By Andrew D. Schwartz, CPA
For doctors in practice, making a lot of decisions every day is just part of the deal.? While some practice management issues come with only one obvious solution, most require that you spend time researching a variety of options only to learn that there is more than one correct answer.? Selecting the best type of entity for your practice is one of those issues with multiple correct answers.
If you are in the process of opening or purchasing a practice, now is the time to determine which type of entity would work best for your practice over the long-term.? Or, if you have owned a practice for a number of years, why not take this opportunity to determine if you have selected the best type of entity for your situation.? Let?s take a look a pros and cons of the various entities available to healthcare professionals in practice.
Most Popular Entity Selection
Most healthcare professionals operate their practice as a Sole Proprietorship, a Limited Liability Company (LLC), or an S-Corporation.? Different rules apply to the different type of entity.? The first question, however, is why even bother to create an entity for your practice.? Why not just go with a sole proprietorship or a general partnership?
If you are involved with partners in your practice, setting up an entity is a must.? While asset protection laws vary by state, running your practice as an S-Corp or LLC should protect your personal assets from your business partner?s mistakes.? Without forming an entity, you would be running the practice as a General Partnership which offers no protection to that risk.
For practices with one owner, setting up an entity helps keep your practice separate from your personal finances.? Some people who own a practice and also own the real estate where their practice is located actually end up establishing two entities – one to hold the assets of the practice and a second to hold the real estate.
Let?s start by looking at two major characteristics for these three options.? While Single Member LLCs and S-Corporations are separate legal entities, only an S-Corp comes with the requirement of filing a separate tax return each year.? Sole proprietors and Single Member LLCs report their income and expenses on a Schedule C filed as part of the owner?s individual income tax return.
Type of Entity
Separate Legal Entity
Files Own Tax Return
Single ? Member LLC
For Part 2 of this series, we’ll discuss the Benefits and Pitfalls of S-Corps.? Stay tuned!