suited for your needs. While it is not impossible to change from one business entity type to another, it is always best to choose the best structure from the very beginning. A capable attorney at Jones Health Law, P.A. would be happy to guide you through this process.

***This blog post does not constitute legal advice and is only intended for educational purposes. You should consult a licensed attorney in the State of Florida that specializes in healthcare law.***

General Partnership vs Joint Venture (Video)

Clients often come to my office very excited about a new business that they are hoping to start or purchase from an existing owner. Many times they need financial help, the expertise and knowledge of someone else with experience in the industry, or a combination of both. As a Corporate Attorney, I’ve drafted numerous contracts and agreements throughout the years in an effort to protect my clients while they achieve their company goals. I can appreciate the different types of contracts and the terms contained therein in a way that some of my clients cannot. Sometimes I have to tell them to take step back and really consider all of their options so that they are happy with the arrangement for the duration of the agreement.

For example, a client recently came to me asking to draft corporate documents for them, but also told me that they were looking for an investor to partner up with them for the acquisition of a restaurant. After discussing the pros and cons of having a partner vs. obtaining alternative financing (i.e. bank loan) we discussed the type of relationship they would like to enter into. I asked them if they would like to enter into a General Partnership or a Joint Venture with the prospective partner. This was not something that they considered and they didn’t have a clue about what I was referring to. I thought that it would be useful to highlight the major differences between the two in this post.

The Debate Over General Partnerships vs. Joint Ventures

Clients often come to my office very excited about a new business that they are hoping to start or purchase from an existing owner. Many times they need financial help, the expertise and knowledge of someone else with experience in the industry, or a combination of both. As a Corporate Attorney, I’ve drafted numerous contracts and agreements throughout the years in an effort to protect my clients while they achieve their company goals. I can appreciate the different types of contracts and the terms contained therein in a way that some of my clients cannot. Sometimes I have to tell them to take step back and really consider all of their options so that they are happy with the arrangement for the duration of the agreement.

For example, a client recently came to me asking to draft corporate documents for them, but also told me that they were looking for an investor to partner up with them for the acquisition of a restaurant. After discussing the pros and cons of having a partner vs. obtaining alternative financing (i.e. bank loan) we discussed the type of relationship they would like to enter into. I asked them if they would like to enter into a General Partnership or a Joint Venture with the prospective partner. This was not something that they considered and they didn’t have a clue about what I was referring to. I thought that it would be useful to highlight the major differences between the two in this post. I will use the word “usually” throughout this post because all facts and circumstances of a General Partnership or Joint Venture are different, but the examples I provide are typical scenarios in my experience.

General Partnerships usually involve two or more individuals, but there can be a mix of individuals and companies in a partnership. Joint Ventures usually involve two or more companies. Joint Ventures are usually defined as “an association of two or more persons (or entities) formed to carry out a single business enterprise for profit in which they combine their property, money, efforts, skill, and knowledge.” This definition is somewhat different from that of General Partnership because it refers to only a “single business enterprise.” In a General Partnership the relationship is perpetual until the business is dissolved by the parties or by the courts. However, a Joint Venture has a clearly stated time duration and scope. Joint venture relationships are generally considered to be a partnership for a single transaction (i.e. only for this location and not other locations).

Business owners usually enter into General Partnership agreements if they need a cash infusion. Business owners enter into a joint venture agreement if they have a specific purpose, product, good, or service that they want to develop, which may require the expertise or capital contribution of the other party. In a General Partnership all partners contribute capital, time, and expertise to the partnership unless otherwise agreed. Joint Venturers may contribute different services to the joint venture, for example, one party may supply the staffing, hardware, and supplies, and the other party may contribute capital, software, and operational support.

Ownership and Control for both relationships can be in proportion to what is agreed upon by the parties. Therefore, there doesn’t have to be a 50/50 split. In a Joint Venture the parties don’t pay taxes as one entity. Each company pays taxes on profits on their individual tax return.

The members of a General Partnership can claim a capital cost allowance as per the relationship rules. Joint Venturers can use as much or as little of the capital cost allowance. The existence of both types of relationships gives rise to a fiduciary or confidential relationship. In General Partnerships members cannot act according to their individual desires they have to act in the best interest of the partnership. Joint Venturers can retain the identity of their own company. General Partnerships share staff, corporate form and name, space, etc. Joint Venturers have their own separate entities, staff, etc. but come together for a common short-term goal.

In a General Partnership, Partners can act as “agents” to the partnership and can sign contracts, enter into agreements, etc. Joint Venturers generally can’t bind the other company to an agreement without consent of the other company, but it is still possible to do so depending on the terms of the agreement. It’s important to note that Partners are liable for the business debts of their partners, while Joint Venturers are not responsible for the other party’s business debts that are not related to their relationship.

General Partners who engage in criminal activity are solely held criminally responsible, rather than the partnership itself. Joint venturers an be held jointly and severally liable for each other’s wrongful acts.

It is important as counsel to inform your client of the various options available to them and to highlight the differences in those options so that they can make an informed decision on how to proceed. At Jones Health Law we strive to provide our clients with as information and advice possible to ensure that our clients make the decision that’s right for their business. If you would like more information regarding General Partnership vs. Joint Venture relationships, or contracting in general please contact us.

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