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 some of the basic differences between the different types of 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.
- 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.)
- A P.L. or LLC with only one member generally is a “disregarded entity,” and all tax consequences are treated as occurring directly to the member.
- A P.L. or LLC with more than one member generally is considered to be a partnership for federal tax purposes unless both members are considered to be one entity, such as if an individual owns a revocable trust and the individual and the revocable trust are the sole members.
- Accordingly, no tax generally is imposed on a multi-member P.L. or LLC, or on a partnership; rather, the tax consequences generally flow-through to the members or partners, who report the income based generally on how such income is allocated among the owners pursuant to the terms of the entity’s Operating Agreement or Partnership Agreement and pay the income tax at their effective personal income tax rates.
- A P.L. or LLC (or LLLP or LLP or general partnership) can elect to be taxed as a corporation, in which case the entity reports its tax consequences as a C corporation (or an S Corporation, if that election also is made).
- 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.
- 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.
There are a lot of other 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 only. You should consult a licensed attorney in the State of Florida that specializes in healthcare law.***