Determining Your Practice Legal Structure
One of your first steps in establishing a practice is to determine its business structure. You’ll need to decide if your business will be structured as a sole proprietorship, partnership, independent contractor, corporation, etc., so you can obtain the proper tax numbers and authorizations (they are different for different types of business structures). This article overviews the various business structures to help you make the best decisions for your practice.
Which business structure is best for you?
Whether you work alone or in a group practice and whether you incorporate or not are decisions many doctors make during their careers. Your choice should be based not only on your personal preferences, but also on what will be practical during different times of your life.
Many entities (such as Medicare) impose limits and requirements on your practice-based on its business structure. Thus, you need the assistance of your practice support team, such as your attorney and accountant, in making any decisions about the structure of your practice.
The solo practitioner may choose to make the chiropractic practice a sole proprietorship, which many consider to be the simplest business structure for a practice. The sole proprietor can make decisions without consulting partners or a board of directors and accepts sole responsibility for the practice's successes and failures.
A doctor practicing as a sole proprietor declares all income from the practice and deducts all business expenses (including employee payroll and liabilities) on his/her personal income tax return.
Practice income and personal income are the same for this type of practitioner. All money that comes into the practice is considered income and must be recorded and deposited. If the doctor takes a personal draw, it should be issued in the form of a check, not taken from the cash drawer. Payroll taxes are withheld from employees.
The chiropractor, as a sole proprietor, pays no FICA tax because he/she is self-employed. A self-employed person is required to pay a self-employment tax.
See the Key Characteristics of Sole Proprietorship for a quick overview of the pros and cons of this type of business legal structure.
Professional Association (corporation)
Another option for a solo doctor is to form a professional association (also known as a professional corporation). Though there are many advantages to incorporating a practice, a doctor must fulfill a number of roles once the professional association is in place.
As the owner of the corporation, the chiropractor is a stockholder. There must be an elected board of directors. The board of directors usually consists of the doctor who serves as the director. As the director, the doctor must elect a president, vice president, secretary and treasurer. (You can fill all of these roles initially if you so choose.) As the president and chief executive officer of the corporation, the doctor is responsible for hiring employees to carry out day-to-day patient care. Thus, the doctor becomes an employee of his or her own corporation.
By becoming an employee of the corporation, the doctor must be paid a salary, from which FICA, federal, state and local taxes are withheld. The corporation must pay payroll taxes on the doctor’s salary as well as the employer's share of FICA, federal unemployment and state unemployment taxes. Worker's compensation insurance premiums must also be paid on the doctor’s salary.
Gross income and practice expenses are not reported on the doctor's personal income tax return. Because the corporation is considered a legal entity, a separate income tax return must be filed annually. If the corporation has net income, it may be necessary to pay corporate income taxes. A corporation can generally keep taxable income to a minimum by increasing deductible expenses. If income exceeds deductible expenses, the result is a net income, taxable as corporate income. Distributions, other than salary, by the corporation to you are generally considered dividends. Dividends are not deductible by a corporation but are income (and therefore taxable) for the doctor.
Most chiropractors who incorporate a practice do so with the intent of establishing a corporate pension and/or profit sharing plan. In doing so, the doctor generally becomes the administrator of the plan, trustee of the trust and participant in the plan. Under these circumstances, pension and profit sharing payments may not be made on dividend distributions.
Doctors incorporating their practices must keep meticulous records. A corporation must keep minutes of stockholders and board meetings. Significant decisions, such as officer salaries, pension, profit sharing contributions and corporate loans, must be recorded. Even bank resolutions must be made to open an account or take out a loan.
If you’re considering forming a corporation, your accountant and/or attorney can advise whether an S-Corp or a C-Corp is the best choice for your practice. Also, contact your malpractice carrier to discuss any coverage changes this may create. (For example, any group practice including a partnership may give rise to vicarious liability issues.)
For a quick overview of the pros and cons of these types of business structures, see the Key Characteristics of a Regular Corporation and the Key Characteristics of an S Corporation.
Partnership and/or LLC (Limited Liability Company)
The major reason chiropractors decide to practice in a group is to share expenses. Group practices can range from space sharing arrangements to formal partnerships or corporations. With a space sharing arrangement, each practice maintains a sole proprietorship or P.A. in which each doctor sees his or her own patients, bills them and collects for services rendered. Expenses are then paid by a central account and allocated to each doctor.
A chiropractor who wishes to enter a more formal business arrangement with another chiropractor may decide to form a corporation, a limited liability company (LLC) or a practice partnership. With a partnership, there is one practice. The partnership bills all of the patients and pays all the expenses. Profit from the partnership is divided among the doctors according to agreed-upon compensation formulas.
A principle disadvantage of a partnership is that it exposes the partners to virtually unlimited liability. For this reason, many group practices have incorporated their practice. In recent years, these practices have been given another option in many states: the LLC. An LLC is an entity treated like a corporation for liability purposes and like a partnership for tax purposes. To some, it represents the best of both worlds.
Since the LLC is relatively new and not available in all states, it is not commonly used. As a form of organization, it should be considered by any unincorporated practice. It may also be practical for building partnerships, such as a separate entity used to own the physical property.
Benefits of Partnership
While there are obvious benefits, such as sharing expenses, space and equipment, probably the most pronounced advantage of forming a partnership is the potential tax benefits. The partnership files a partnership income tax return, but it pays no tax on the partnership income. The partnership income is allocated to personal income (in accordance with the partner's compensation agreement) and reported on their personal income tax form. With a partnership, Sub-S and LLC, there are certain tax benefits to the partners. These benefits include investment tax credit, depreciation and contributions.
Issues Regarding Partnership
Decision making in a partnership or corporation can become more complicated since ownership and decisions are shared.
Some chiropractors form partnerships while their partners remain in PAs (professional associations) because they wish to maintain corporate benefits such as corporate pension plans and medical reimbursement plans. Due to the potential for abuse in such an arrangement, the government has strict regulations governing partnerships of professional associations. If a partnership or corporation is formed to conduct a group practice or to share expenses, the practice must adhere to the same taxation and record keeping issues as an individual incorporating.
A major consideration when more than one person owns the practice, such as in a partnership or corporation, is how to handle an owner’s death, retirement or departure from the practice. To ensure a smooth transition during a change in ownership, a written agreement should be structured with the help of an attorney or an accountant to cover all the legal and tax issues. Crafting an estate plan that provides for some "key man" life insurance coverage or other mechanism to ensure an orderly transition can be beneficial. With this type of coverage, an owner's interest in the practice can be pur-chased or sold without creating any financial strain on the other owners or the practice.
Find out the pros and cons of these types of business structures by reviewing the Key Characteristics of a General or Limited Partnership and the Key Characteristics of a Limited Liability Company (LLC).
Practicing as an Independent Contractor (IC)
Many recent graduates choose either to work as an associate or to practice as an independent contractor (IC) renting space, equipment and staff services from an already established doctor. But independent contractors are considered business owners and need to set up the legal structure of their business as if starting their own practice.
If you are considering practicing as an independent contractor, review the sole proprietor section of this article for options available to you.
NOTE: When entering a relationship as an IC, the agreement must not have any hint of control over the IC. If the relationship is determined to be one of employment rather than independence, it can have serious tax implications to the involved parties (both to you and the doctor who owns the physical office). Reviewing the IRS Revenue Ruling is essential. (Go to www.IRS.gov and search “independent contractor”.)
Get Professional Advice!
Since there are a myriad of legal and tax issues that go along with setting up your business legal structure, seek the proper accounting and legal advice from your practice support team.
In addition to the general issues associated with business structures, there are regulations and laws that govern relationships between health care professionals and their business entities. Also, though business structures can be changed, e.g., a sole proprietorship becoming a corporation, there are significant tax issues associated with these changes. So seek the proper advice before you make any decisions regarding the business legal structure of your practice.
For a quick reference and comparison of the different type of business structures, see Key Characteristics of Business Structures Comparison – which will allow you to review each of the types in a side-by-side chart.
(PLEASE NOTE: The overviews and comparisons provided as links to this article are intended as general information only and may not include the latest developments. Check with your accountant or attorney for up-to-date information about which structure makes the most sense for your individual situation.)