Choosing A Legal Structure for your practice on NPBusiness.ORG

How Do I Choose The Legal Structure For My Practice?

Of all the decisions you must make BEFORE starting your practice, choosing a legal structure may be the most challenging.

With only a handful of structures to choose from, you’d think it’d be easy.

But no, it’s anything but…

Each business structure has pros and cons, and it’s rarely clear which entity would be best for your situation.

Legal Structures Are State-Specific

Adding to the complexity is that your choice of legal structure is state specific. The state you’re in matters because not all entity selections are the same in every state.

Additionally, your choice of legal structure may be different from how you’re taxed as a business. How you’re organized within your state does not necessarily carry over to the IRS.

For example, you may choose to organize as a C corporation in your state, but elect to be taxed as an S corporation by the IRS.

But wait, there is more…

The legal structure you choose will impact your business for life. And while you can change it at any time, it may not be a simple process.

Because once you choose your legal structure and apply for your EIN, the information shows up on every piece of paper flowing through your office. And it’s a pain to get it changed!

So wouldn’t it make sense to pay extra attention to this important decision? I’m certainly all for it!

Unfortunately, some new business owners don’t worry too much about picking the best structure for their startup; for them, it’s an after-thought.

But not for you!

After reading this article, you’ll have a better understanding what goes into the decision process and why it’s so important.

You’ll make better decisions and ask more informed questions, should you decide to get help from a professional when setting up your legal structure.

But first things first… 

What is a Legal Structure?

You’ll hear other terms besides legal structure. They all mean the same and include business form, business structure, business entity, and legal entity.

Essentially, the legal structure of a business is a separate entity from the people running the business.

Just as individuals have legal rights and obligations, so do businesses. A business has standalone rights, accomplished through the election of a legal structure.

Here are examples of rights and obligations, businesses can take on:

  • Enter into agreements or contracts
  • Assume debt and repayment
  • Take legal action or be subject to it
  • Be accountable for their actions


Before I write another word…here is a disclaimer. Please keep this in mind as you read through the article!

I am not an accountant or attorney. The information contained in this article is informational and does not replace qualified legal or tax advice. With this out of the way, let’s move on.

Types of Legal Structures

  • Sole Proprietor
  • Partnerships
  • Corporations
  • LLCs (Limited Liability Corporation)
  • Professional Corporations

As mentioned earlier, the legal entity you choose for your business has a wide reach. Here are some of the things to consider:

  • Protection & Liability:
    • Is there personal liability for business debts?
    • How are your asset protected?
  • Ability to raise capital?
  • Management and control of business:
    • Who can own the business; are there restrictions?
    • Who has the right to obligate the business (financially and contractually)?
    • Who can make decisions?
    • What is the ability to transfer ownership?
    • How do death and departure affect the business?
  • Required paperwork:
    • What are the start-up formalities/filing requirements?
    • What are the ongoing formalities/filing requirements?
  • Taxation:
    • Individual
    • Flow through
    • Standalone

I know… it’s a lot to consider.

And really, you can only do this if you are clear about what it is you want to accomplish.

Spend time thinking about the business you want to build. It will give you the foundation to make the “best choice” for you at this time.

Now let’s take a closer look at the legal entities.

Sole Proprietorship

It is the simplest business structure of them all. It’s free to start and doesn’t require a formal selection. Here the business and the owner are one and the same.

Even though it may be tempting to choose this structure because of its simplicity, you should stay away from it when starting a practice. You’ll soon see why.

Protection & Liability:

  • Offers no asset protection
  • There is personal liability for all business debts


  • Flow-through taxation: owner taxed at individual tax rate

Ability to raise capital:

  • Limited, individual only

Management and control of business:

  • Sole proprietor only

Required paperwork:

  • None

Partnerships (General and Limited)

The general partnership is just as easy to form as the sole proprietorship; most states don’t require formal selection. The partners share profits and obligations equally.

The limited partnership requires formal filing with the state.

Protection & Liability:

  • Personal liability for general partners
  • Limited partners not personal liable


  • Individual tax rates of general and limited partners

Ability to raise capital:

  • Limited, as individuals

Management and control of business:

  • Only general partner can obligate business
  • All partners must agree to sell or transfer
  • Automatic dissolution upon death of a partner, unless addressed in partnership agreement

Required paperwork:

  • No filing required for general partnership
  • State filing for limited partnership


A corporation is a legally separate entity from the people who own or manage it.

The S corporation is a corporation which elected Sub S status with the IRS. This means that corporate income and losses flow through to individual shareholder tax rates.

Protection & Liability:

  • No personal liability of shareholders
  • There is protection of personal assets


  • Tax at the corporate level and tax on distribution to shareholder
  • S corp taxed at individual shareholder tax rates

Ability to raise capital:

  • Entity can raise capital

Management and control of business:

  • Officers and directors can obligate business
  • Decisions by board of directions
  • Upon death or departure of shareholder, corporation continues

Required paperwork:

  • Articles of incorporation filed with state
  • Bylaws and yearly meetings required

Limited Liability Corporation, LLC

The LLC is a legally separate entity from the people who own or manage it.

Protection & Liability:

  • No personal liability of shareholders
  • There is protection of personal assets


  • Flow-through taxation at individual tax rates, unless corporate taxation elected

Ability to raise capital:

  • Entity may raise capital, but owner may be required to give personal guarantee

Management and control of business:

  • Members or managers may obligate business
  • Decisions made by members or managers
  • Continuation upon death depends on state

Required paperwork:

  • Article of formation filed with state

Professional Corporations

In some states, certain professionals (notably health, law, accounting, dentistry) who want to incorporate, can only do so as professional corporations.

Some states allow the formation of both, regular corporations and professional corporations.

Then there is the professional limited liability corporation. Most states mandate that all members of the PLLC be licensed in the same specialty and maintain a certain amount of malpractice.

These legal structures tend to be more complex; they vary from state to state and possibly by profession. I suggest you contact a qualified professional to get assistance with setting up a PC, PSC, or PLLC.

Alternatively, you may contact the Secretary of State office for your state, to get additional information.


It’s a lot to digest… please, don’t let it overwhelm you.

Keep in mind that there is not one size fits all; different situations call for different solutions.

Here are some resources I’d like to share with you:

And even though you’re a busy professional, there is a certain amount of information you need to know to run your business effectively.

Here are a few suggestions to help you get started selecting the best structure for your business.

Create a list of priorities of what’s most important to you…

  • Is it to limit your liability?
  • Do you need to protect the assets you and your partner have built over the last twenty years?
  • Or is it taxes? Perhaps you own another business or income-producing assets that would affect taxes on profits from the practice?

 So here is what to do next…

Think about what you’re trying to accomplish. Get clear about your needs to protect assets, shield from liability, and achieve optimal taxation.

Ask yourself this:

  • What are the long-term goals for my business?
  • Will the business entity I’m considering help me accomplish these goals or would it make it more difficult?

If necessary, get help from a trusted advisor.

But if nothing else, check out these resources from Nolo:

Then make your choice and keep moving forward.

What’s the legal entity of your practice? Or which entity are you considering? Share your thoughts with us and let us know.


By Johanna Hofmann, MBA; regular contributor to the NPBusiness blog and author of “Smart Business Planning for Clinicians.”

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