Consider Becoming Your Own Corporation

Roccy DeFrancesco, JD

Physician's Money Digest, August15 2004, Volume 11, Issue 15

John Smith, MD, makes $500,000 ayear working in a 10-doctor medicalpractice. After researching incometax reduction plans, Dr. Smith decides thathe wants to implement a plan where hecan put away $75,000 a year in a tax favorablemanner for use as supplementalretirement income. He then tells his partnersthat he wants to implement a plan inthe practice that won't require funding byother physicians or employees.

Reality check:

Five of the founding members of thepractice are over age 55 and decide thatthere is no upside for them if Dr. Smith,age 40, implements the plan. Therefore,they tell Dr. Smith that they will not allowhim to implement his plan in the practice. Does this scenario soundfamiliar? If it does, you should consider thebest solution to this sad and common situation:the perfect corporate structure.

Corporate Substitution

Most multiphysician medical practiceshave a main company (usually a C or Scorporation) that employs both thephysicians and all of the employees. Forthe sake of this article, let's call the maincompany the mother company. If a physicianwants to implement any kind ofincome tax reduction plan, it must bedone inside the mother company as acorporate deduction. With just the mothercompany in place, all of the employeeswill usually take their income from themother company via W-2 income.

The perfect corporate structure exchangesa professional corporation (PC)for the physician. The PC then becomesthe entity that receives income. Soinstead of Dr. Smith receiving a W-2 paycheckfrom the mother company, themother company will cut the paycheck toDr. Smith, PC. Dr. Smith, PC, will, in turn,cut a paycheck to Dr. Smith.

Uncomplicated Matters

Is the perfect corporate structure complicatedto create? No, absolutely not.Let's consider the case of Dr. Smith, whohas a contract with his practice that sayshe will get paid whatever he is to be paid.Dr. Smith would simply redo the contractso that it states that Dr. Smith, PC, will bepaid the normal W-2 income as a consultingfee (plus the normal matching corporatepayroll taxes the mother companywill pay on his behalf).

Free man:

In his 10-doctor medical practice, Dr.Smith might be the only physician whogets paid this way. However, any or all ofthe other physicians (ie, owners andemployee physicians) in the practice cando what Dr. Smith did and create theirown PC. Once Dr. Smith hasmoney in his PC, he can choose to do whateverhe wants with that money withouthaving to ask the partners in the mothercompany for permission.

The biggest benefit of the perfect corporatestructure is the ability of each physicianto implement their own income taxreduction plan without having to beg forapproval from the partners. Plans such asthe Equity Disability Trust and ABC Plancould reduce a physician's income taxes between$25,000 and $250,000 a year.

Roccy DeFrancesco, JD, is anattorney and author of "The Doctor'sWealth Preservation Guide."He has run a medical practice andlectured for many state andnational medical associations. Fora free asset protection, income, and estate taxreduction CD, or for questions, call 269-469-0537or e-mail roccy@wealthpreservation123.com.