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Corporate Structure for Medical Businesses

Successful physicians accumulate high net worth and are targets for lawsuits.

Physicians have special considerations and need to be concerned over the corporate entity that they choose for their business.  Added professional liability can be transferred to personal wealth and this is a danger that every doctor faces.  The business of medicine does not stand still for the sake of healing and this can become a conflict of interest and a financial tug of war.

Most physicians assume that their medical malpractice insurance is adequate to cover their liability.  In the past, a million dollars was the net worth of many doctors.  Today many doctors have a net worth over five million.

Here is a list of what can be garnished from a physician if involved in a major lawsuit.

♦the exhaustion of their medical malpractice insurance to the limits
♦their accounts receivables
♦their homes
♦their cash assets
♦their portfolios
♦unprotected retirement funds.

It may sound preposterous, but it has happened to more then one physician.  Good physicians require focus in their practice and this means focusing on the profession, not on the office antics and the concern over whether the assets of the future and the assets of the family are in jeopardy.

This protection begins with the selection of corporate structure.  There are several options to choose from, but likely only one is going to be the best for your corporate structure.  This requires analysis of risk, and the status of each physician in the practice.

For example, a physician in a partnership may face pass-through liability.  Groups of physicians who use a C-Corp face high taxes and a Sole Practitioner faces major pass- through liability.  However, a physician may choose one of the above due to another advantage.  The point is that an expert analyst who is versed in liability and taxation should be consulted.  Ignoring one for the other is not a good idea.

C-Corporation
Many business owners want to use a C-Corp thinking they will avoid taxation.  A C-Corp is not a “pass-through” entity for taxation.  This means that any money left at the end of the year is taxed at a corporate rate of 35% for physicians.  The owners receive a normal W2 for working for the corporation.  This means that the corporation is taxed and so is the individual.  This is frequently referred to as a double tax trap.

The greatest advantage of a C-Corp is that the owners can deduct 100% of the cost of Long Term Care Insurance (LTCI).  There is a way to run a medical business free of a C-Corp and use a C-Corp to retain the 100% deduction for LTCI passing the money tax-free to the physician’s heirs.  An expert advisor who understands this concept should initiate this process for the physician.  It is not necessary to include all of the employees in the office in this program.

There may also be taxation problems with a C-Corp that could result in “unreasonable compensation.”  This means that if an office makes money from ancillary sources, such as physical therapy, X-Rays, MRIs and the like, this amount of money is potential unreasonable compensation.  From the perspective of the IRS. the money was not earned by the work of the doctor and is thus subject to additional taxation.

A C-Corp is not the best alternative for a medical practice in almost every case.  Remember that when paying bonuses, which usually occur in January, the taxes are due in the year the money was earned and not in the year the money was paid (for example if bonuses are paid in January).

S-Corporation
An S- Corp is a “pass-through” entity.  This means that the income in the company will pass through to the owners each year, regardless of whether there is a profit or a loss.  The advantage is that the owners of an S-Corp can take a partner distribution at upwards of 40% (depending on what your advisor allows).    The reason for this is a reduction of taxes, which may equate to up to another 5%.

Limited Liability Company (LLC)
Often LLCs are overlooked as a viable choice for physicians.  Many people do not realize that an LLC may take an election to be taxed as an S-Corp or a C-Corp.  Once people learn about this, they usually change their opinions. It is also possible that an LLC without declaration of taxation as an S-Corp or a C-Corp, will likely be taxed as a partnership.

Professional Corporation, P.C.
P.C.s are reserved for professional fields such as medicine or accounting and are very similar to LLCs and elect their form of taxation to take advantage of the best strategies for saving money and protecting assets.

Partnership or Sole Proprietorship (SP)
Partnerships and Sole Proprietorships hold the greatest liability of all company structures.  A partnership can make the owners liable for each other in partnership and their mistakes in practice.  A corporation may not protect the owner individually, but it will protect the owners routinely as a matter of law for all of the issues that pertain to corporation liability.

Which should you choose?
If you are concerned about the Long Term Care Insurance, then you have to investigate using a C-Corp, but this does not mean it has to be the structure of your business.  It is more prudent to use an LLC or an S-Corp or a P.C. and be taxed as an S-Corp.

If physicians disagree, read the Perfect Doctor's Office in this section.

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