Whether the designation is S-Corporation, C-Corporation, LLC, or PSC, many reasons for medical practices to incorporate are tax driven, but there are other benefits.
Whether the designation is S-Corporation, C-Corporation, a limited liability corporation (LLC), or a personal service corporation (PSC), many reasons for medical practices to incorporate are tax driven, but there are other benefits. And if you’re thinking about incorporating your practice, you’re not alone.
“There’s really no good reason not to incorporate. In fact, there are plenty of reasons why you should,” says Stephen Levy, an attorney/partner at Kurzman Eisenberg Corbin & Lever, LLP.
According to Levy, a C-Corp is your traditional corporation, like IBM. It’s taxed under Section C of the Internal Revenue Code. S-Corps are taxed under Section S, and LLCs are taxed as if they were partnerships.
And there are certain tax ramifications to going one way or the other. A C-Corp pays taxes as a corporation, and whatever is left over can be paid to the physicians and the owners. However, the idea of having a second level of tax bill was unappealing to many, so S-Corps evolved, and they do not pay corporate-level taxes.
“It’s called a flow-through entity, such as an LLC, or a partnership,” Levy explains. “You get a tax report that you the individual owner of the entity just report on your personal income tax return, and there’s only a tax at that level.”
Physicians would probably prefer an S-Corp to avoid a portion of their income being taxed 15.3% for self-employment, according to Levy.
“And if you’re practicing in an S-Corp, you can take as salary a ‘reasonable salary,’ and the balance of your income you can distribute as a dividend,” he says. “The dividend is not subject to self-employment tax.”
With a PSC, corporate income is taxed at a flat rate of 35%. However, there are specific criteria that a medical practice must meet, particularly in certain states, in order to file as a PSC.
According to Deborah Sweeney, chief executive officer of MyCorporation Business Services, in addition to providing services as its principal activity, the employee owners must perform a substantial portion of those services. In addition, the employee owners must own more than 10% of the fair market value of the company’s stock.
“The [35% flat tax rate] adds predictability,” says Sweeney, likening it to a form of tax budgeting.
Tax reasons aside, there are additional benefits for a medical practice to incorporate. According to Levy, if doctors are practicing as a partnership, which is an unincorporated form, each partner is going to be fully liable for all liabilities of the business, including malpractice liabilities of his or her partners. If a partner makes a mistake and incurs a malpractice claim, all the partners are going to be equally liable to pay those damages, subject to insurance. But, says Levy, there’s no reason to be in that position.
“It’s an unnecessary exposure,” he points out. “By practicing in the context of a professional corporation or in a limited liability form or an S-Corporation form, only the individual’s assets who committed the malpractice and the assets of the practice itself would be exposed to the claim. But the individual assets of the other owners will not. That’s a big item right there.”
“If a physician dies, his estate may not want to be on the hook for another 10 years for the office lease,” Levy says.
If a physician makes a mistake in the type of corporate entity structure he or she selects, it’s not as though they’re locked into that structure, Sweeney says. The nice part of most tax laws and corporate structures is that you can change. You can convert from one type of entity to another; you can elect one tax status and then un-elect it.
“Too often, people err on the side of not incorporating because they’re too nervous to choose one type of entity over another,” Sweeney says. “But the reality is to choose what’s best for you at the time you form, and then know that if you needed to you can file a conversion.”
Alphabet soupBenefits beyond taxesAnd there’s more. By incorporating, physicians — particularly those in larger practices — can protect themselves from exposure to trade debt. When small medical practices enter into a lease or borrow money from the bank, even if they’re incorporated, they’re typically going to have to sign a personal guarantee. But practices that are a little larger and have a steady stream of revenues from multiple providers can often get away without a personal guarantee, and just have the practice be liable for the lease, the bank debt, and trade debt, too. Nothing’s in stone