Choosing The Right Business Structure for Your Medical Practice

Starting your medical practice is both exhilarating and terrifying. You like to do things your way; your business structure is significant to you. When used correctly, the advantages of a solid business structure are enormous. Your business structure will manage operations, streamline processes to ensure effective and efficient practice and assist you in making critical business decisions.

Your company’s legal structure impacts your tax rates, administration and paperwork obligations, fundraising skills, and more aspects. Sole proprietorships and partnerships are easier to establish, but they do not provide liability protection. Corporations require more work to develop, but they provide liability protection and, in some situations, lower tax rates.

One of the typical mistakes doctors make when organizing medical practices is focusing solely on the tax outcome. As a result, they frequently adopt wrong structures in the mistaken belief that it will help them pay less tax. While tax efficiency is crucial, it should be fine with structuring your medical practice. In reality, business structuring decisions should not be based only on tax considerations, as this would be tax evasion.

What is a Business Legal Structure 

A business legal structure, often known as a business entity, is a government classification that governs some parts of your company. The legal structure of your business determines your federal tax duty. It can have liability repercussions at the state level.

How To Choose The Right Legal Structure? 

Different legal arrangements have distinct benefits and drawbacks. In most circumstances, the criteria you will use to choose the best format will include the following:

  • Owner Liability: 

Corporations and LLCs both provide business owners with some personal liability protection against claims made against the company. This is one of the primary advantages of forming an LLC. 

  • Expenses and Procedures:

Sole proprietorships and partnerships only require a little fees and documents to start a business. Partnerships need to create a partnership agreement specifying who does what in the company.

  • Taxes: 

Your income tax position is also affected by the business structure you choose. Sole proprietorships, partnerships, limited liability companies are also known as”pass-through” tax entities, meaning the taxes on business profits and losses “pass-through” to the owners’ income taxes. However, even if they take no money from the company throughout the tax year, these owners must file taxes on any net gains from their business.

  • Investments: 

If your company relies on investors, a corporation may be the best business form for you. A corporation’s structure enables a company to sell ownership shares through stock offerings. The previous business models are unable to provide stock.

Business Structures for Medical Practices 

  • Sole Trader: 

A sole trader is a doctor running a company as an individual. If no other entities are engaged, you are regarded as a sole trader whether you are doing locum work, full-time contracting, or running a practice.

Regarding start-up costs, a sole trader is the simplest and least expensive business structure, and lone traders have very few legal and tax formalities. The standards for preserving records, auditing, and filing are also more lenient. The entity is not subject to any taxes. Instead, the income is reported and taxed by the individual owner.

  • Partnership: 

A partnership is formed when multiple individuals form a business for mutual profit. As a result, if you intend to own a medical practice with at least one other physician, a partnership is an option to consider. In a general partnership, however, all partners can act on behalf of one another as well as a full authority on behalf of the practice.

  • Limited Liability Companies (LLC):

Because it provides more liability protection than other entities and is less complex to manage, this entity type is often the ideal choice for medical practitioners entering private practice. In most states, the business does not pay taxes because profits and losses are passed through to individual business owners – a situation known as a pass-through entity. These businesses can have several owners, Employer Identification Numbers (EINs), and different assets and liabilities.

  • S Corporation:

A S corporation is formed by filing Articles of Incorporation with the state. The choice to elect S corporation status is made by submitting Form 2553 with the IRS, making a state-level S corporation election after establishing your business, and the decision must be unanimous among all the shareholders. An S company is a business that has elected to have its earnings, deductions, capital gains, and losses, charity contributions, and credits passed through to its shareholders.

  • Professional Limited Liability Company (PLLC)/ Professional Corporation (PC)

These entity formations are utilized in states where creating LLCs is forbidden for firms that require professional certification and credentials. Although requirements vary in each state, normally, all owners must be licensed in the same profession, provide documentation of state licensing, and have constraints on the business name that can be used (requiring entity-specific ends in the name). It’s worth noting that PCs are taxed differently than PLLCs.

Choosing the correct company structure is important in starting and running a successful medical practice. Your legal and financial duties, as well as the overall stability and growth of your medical practice, are all affected by this decision. Making the wrong decision might result in personal guilt, tax inefficiencies, administrative costs, and strained partnerships.

If you need guidance finding the right business structure for your medical practice, do not hesitate to contact us. We are glad to help you through the process. 


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