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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

Disclaimer!

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

Taxation:

  • 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

Taxation:

  • 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

Corporations

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

Taxation:

  • 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

Taxation:

  • 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.”

legal entity, legal structure

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  1. Hi
    I’ve
    I’m in my third month as a sole proprietor/independent contractor for a healthcare company. I think I need to go one step further and form an LLC. Since I didn’t do it at the order I’m concerned about how to proceed. Is something like legal zoom a good idea?
    Will having an LLC allow me to open a health savings account?

  2. Maxine, in many states you can form an LLC yourself or use tools like Legal Zoom, or books like Nolo, as long as it’s simple. The LLC is not about you have an HSA – that will be separate depending on the type of health insurance you have. If you are looking for the business to actually purchase your healthcare, you may need to elect an S-corp. Please talk with your CPA about the choices that are most appropriate for you.

  3. Hello, I am a Michigan Nurse Practitioner. My business partner is Also a nurse practitioner. We are opening a behavioral healthcare clinic where we address addiction. I know we cannot use the delegation of PC because we are not doctors. Is LLC enough to file the name of our company with the state of MI?

  4. Latrese, my understanding is that a Nurse Practitioner cannot have any form of corporate entity in MI as NPs are designated as not being a “learned profession”. That means your option is to be a sole proprietor – obviously not anywhere near ideal. Check with MICNP to see if there have been any updates.

  5. Thank you for this article. I will be beginning my NP career in a 1099 contract position and plan to eventually set up my own telehealth practice. Would an LLC or S Corp be preferable? I live in Nevada.

  6. Hi Barbara, I am a CNS in Illinois and I heard you speak at ISAPN-very informative!

    I am looking to start up a coaching type wellness business on supplements and oils etc, and also offer employee wellness programs. I am not sure yet about prescribing and actual clinic visits, that’s a possibility to add in the future. Curious if you have a suggestion for the business set up with Illinois.

  7. Jen, some it will depend on how your state views you (some insist that professional be a PC or PLLC for example), but for the best structure, you would do well to talk with your CPA. LLC, S-Corp, etc are business structures, but they are also tax structures. Your CPA can advise you as to which would be best for you and your family.

  8. Hi Shannon,
    I really enjoyed speaking at ISAPN. I hope you enjoyed as much. Lots of great energy in Illinois!
    I’m not sure I understand your question. There are many ways to set up a business and paying attention to the business rules as well as scope of practice is essential for any state. Setting up to offer employee wellness programs is a great idea, and of course it can include coaching – online and in person. If I did not answer your question, please let me know.

  9. Hi Barb,
    I am a nurse practitioner in Illinois and I am taking my first 1099 position and will likely have second very soon. It it advantages to set up some type of corporation to decrease my tax liability?? I know I will some some expenses I am not used to as an employee (paying a physician to collaborate, malpractice insurance).

  10. Hi Amy,

    The advantage of having your own business is that you can take deductions. Your CPA can advise you as to the best corporate structure for your individual tax situation.

    However, as a 1099 contractor in Illinois, please make sure you read this article and check with your state. It’s getting hard and harder for NPs to work IC with the newer laws coming out.

  11. Hello Barbara,

    I am a Primary Care Nurse Practitioner in Illinois and is looking to start a Primary Care Practice. Do you have any information on if it is Legally possible to start a Practice in Illinois as NP?

  12. My understanding is the rules for attestation are being published shortly, so please check with ISAPN.
    That said, it’s legal in every state to start a practice – it will vary with the different hoops we need to jump through (for now!).

  13. Hi Barbara,
    I am a Nurse Practitioner with a LLC in the state of MI who frequently contracts my services out to private practice and receive a 1099 at the end of the year. I currently do not have a business license other than my NP license and my LLC article from the state. I was asked by an agency in a different state if I could produce one and I have never been asked this before. My CPA never addressed it when she did my LLC paperwork. Should I have one? Thank you.

  14. Kim, in most states (and many cities, counties), a business license is required in order to conduct business. It’s also connected to paying business taxes. For example, in WA State, I had a state business license and paid quarterly business taxes (just like the quarterly IRS tax payments). Here in MO, I not only have a state license (and applicable taxes), but I also have a city license.

    Check again with your CPA and/or the Secretary of State. It’s likely connected with your business structure.

  15. Hi Barbara,

    I am a psychiatric nurse practitioner residing in IL. I recently formed my own PLLC and will be contracting my PLLC to work with a private practice located in CO. I will be seeing patients via telehealth all of whom are in CO. Of course, I have gotten my CO licenses, DEA, and everything needed to treat individuals in CO.

    My question is, when filling out the CAQH, I am noticing for practice location, it is asking for the practice name, tax ID, and address. Since I am seeing patients for a private practice in CO (address and practice name) but billing under my PLLC tax ID, is it ok to mix those within the practice location section of CAQH? I want to make sure I’m doing things correctly in that regard. Any help would be much appreciated! Thank you!

  16. Hi Tom. There are many ways to answer this. Is your practice and office for telehealth going to be located in this practice? Will your mail go there? If so, then it can be treated as if you are renting space from this practice, and that would be your business address. If you are going to be seeing people from elsewhere, and perhaps contracting with multiple offices, then you’ll want your own business address. Hope that helps.

  17. Hello; thank you so much for your articles and abundance of information they have all been very helpful.

    I’m interested in starting a House Call practice following the DPC model and a lot of the Q&As in this article have answered my questions.

    I have read as well the difference with LLC and PLLC on the Nevada website and it is not very clear on wether or not NP is considered a professional that needs to register as a PLLC. I saw someone else ask a question along the lines of this and my next step is to call Nursing board; but I wanted to get your recommendation as to whether or not I should choose one or the other if we have that choice and it is not mandated that we do an LLC or PLLC definitively (meaning we have the option in one or the other) if that makes any sense

  19. Hi Barbara
    I am a DNP-PMHNP in California and my goal is to open my own mental health practice. What would you suggest for me, an LLC or S Corp.

  21. I am a PMHNP starting my own telepsych business. I don’t plan to see any patients. I will hire 1099 NP employees and run the day to day aspect of the business such as marketing and scheduling. Do I need a PLLC or LLC? I live in Texas but will have NP’s seeing patients outside the state (FPA states).

  22. Business structure varies from state to state. The Texas Secretary of State will have more information on what is required in Tx.
    On another note, please note – contractors/1099s CANNOT be employees. Make sure you are familiar with IC regulations from the IRS and your state employment laws.

  23. Hi Barbara,

    I’m a new FNP graduate in Texas and taken a 1099 job and getting paid per encounter. I’m not clear if in Texas NP considered a professional and need to register as PLLC or LLC. I appreciate any recommendations.

  25. Hi Barbara,

    You are so knowledgeable. Could you please share if a APRN in Florida can have an LLC? I think this is my best option according to my tax/CPA person but I wanted to double check. Thank you in advance.

  26. Good Morning Helene, Every state is a bit different as to which structure is allowed – LLC, PLLC, PC, etc. In this care, I would listen to my CPA as these are legal and tax structures. Good luck on your business!

  27. Hello,
    Do you know if an NP can start a Primary care LLC in Georgia? GA needs a collaborative physician, but does the business license have to have the MDs name? Thank You

  31. I am a Nurse Practitioner in Pennsylvania. I am interested in starting my own practice in aesthetic/ cosmetics. Is it possible to own a business as a PLLC as a Nurse Practitioner in PA? I can’t seem to find the regulations on the state board page as it relates to this and am getting mixed responses from other practitioners.

  32. You can start a practice in PA. It’s important that you following scope of practice and BON regulations in terms of clinical practice. In general, BONs don’t regulate business. You’ll also want to follow requirements for business per the Secretary of State.

  33. Hi Barbara,
    I am an R.N. (not NP or APRN) and IC for an agency servicing Pharmacy clients for their home IV infusion needs in NY. I wanted to register a business for asset protection and tax saving benefits and was geared towards an LLC by a tax professional. While doing my research, I was told by NYS office of the Professions that I HAD to file as a PLLC because I was an RN. I spoke with a business attorney who agreed that I had to file a Professional business due to the service I’m providing but is telling me a PC is the better bet (I would need to cover my own health insurance costs and retirement). Who is right?

  34. They are both correct. New York requires all professionals to choose a “professional” LLC or corporation. As a PLLC, your accountant should help you also file for S-Corp tax filing status which allows you to become an employee of your own business, collecting a salary…and paying for insurances, retirement etc as part of the business – ie before taxes, rather than after taxes. In general, it’s more advantageous for you. However, follow the advice of the CPA in terms of your taxes. Things always are subject to change and vary from state to state.

  35. I’m an NP in Tennessee and looking to start working as a 1099 employee for a Skin company with Botox and Fillers would I choose PLLC or LLC to help with taxes

  36. PLLC vs LLC is often determined by state rules for professionals starting businesses. Your CPA can also advise you, especially as it pertains to taxes (that should be their focus – to help you save on taxes).

  37. Hi Barbara,

    I am opening a new PMHNP practice in CA. Do I need to created standardized procedures in order to see pts (diagnose and prescribe)?

  39. I’m licensed in IL as an NP. I have a job offer in CA and the private practice owner offered work as independent contractor. I am filing for all the proper CA licensure but I’m wondering where I should file for business license (IL or CA)? Would an attorney or CPA be best to advise? Any direction would be appreciated. Thanks, B

  40. Brenda,
    The first thing I would say is to look carefully at the rules for employment in California, especially the “ABC” rules and IRS rules that determine if you are actually an independent contractor in California. They have the most strict rules in the country. This may help: https://npbusiness.org/independent-contracting-california-and-beyond/

    Chances are you only need a business license in IL (assuming you will be working remotely), (disclaimer: I’m not an attorney, so do your due diligence)

  41. I am a nurse practitioner in Pennsylvania, and wanted to open an LLC to perform psych consultations in the nursing home. I am uncertain whether I need an LLC or PLLC.
    I have contacted the state business offices, but they are too busy to respond. The PA code does not list nurses or CRNPs in their definition of “restricted professional services”. Do I need to open a PLLC because as a CRNP I will be making medical diagnoses and developing treatment plans that include medical interventions.
    Thank you, your advice is greatly appreciated.

  44. This is from https://www.azcc.gov/corporations/faqs:
    ————
    Should I form a professional LLC?

    Typically, persons in licensed professions, such as doctors, accountants, or lawyers, form professional LLCs. You should check with the agency or board that licenses your profession to see if it requires you to form a professional LLC or if it prohibits you from forming a professional LLC. The Arizona Corporation Commission cannot tell you whether you can or should form a professional LLC because this issue may involve legal or tax advice, and A.C.C. staff are not licensed attorneys or accountants and cannot give legal or tax advice to the public.
    ———
    Sounds like you need to check with the BON.

  45. Thank you, Barbara. I called the AZBN. They said they “do not govern over this.” Sounds like an LLC is okay in AZ.

  46. Hello Barbara,

    Thanks for all the work you’ve done here. Like Mike above, I am also an Arizona NP. I am about to accept a 1099 contract position. I know that an LLC would offer me asset protection and decreases personal liability, but its effects on taxes are not as clear. I’ve heard from some that an LLC offers tax benefits over being paid directly but others have said that my tax burden might be greater with the LLC due to self-employment tax. Now I’m hearing that opening an LLC and then switching it to an S-corporation is the best way to both protect myself and leverage tax laws in the best possible favor to me. Then of course others are telling me that an S-corp is way too complicated and not worth the benefits. Can you advise on what would be best for me in terms of both protection and taxes? Any advice will help.

    Also, I know that I will likely need to speak to a CPA here in Arizona, and wanted to know if you have any you recommend? If not, is there a way to determine a good CPA? I assume they are like any other profession where there is a huge disparity in aptitude amongst licensees.

    Thanks!

  48. This is something that your CPA can advise you on. They will have more information about your income and tax status and can show you the difference.

    I will say…my first CPA never told me about having an S-Corp. When I changed, I was shown just how much I would have saved in taxes over all those years.
    Not everyone understands and they look at the cost of payroll etc.

    Good luck!

  49. Hi Barbara, I am a NP in Michigan and I will be opening my own primary care clinic with my supervising physician being a 1% owner of the company. Can I open this as a PLLC in Michigan? I am receiving conflicting information and having a hard time making sense of it all.

  51. I'm a NP in California and I want to start my practice in Aesthetics and IV hydration. I was first advised to set up an LLC which I did but then an attorney that it was prohibited for me as an NP to have an LLC.
    I then reached out to another attorney and he said I need to be an S-Corp and then another attorney said that I need to have a Medical-Corp! Needless to say I'm SUPER confused!! I do have a Medical Director if that makes a difference. Please HELP me! I reached out to Andrew Gale and he said that I could do either but that just put me right back to the beginning? I just need to know M-Corp or S-Corp? I thank you for anybody's guidance. I just want to make sure I do it right and that I'm protected.
    3/6/2023
    Thank You!!!!
    M.Barraza,FNP-BC

  52. Hi Maria.

    In California, you can either have a Medical Corp or Nursing Corp. The biggest difference is that with a Medical Corp, you can only own up to 49% of the practice. It must be at least 51% physician owned. The advantage there becomes billing. But with your practice, you’ll likely be cash-based, so a Nursing Corp will work. Either way, as a professional, you’ll file as a “Professional Corp or PC”.

    The S Corp is not a legal structure but it’s a tax structure. Once you are a PC (or LLC if you are able), you’d elect S-Corp status which tells the IRS how you’ll be taxed.

    With AB890, things are changing in CA. You may want to listen to the webinar I did with Melanie a few months ago. She went into some of this and spent most of the time answering questions about business in CA. You’ll find it at An update to California’s AB-890.

    Not all attorneys in CA understand the complex rules NPs have. If you wish to work with an attorney in CA, I recommend you contact Melanie Balestra – she is both an NP and an attorney and has been helping NPs set up the appropriate corprations there.

  53. Hi you have so much valuable information here!
    I am an NP in NJ, I have a collaborating physician and want to start doing some aesthetics part time, as a mobile business. I have an LLC but am not sure do I need to form a "business entity" where the physician is 51% owner? A health care lawyer told me since I already have a collaborator I can just start practicing mobily, but seems a bit too simple?

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