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Should
You Incorporate Your Medical / Dental Practice?
If you practice
medicine / dentistry or other health care profession as a sole proprietor, you probably ask yourself, should I form an
entity? What are the costs and benefits of forming an entity versus remaining a
sole proprietor?
Answering these questions is not easy. The answer is different for every
practice depending on its circumstances and needs. The answer depends on a
balancing of many different and conflicting factors. Most of us suffer
information overload not long after starting this analysis – all of the factors
start swimming around in our minds and we don’t know what to think.
This article gives you a quick roadmap in deciding whether or not to incorporate
your practice. The first and foremost consideration is whether you need
limited liability. Next you ask, are the costs of forming and maintaining a
professional corporation worth the limited liability protection? Then you
determine whether you will be taking on a partner. Then you delve into the tax
advantages and disadvantages of forming a corporation. Last, you weigh the
factors against one another and make a decision.
Limited Liability.
Limited liability is
the primary factor in deciding whether or not to incorporate. A sole proprietor
doctor is personally liable for all debts and liabilities of the practice,
including real property and equipment leases. On the other hand, a shareholder
of a corporation is not personally liable for the corporation’s debts
(except payroll taxes). Remember, however, that limited liability might
not protect you where you need it most – the doctor is always liable for his or her own negligence and the negligence of
employees under the doctor’s supervision. Only insurance can mitigate such
liability.
Costs. You
want the benefits of limited liability. Now you need to ask yourself, is it
worth the price? Limited liability costs money – entities pay franchise taxes
and require higher legal and accounting
costs for their organization and maintenance. Worse yet, because doctors are
subject to special regulation, a doctor needs specialized legal advice – an
ordinary business attorney might not have the necessary expertise. A
doctor
probably will incur more legal fees than the run-of-the-mill service
corporation.
In any event, after
comparing the benefits of limited liability against the costs of incorporation,
you now can ask a fundamental question, is the limited liability worth the costs
of maintaining the corporation? If the answer is no, you probably can stop here
(but read on just in case).
Partners.
If you want a partner in your practice,
you should form a professional corporation. Although two or more doctors can
work together as a partnership, this is not your best choice. Partnerships are
risky because each doctor is liable for the acts of each other doctor in
carrying out the practice. Incorporation mitigates this risk by
protecting against liability for the torts of the other doctors in the group.
Tax Factors.
In my experience, the tax analysis will cause most of your confusion. Worse, in
the end you may find that the various and sundry tax advantages and
disadvantages seem to cancel one another out. For this reason, for the most
part, tax should not be a major
factor in deciding whether to incorporate your practice.
1. Tax
Advantages of Incorporation. There
are few remaining tax benefits for incorporation. Moreover, what few tax
benefits there are work only for “C” corporations (not for “S” corporations).
In brief, forming a professional C corporation helps with fringe benefits (most
notably health insurance) and life insurance. Incorporation does not do
much good for your retirement plans.
In two limited areas,
forming a professional C corporation can provide some benefit. First, if the
applicable corporate tax rate is lower than your personal tax rate, then
incorporating can shift income to the lower corporate rate. Second, you can
defer income tax by selecting a fiscal year. The bottom line here is to talk
with your accountant. If not structured properly, you run the risk of incurring
the dreaded double tax and the 35% flat tax for personal service corporations.
2. Tax Disadvantages of Incorporation.
As I mentioned above, your corporation must pay a franchise tax. California
imposes an $800 minimum franchise tax on corporations (except in the first year
of the corporation’s existence). Also, being a sole proprietor
doctor has
these additional tax benefits: (i) you can never be taxed as a personal service
corporation; and (ii) you can avoid FUTA, California unemployment taxes and
workers compensation premiums.
This article only gives a
short roadmap of the issues involved in deciding whether or not to incorporate
your practice. There is a lot more to this topic than introduced here.
So, before you do anything, get competent legal counsel to help you.
Call
me to schedule a legal consultation:
510-796-9144
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