Selecting an Entity Structure for Your Healthcare Practice

Selecting an Entity Structure for Your Healthcare Practice

The entity structure you choose for your healthcare practice can significantly affect your liability exposure, tax obligations, administrative requirements, and long-term growth strategy. Common ownership structures for healthcare practices include sole proprietorships, general partnerships, limited liability companies (LLCs), limited liability partnerships (LLPs), and professional corporations (PCs).

The ideal structure for your practice depends on several factors, including the state in which you operate, the number of owners involved, your anticipated growth plans, your desired level of liability protection, and your overall tax strategy. Below is a general overview of these entity types and some of their tax and liability considerations.

Sole Proprietorship

  • Available only to solo practitioners
  • Owned and operated by a single individual
  • Simple and inexpensive to establish
  • Requires relatively minimal administrative formalities
  • Income and losses are reported directly on the owner’s individual tax return (pass-through taxation)
  • The business itself is not treated as a separate taxpaying entity
  • The owner is personally liable for all business debts, obligations, and legal claims against the practice

General Partnership

  • Owned by two or more individuals
  • Partners share management responsibilities, profits, losses, and liabilities
  • Income and losses pass through to the partners and are reported on their individual income tax returns
  • The partnership itself is generally not subject to federal income tax
  • Requires a partnership agreement
  • Partners may be personally liable for the debts and obligations of the business
  • This structure does not generally offer protection in the case of malpractice by another physician in the practice

Limited Liability Company (LLC)

  • Can be owned by a single member or multiple members, including individuals or other entities
  • Provides liability protection for members against many business-related claims and obligations
  • Members are generally liable for creditor-related liabilities only to the extent of their investment in the company
  • Often preferred by group practices for more comprehensive protection
  • Income and losses typically pass through to the members for tax purposes
  • Requires an operating agreement
  • Offers greater protection for owners’ personal assets than sole proprietorships or general partnerships
  • Higher administrative costs and burden than sole proprietorships or general partnerships
  • Members are subject to self-employment taxes on their share of business earnings

Limited Liability Partnerships (LLP)

  • Commonly used by professional practices with multiple owners
  • Provides partners with protection from liability arising from another partner’s malpractice or negligence
  • Income and losses pass through to the partners for tax purposes
  • Requires a partnership agreement
  • Offer greater protection than general partnerships
  • Partners may still be liable for certain business debts

Professional Corporation (PC)

Certain states—including New York, California, Texas, and New Jersey—require physicians and other licensed professionals to form a Professional Corporation (PC) or Professional Limited Liability Company (PLLC), rather than a standard business corporation.

Professional corporations:

  • Are limited to licensed professionals
  • Provide liability protection against many business-related claims and obligations
  • Help protect owners from malpractice claims arising from another physician’s actions
  • Can be structured as either a C corporation or an S corporation for federal tax purposes
  • Require more administrative formalities, including bylaws, annual meetings and minutes, shareholder agreements, and employment agreements
  • Typically involve higher setup and maintenance costs

It is important to note that no entity structure shields a healthcare professional from liability for their own malpractice or professional misconduct.

C Corporation

  • May have an unlimited number of shareholders
  • Taxed as a separate entity
  • Corporate profits may be subject to double taxation if distributed as dividends to shareholders
  • May offer greater flexibility for raising capital

S Corporation

  • Limited to 100 shareholders
  • Income and losses generally pass through to shareholders for federal tax purposes
  • Avoids double taxation associated with C corporations
  • May provide opportunities for self-employment tax savings in certain situations
  • Subject to specific IRS eligibility requirements

Partner with RBT CPAs’ Healthcare Accounting Team

Selecting the right entity structure is an important decision that can affect your practice’s legal exposure, tax treatment, and operational flexibility for years to come. Since laws and tax implications vary by state and individual circumstances, practice owners should work with legal and tax advisors to decide which entity type is best for them. RBT CPAs’ healthcare accounting team is here to help you navigate this decision and to support all of your practice’s accounting, tax, audit, and advisory needs. Reach out to us today and find out how we can be Remarkably Better Together.