What does it mean when business managers, lawyers and consultants talk about incorporation? Incorporating a medical practice means weighing the pros and cons. It can mean a difference in taxes, liability and costs. Finding someone who can give advice on whether or not you should incorporate your practice can be difficult too. Many states have different rules about incorporating medical practices. There are several areas to find information:
- Ask already incorporated small medical practices
- Consult with a business lawyer who specializes in medical practices
- A tax accountant specializing in small medical practices
- Sorting through the information you receive can be very confusing.
Sole Proprietorship vs Limited Liability Corporation (LLC)- If you are not incorporated, you are responsible for all debts the practice incurs. These include vendor contracts, property and equipment leases. This is known as a sole proprietorship, and you and your medical practice are considered the same on your tax returns. An LLC keeps your personal taxes and your business taxes separate; you only have liability up to the amount invested in the LLC. LLC laws vary from state to state. Keep in mind however, that an LLC does not protect a physician from professional negligence; insurance is still needed for this.
If a two or more physicians start a private practice, it is usually recommended to incorporate the practice, as this protects each physician from any liabilities incurred by the other. A partnership does not offer this kind of protection. An LLC can have an unlimited number of owners. If you are the sole doctor in the practice.
Costs- Incorporating can cost money, as consulting with a lawyer initially can start at $2000 for setup fees. Taxes are another issue. Review with an accountant how much more or less taxes you will be spending. Depending on how cash flow is in the medical practice determines the taxes for the LLC. State law also determines taxes. For example, in Colorado, an LLC is a pass-through taxation entity. This means that profits go to the owners who pay the taxes, reporting it on their personal tax returns. This is not a popular choice for physicians. Be sure to inquire in your home state how taxes for an LLC are determined; in other places, such as Texas, a LLP (Limited Liability Partnership) is preferred due to taxation.
If you have questions about setting up your practice, contact us for more information!