What Business Structure Should You Use for Your Physicians Practice?

As a physician, you’ve spent years honing your medical expertise. However, when it comes to managing the business side of things — like choosing an entity structure for a new practice — you might feel a little in the weeds.

Whether you’re starting a new practice, buying an existing one or considering restructuring, choosing the right business structure is a critical decision that can significantly impact your legal protections, tax obligations and operational flexibility.

In this article, we’ll explore the different business structures available to physician practices and provide guidance on factors to consider when making this important decision.

Why Business Structure Matters for Medical Practices

Selecting the right business structure for your medical practice is more than just a bureaucratic formality. It can have far-reaching implications not only for your practice’s success, but also for your personal financial health.

From a legal standpoint, your chosen structure affects your personal liability protection. This is crucial in the medical field, where malpractice claims are an ever-present concern. The right structure can help shield your personal assets from business liabilities, providing peace of mind as you focus on patient care.

Tax implications are another critical consideration. Different structures can lead to vastly different tax treatments, potentially either costing or saving you thousands of dollars each year.

Operational flexibility is also a key factor. Some structures offer more leeway in management and decision-making processes. This can be particularly important if you’re planning to bring in partners or expand your practice in the future.

Finally, your choice of business structure can impact your long-term growth and succession planning. It can affect your ability to bring in new partners, sell your practice or transition ownership when you’re ready to retire.

Common Business Structures for Physicians Practices

Now that we understand why business structure matters, let’s examine the specific options available to physician practices. Each structure offers a unique combination of legal, tax and operational characteristics.

In the following sections, we’ll explore the most common entities used by medical professionals, including LLCs, S Corporations, C Corporations, and professional entities. For each, we’ll discuss their key features, advantages, and potential drawbacks, as well as scenarios where they might be the optimal choice.

Limited Liability Company (LLC)

The limited liability company (LLC) has become an increasingly popular choice for physician practices due to its flexibility and versatility. LLCs offer a unique combination of liability protection and tax flexibility, making them an attractive option for many healthcare professionals.

One of the key advantages of an LLC is its tax flexibility. Depending on your specific circumstances, an LLC can be taxed in several ways:

• Disregarded entity: For single-member LLCs, this is the default tax treatment. The practice’s income and expenses are reported on the owner’s personal tax return, simplifying tax filing.
• Partnership: This is the default for multi-member LLCs. Each member reports their share of the practice’s income on their personal tax returns.
• S corporation: LLCs can elect to be taxed as an S corporation, potentially reducing self-employment taxes on a portion of the practice’s income.
• C corporation: While less common, LLCs can also elect to be taxed as a C corporation, which may be beneficial in certain situations.

LLCs are particularly suitable for small to medium-sized practices, solo practitioners or group practices that value flexibility in taxation and management. However, it’s important to note that in some states, medical practices may be required to form as professional limited liability companies (PLLCs). These are similar to standard LLCs but specifically designed for licensed professionals. We’ll talk more about these shortly.

S Corporation

While not a distinct legal entity, S corporation status can be elected by both corporations and LLCs. This structure offers potential tax advantages for established practices with significant income.

The primary benefit of an S corporation is the potential for tax savings. As an S corporation owner, you can pay yourself a reasonable salary and take additional income as distributions. This business income and the related distributions are not subject to self-employment taxes, potentially resulting in significant tax savings. This is particularly beneficial in states like Florida, since it allows businesses to avoid the state’s corporate income tax and benefit from the state’s lack of personal income taxes.

S corporations are often a good choice for established practices where the tax savings on the business income and the related distributions can outweigh the additional administrative requirements.

Finally, disregarded entities, partnerships and S corporations can benefit from the maximum long-term capital gains tax rate of 20% when selling the assets of the practice. This 20% rate is available when selling the stock but is not available for C corporations when selling the assets of the practice.

C Corporation

C corporations are less common for small medical practices but can be beneficial in certain situations, particularly for larger practices or those with complex ownership structures.

One of the main advantages of a C corporation is that it’s a separate tax entity from its owners. This can be advantageous when it comes to reinvesting profits into the practice. C corporations also offer more options for tax-deductible fringe benefits and have no restrictions on the number or type of shareholders. This is unlike S corporations, which can only have 100 shareholders (all of whom must be U.S. persons for tax purposes).

However, C corporations face the challenge of “double taxation.” The corporation pays taxes on its profits, and then shareholders pay taxes on dividends they receive. This can make C corporations a less tax-efficient approach for smaller practices.

C corporations might be suitable for larger practices planning significant growth or those considering outside investment, particularly in scenarios involving private equity or complex ownership structures.

Professional Corporation (PC) or Professional Limited Liability Company (PLLC)

As we mentioned earlier, some states require certain professions (including physicians) to form PCs or PLLCs. These entities are designed specifically for licensed professionals.

For example, in Florida, professional practices created as LLCs often use the “PL” designation to indicate their professional status. However, it’s important to note that this designation doesn’t affect the tax treatment of the entity. A PC or PLLC can still elect to be taxed as an S corporation or C corporation, just like a standard corporation or LLC.

These structures are particularly relevant for practices in states with specific requirements for medical professionals. They offer similar liability protection to standard corporations or LLCs while meeting state-specific regulations for professional practices.

Making the Right Choice: Factors to Consider and Decision Process

Choosing the right business structure for your physician practice involves carefully weighing several factors:

• Income projections and growth plans: Your current and projected income can significantly influence which structure is most tax efficient. For example, if you’re expecting high levels of income, an S corporation might offer significant tax advantages. If you are looking to reinvest the earnings and not distribute profits to the owners, a C corporation structure might be more advantageous.
• Number of owners/partners: Single-owner practices have different options compared to multi-owner practices. If you’re planning to bring in partners, this could influence your choice of structure.
• State-specific requirements: Some states have specific requirements for medical practices. Always check your state’s regulations when choosing a structure.
• Operational flexibility needs: Think about how each structure will impact your day-to-day operations and decision-making processes. Some structures offer more flexibility than others.
• Long-term goals: Consider your plans for the future. Are you looking to bring in partners? Sell the practice eventually? Different structures can facilitate or complicate these transitions.

When making this decision, it’s crucial to assess your current and future needs. Work with healthcare accounting professionals to project your income and understand how different structures will affect your tax obligations. Consider the operational factors that are most important to your practice, such as decision-making processes and administrative requirements.

Remember, there’s no one-size-fits-all solution. The right structure for your practice will depend on your specific circumstances, goals and the regulatory environment in your state. It’s also important to note that your business structure isn’t set in stone. As your practice grows and evolves, you may need to reassess and potentially change your structure to better suit your needs.

Given the complexity of this decision and its long-term implications, it’s highly advisable to consult with a healthcare CPA and an attorney experienced in medical practices, who can provide tailored advice based on your specific situation and help you navigate the intricacies of each option.

Combining Multiple Entity Structures

Often, it can be beneficial to use multiple entity structures, all within the same business. This has become increasingly popular in recent years as private equity investors continue to make inroads into the healthcare industry.

For instance, a healthcare practice owned by an investor (as opposed to licensed medical professionals) could be set up using three distinct entities, as follows:

• LLC #1: An LLC, taxed as a partnership, that owns the real estate associated with the medical practice. This LLC passes rental income directly to members of the partnership. This setup works well for real estate, because real estate rental activity isn’t subject to social security and Medicare taxes.
• LLC #2: An LLC, electing to be taxed as a C corporation, that acts as the operating company that provides the medical care, handles billing and so on. Regulations typically require this entity to be owned by a licensed medical professional. In this instance, the medical professional is an employee of this LLC and receives a salary. The LLC pays all of its operating income to LLC #3 as a management fee.
• LLC #3: An LLC, electing to be taxed as an S corporation, that receives all income from the medical practice owned by LLC #2 through a management fee. The owner of this LLC takes a reasonable salary. Income above this is treated as a distribution and is not subject to employment taxes.

Build Your Practice with Support from James Moore

Choosing the right business structure for your physician’s practice is a critical decision that impacts your legal protection, tax obligations, and operational flexibility. While LLCs offer versatility, the optimal choice depends on your specific circumstances, including income projections, number of partners, and long-term goals.

James Moore’s team of expert healthcare CPAs can guide you through this complex process. We can assess your practice’s current challenges and help you map out a profitable path forward — including choosing the best structure for your situation. To learn more, start the conversation today.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.