I’m Dr. Hassan, a Board-Certified Physiatrist and Independent Practice Owner. I help physiatrists start and grow their own profitable practices so they can achieve financial independence and live without limits.
In building a business, you want to think about which entity is right for you. Each entity has its own set of pros, cons, and risks, depending on the state. Legal business entities that physicians can consider are:
- sole proprietorship
- general partnership
- limited partnership
- C corporation (standard corporation)
- S corporation
- limited liability company (LLC)
- and limited liability partnership (LLP)
Legal Entities for Medical Practices
A sole proprietorship is a business that is unincorporated with one owner or a married couple. Before 1969, the IRS did not permit physicians or other professional organizations to be federally taxed as corporations. Once this changed, many physicians shifted from sole proprietorship to some form of a corporation. While sole proprietorships are easiest to start, maintain, and file taxes for, as sole owner, you are personally responsible for your business’s debts and liabilities. General partnerships are similar to sole proprietorships, except they’re run by two or more owners (who are not married to one another).
Limited partnerships are registered businesses, as opposed to unincorporated, with both active (practicing physicians) and limited partners (e.g., investors and silent partners). Limited partners have less liability and can leave the partnership without having to dissolve the business partnership. Active partners are responsible for all debts and liabilities.
C corporations are also incorporated and consist of shareholders, a board of directors, and officers. As an independent legal entity, it exists separately from the physicians. Compared to the previously mentioned entities, C corporations have far more regulations and tax laws to abide by. They also, however, qualify for more tax deductions than any other business entity.
S corporations maintain the same limited liability as C corporations, so owners don’t have to worry about personal liability for debts. The primary difference between the two is that, with S corporations, the physicians’ profits and losses pass through to their personal tax returns. The IRS taxes it similar to that of a sole proprietorship and general partnership.
Limited Liability Companies (LLCs) are more like sole proprietorships and general partnerships but with limited liability protections. Another big plus is that you can choose how you’d like the IRS to tax you: as a corporation or a pass-through entity. LLCs are typically more expensive than sole proprietorships and requires state registration, but they’re the most popular business entity amongst small businesses.
Limited Liability Partnerships (LLPs) are state-registered and consist of two or more active partners. LLPs can also be expensive to create, but the most significant advantage is that they protect you from personal liability for acts of other partners. Tax wise, partners report profits and losses on a partnership tax return, while reporting a share of the profits and losses on their respective personal return.
Choosing the Right Business Entity
When choosing the right business entity, you want to consider both your immediate and long-term financial goals. Consider whether or not you anticipate growth or are satisfied with being small. Regardless of what size you envision your business, you want to have your company positioned well. This begins by determining what is the best entity to form for your particular business.
The structure you choose should provide maximum protection of assets while decreasing your tax liabilities as much as legally possible. Different states allow different entities to be formed. Research your state to determine what options you have available to you, as each entity carries its own pros and cons.
Your entity serves as your foundation from which all else in the business grows. So it may be beneficial to discuss your options with your financial team to determine which entity is best situated to help you achieve your financial goals.
Set and establish a good foundation so that you can build, grow, and ultimately achieve the goals you set out for.
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I’m Dr. Hassan, a Board-Certified Physiatrist and Independent Practice Owner. I help physiatrists start and grow their own profitable practices so they can achieve financial independence and live without limits. Follow me on social media @DrHassanRehab.