Creating a business

    Before you open your doors and start seeing patients it is necessary to create a business. This allows some protection to you personally as well as provides you with several tax advantages, not to mention you may sell the actual “business” or your practice when you retire or want to quit. If you do not have a business it is difficult to sell anything. There are several types of businesses that can be created and I will discuss a few of them that are typically used in medical practices. I highly recommend that you hire an accountant to help you decide and to further explain them. In addition, a CPA (Certified Public Accountant) will also prepare your yearly taxes and quarterly taxes. It will cost approx one-thousand dollars for a CPA to file all necessary paperwork for a corporation and slightly less for other forms. Most accountants charge $75-100 for quarterly taxes, and this depends on the number of employees that you have. Yearly tax fees range from $500-900

            The first type of business is a sole proprietor. This is the simplest form of a business. You are the business and there is no separation, thus no protection. Your liabilities are the businesses and visa versa. It is the easiest to maintain as far as finances and taxes are concerned. All income from the business is considered your personal income. You may co-mingle all funds and it does not require separate accounts or much accounting for that matter. This is a good option for someone who has a small home business with no employees and little income, usually less than 20 thousand a year. This is a great option for a massage therapist who has a side business at home, but I do not recommend this for providers who will generate more income. It fails to protect you from liability and limits your tax write-offs. 

A limited liability partnership (LLP) is a form of business organization combining elements of partnerships and corporations. In an LLP, all partners have a form of limited liability of assent protection, similar to that of the shareholders of a corporation. In addition, the partners have the right to manage the business directly, and a different level of tax liability than in a corporation. Limited liability partnerships are distinct from limited partnerships, in that limited liability is granted to all partners, not to a subset of non-managing "limited partners." This means that debt collectors will go after the business assets before your personal assets, unlike a sole proprietor where your persona assets are the business assets. However, some US states have combined the two forms to create limited liability limited partnerships. Although found in many business fields, the LLP is an especially popular form of organization among professionals, particularly lawyers, accountants and doctors. In some U.S. states LLPs can only be formed for such professional uses.

The liability of the members of an LLP varies from state to state. Section 306(c) of the Uniform Partnership Act, a reference upon which many state laws are based, grants LLPs a form of limited liability similar to that of a corporation. "An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner." However, a large minority of states extend such protection against negligence claims, thus that partners in an LLP can be personally liable for contract and intentional claims brought against the LLP.

As in a partnership or limited liability company, the profits of an LLP are distributed among the partners for tax purposes; the LLP is "tax blind". This avoids the problem of getting taxed twice, frequently found in corporations. An LLC differs from an LLP in that the LLP has the organizational flexibility of a partnership.

A corporation is a legal entity which, while being composed of people, exists completely separately from them. This separation gives the corporation unique properties which other legal entities lack. The extent and range of its status and capacity is determined by the law of the state of incorporation. Investors and entrepreneurs often form joint stock companies and incorporate them to facilitate a business; as this form of business is now very common, the term corporation is often used to refer specifically to such business corporations. Corporations may also be formed for political, religious or charitable purposes, called not-for-profit corporations, or as government or quasi-governmental entities called public corporations.

Unlike in a LLP or sole proprietorship, owners of a corporation hold no liability for the corporation's debts and obligations. Limited liability further allows corporations to raise funds for riskier enterprises by removing risks and costs from the owners and shifting them onto creditors and to other members of society, thereby creating an externality. The assets and structure of the corporation exist beyond the lifetime of any of its members or agents. This allows for stability and accumulation of capital, which thus becomes available for investment in projects of a larger size and over a longer term than if the corporate assets remained subject to dissolution and distribution.

So how does this relate to your medical practice? Well the most protection for you financially is a corporation. You will be protected from debt collectors as well as tort claims against your business, but not malpractice claims as this will be covered by your malpractice insurance. Having a corporation however, requires more work on your part. You will need a business account separate from your personal finances and will need to maintain meticulous records as to the income and expenditures, in the event you are audited by the Internal Revenue Service. Having a corporation also allows you to pay for things from your business, in essence using pre-tax dollars. This would include but not limited to: automobile expenses, phone, internet, toys(boats, snowmobiles, etc), travel, and entertainment meals. You may be wondering about double taxation since corporations are taxed on their income and then you would pay personal income tax on the dividends above your “salary”. The solution for this is having a subchapter S corporation. With an S-Corp the profits are passed on to you as the owner as ordinary income and are not taxed in the corporation. An example of a S-Corp which I recommend is a Professional Corporation or PC. This can only be held by an owner or owners that are doing business in a regulated profession such as a medical provider. Please ask your accountant for the specifics in your state. Many physicians have set up there practice this way and you may have seen them, example John D. Smith, MD PC.