Business Structures: What You Must Know…

Stepping out and starting your own practice is exciting. At the same time, entering unfamiliar territory may feel scary and intimidating.

Not only must you tend to the medical side of your practice, but many non-medical things need your attention, too. And to make matters worse, sometimes, decisions must be made faster than you’d like.

Choosing the correct business entity is one of the most critical decisions when starting a practice, but you don’t want to rush it.

The subject may feel overwhelming at first. However, when you understand your options and how they impact your practice’s legal and tax obligations, you can be confident to make an informed decision. Even though you can change the legal entity, assume your initial selection is the one you will stay with.

So now, let’s break down what’s involved in choosing a legal structure or business entity. But first…

What Is a Business Structure or Entity?

A business entity is the legal structure under which your practice or business operates.

In the US, businesses can operate under various business structures, each with unique implications for taxation, liability, management, continuation, and regulatory requirements.

Here’s a brief overview of the most common options:

#1 Sole Proprietorship

This is the simplest and most common business structure, where one person owns and operates the business.

It is considered an informal business structure; no formal registration is required except for necessary licenses or permits. It is the default structure if no other selection is made.

The owner is personally liable for all debts and obligations, and all business income is reported on the owner’s personal tax return. The sole proprietorship is considered a pass-through entity.

In the event a business owner dies, the business ends. Even though a business can be passed on to a beneficiary, a new business must be established, complete with licenses and permits.

While many small, low-risk businesses start or operate as sole proprietorships, a practice is better served by choosing another entity.

#2 Partnerships

A partnership is a business owned by two or more individuals. There are several types, including the general, limited, and limited liability partnership.

General Partnership (GP)

A general partnership is like a sole proprietorship with two or more people. It, too, is the default entity when two or more people start operating a business together without explicitly choosing another legal structure.  

This is important because you could enter a partnership without realizing it. Consequently, you could be responsible for debts and liabilities if something were to go wrong; general partners have unlimited liability.

All partners share management responsibilities, profits, and liabilities. The partners are personally liable for the business’s obligations regardless of which partner takes on the debt or liability.

As an informal structure, the partnership ends with the death of a partner unless there is a partnership agreement with provisions for the death of a partner.

Like the sole proprietorship, the general partnership is also a pass-through entity concerning taxation. All profits and losses are reported on the partners’ personal tax returns.

Limited Partnership (LP)

A limited partnership consists of a general and one or more limited partners. Most states require formal registration for this entity.

The general partner operates and manages the business and is fully liable for all debts and obligations assumed.

Limited partners invest in the business without getting involved in the day-to-day operations. Liability for the limited partner is capped to the amount of their investment.

For tax purposes, this structure is treated as a pass-through entity.

Limited Liability Partnership (LLP)

This legal structure resembles the general partnership, where all partners can participate in operating the business.

However, compared to the general partnership, the LLP offers liability protection for all partners, meaning that individual partners are not personally liable for the malpractice or negligence of other partners.

LLPs are taxed as pass-through entities, meaning that profits and losses flow through to the individual partner’s tax returns.

In most states, LLPs require formal registration with the appropriate state agency.

Professionals in law, medicine, dentistry, accounting, etc., commonly use this structure. However, some states impose restrictions on some professions, requiring that they organize under a different structure.

#3 Limited Liability Company (LLC)

Limited Liability Company (LLC)

The LLC is a flexible structure that provides liability protection like a corporation but with fewer formalities.

Even though the LLC requires formal registration with the state, it is easy to set up and maintain.

LLCs can be single or multi-member organizations and may be taxed as a sole proprietorship, partnership, or corporation.

LLCs are a good fit for small to medium businesses that want protection from liability and flexibility in how they are taxed.

Professional Limited Liability Company (PLLC)

Depending on the state, licensed professional service businesses may have limited choices in business structure.

Some states allow for the formation of LLCs, while others require that certain professions be organized as an LLP, PPLC, or PC (Professional Corporation). Here is a list of state-by-state requirements for professionals.

Please verify the information in the document before making decisions based on it.

While the PLLC is similar to the LLC, it provides additional protection in case of a malpractice lawsuit. With a PLLC, only the person accused of malpractice is exposed, while other members are protected.  

#4 Corporations

There are various corporate structures for businesses to choose from. However, for our purposes, we’ll limit our discussion to the following:

C-Corporation (C-Corp)

The C-Corp is a separate legal entity independent of its owners; its shareholders own it.

The corporation generates a profit (or loss), pays tax on its profit, and can be sued and held accountable on its own accord.

While the C-Corp provides the best protection against personal liability of all legal structures, the cost of forming and maintaining it outweighs its benefits for most small businesses.

This structure is a good choice for bigger businesses, those needing to raise significant capital, and those wanting to take their company public.

Non-Profit Corporation

A non-profit or nonbusiness entity is a separate, independent legal entity created to benefit society, not generate a profit.

Non-profits are formed at the state level and must register with the IRS to receive tax-exempt status.

Like C-Corps, non-profits must adhere to specific rules and formalities to maintain their special status.

S-Corporation (S-Corp)

This “structure” is often confusing because the S-Corp is not a legal structure as such.

It is a special tax designation granted by the IRS, available to eligible corporations and LLCs. This means you can’t go to your state and incorporate as an S-Corp, but you can go to the IRS and apply for it after establishing an eligible entity.

Businesses structured as LLCs can apply to the IRS for the special tax designation, which may benefit small businesses in several ways.

In addition to pass-through taxation and limited liability, S Corp owners can lower the self-employment taxes they owe by becoming an employee of the LLC.

Once you are an employee of your company, you receive a salary, and the company submits payroll taxes on your behalf. You must pay income and 100% self-employment taxes without the S-Corp designation.

Under the S-Corp, the employer pays half of all employment taxes once an employee. The bottom line is that an S-Corp can save you substantial amounts of money.

For additional information about taxation of legal structures, visit sba.gov

In Summary…

Choosing the right entity for your practice is more than checking a box—it’s about setting yourself up for success.

Here are the things to consider when selecting a legal structure for your practice.

1. Liability Protection: How much protection do you need? How much personal liability are you willing to assume?
2. Taxation: Which structure offers the best tax advantages for your situation?
3. Management and Ownership: How much control do you want in your business? Are you planning to take on partners?
4. Compliance and Formalities: Some structures require more paperwork and regulatory compliance. Are you willing to keep up with all formalities?
5. Long-Term Goals: Will your structure support growth, additional partners, or outside investment?
6. Continuation: Will your structure allow for the continuation of the business if a partner or owner dies?

Choosing the right legal structure is a foundational decision for your business. It protects your personal assets, keeps you compliant with regulations, and optimizes your tax obligations.

Consult with a business attorney or CPA to ensure the structure aligns with your goals and complies with state and federal requirements so you can focus on what matters most: providing excellent care to your patients.

Do you have questions about choosing a legal structure for your business? Just let us know; leave your question or comment below…