How Will Your Choice of Entity Type Affect Your Medical Practice’s Business Tax Requirements?
As a medical practitioner, you have invested a great deal of time and money in learning your trade. If you are planning to start your own medical practice, there is an entirely different set of skills to master: owning and operating your own business. Starting your practice will require financing for facilities and equipment. You will need proper licensing, banking, and insurance coverages, including malpractice. It also requires compliance with intricate healthcare laws and delicate liaising with insurance companies. Starting your own practice takes a great deal of forethought and planning. Before all the pieces of running a business fall into place, you have to determine your business structure or entity type.
The entity type you choose plays a significant role in determining everything from your legal risks, financial obligations, and ownership structure to your personal and business tax requirements. Depending on your goals and the state laws where you intend to practice, you can organize your medical practice as a sole proprietorship, general partnership, limited partnership (LP), limited liability company (LLC), limited liability partnership (LLP), C corporation, or S corporation. Massachusetts state law permits the organization of all of these entity types. Your choice should be the entity type that aligns your personal and business goals with the optimal tax situation. Here is a look at some key personal and business tax requirements based on the most common entity types.
Sole Proprietorships & Single-Member LLCs
If the practice will have one owner, a sole proprietorship is a simple and inexpensive choice in terms of start-up and administration; however, the owner is not protected from the practice’s legal liabilities, debt, or losses. The legal protection provided to the owner of a single-member LLC depends on state law. Sole proprietorships and single-member LLCs are “disregarded entities” for tax purposes, meaning business income, gains, and losses are reported on the owner’s personal income tax return. As the owner, you do not pay yourself a W-2 wage, so you must make quarterly estimated tax payments. Your business income will be subject to federal, state, and local income tax, and may be subject to employment, sales, or other business taxes.
General Partnerships
When a practice has two or more owners, they may choose to form a general partnership. These entities are relatively simple to operate, but they do not provide owners protection against the practice’s legal liabilities, debt, or losses. For tax purposes, general partnerships are “pass-through” entities, meaning business income, gains, and losses are allocated to and reported by the owners on their personal income tax returns. Generally, income is allocated the same as ownership. Owners do not receive W-2 wages, so they must make quarterly estimated tax payments. Business income may also be subject to federal self-employment taxes in some cases.
LPs, LLPs & Multi-Member LLCs
While an LP is taxed the same way as a general partnership, it offers more protection to the owners and allows for more flexibility in allocating income. In an LLP, partners are protected against liability for acts of other partners. A multi-member LLC is also taxed in the same manner as a partnership; however, owners are protected against personal liability for business risks at the same level as a corporation.
C & S Corporations
C corporation status provides owners with the highest level of liability protection. A C corporation is not a likely option when you are starting out. C corporations are subject to double taxation. A C corporation’s taxable income is subject to federal corporate income tax (currently 21%) at the entity level. Dividends are also taxed at the shareholder level when distributed.
S corporation status provides shareholders with liability protection as well. These corporations are taxed as “pass-through” entities, which eliminates double taxation. Income, gains, and losses are allocated the same as ownership. Owners may receive employee salaries and other fringe benefits. They are also provided certain privileges under the Tax Cuts and Jobs Act. S corporations have stricter rules in terms of capital structure and may only have one outstanding class of stock.
Contact Livingston & Haynes
Ultimately, choosing the right entity type for your medical practice is a multi-faceted endeavor that is unique to your circumstances. In addition, your business may be able to elect to be taxed differently than your original entity type selection dictates.
My team at L&H is made of healthcare industry leaders. We are industry-savvy and help medical practitioners develop strategic plans that focus on every aspect of start-up and operations. If you are ready to take the next step, contact me today. I look forward to working with your practice.
by Maria Bunker, CPA
Maria Bunker, CPA, became a partner at Livingston & Haynes in 2017. She specializes in audits and tax planning and has worked with clients in diverse industries, including healthcare, financial services, real estate partnerships, and various nonprofit organizations.