When you set up your practice, you need to decide which type of entity to establish. Whenever you have business partners, setting up a legal entity for your practice is a must. While an entity won’t generally protect you from your own malpractice, operating a practice as a Corporation or LLC will shield your assets from mistakes made by your business partners. Another benefit of setting up an entity is to separate your practice from your personal finances.
Currently, here are the most commonly used entities to choose from:
- Limited Liability Company
- Sole Proprietorship
There are pros and cons to each type entity. For C-Corps, there are a variety of limitations and pitfalls including:
- During the early years, when your practice might be generating losses
- In each subsequent year, when they your practice is hopefully generating profits
- When your practice is sold
Due to these pitfalls, we don’t see many small healthcare professionals that choose to run their practices as a C-Corp. For that reason, let’s focus on the other three entity options: sole proprietors, S-Corps, and LLCs.
Please note that like most of the tax rules, the C-Corp issue is not completely black and white. Some healthcare professionals do opt for a C-Corp to be able to deduct their disability insurance premiums and their family’s health expenses through a Health Reimbursement Arrangement; as well as to participate in certain pre-tax benefits not available to sole proprietors and owners of S-Corps and LLCs. These professionals need to be very careful to navigate around these pitfalls, however, to avoid paying excess taxes.
In part 2, we’ll compare the advantages of Sole Proprietor vs. LLC. vs. S-Corp