As a physician, most of the time, your employer takes care of the business aspects of your work. However, what should you do if you plan to moonlight as a physician — how should you set up your business structure?
You may want to consider a physician LLC, a business structure that can reduce liability and taxes — two major benefits for physicians, given that in general, physicians have large malpractice considerations and large salaries.
In this piece, we’ll get to the bottom of whether you may want to consider a physician LLC (including the definition of LLC), how you start a physician LLC, whether or not you should incorporate, and the advantages of an LLC. By the time you’re done reading, you’ll have a better idea of whether you’ll want to consider an LLC for your own business.
What is an LLC?
A limited liability company (LLC) is a business structure that offers limited liability protection, legally offering protection by separating your business from you, as an owner, and shielding your personal assets from business debts and lawsuits. In short, an LLC minimizes your personal liability.
LLC owners are called members (with no maximum required number of members) and can include the following:
- Individuals
- Corporations
- Other LLCs
- Foreign entities
An LLC for physicians has more tax flexibility than a corporation, as they are taxed like partnerships and sole proprietorships, utilizing pass-through taxation. Pass-through taxation means that when it earns profits, it does not directly send a portion of the profits to the Internal Revenue Service (IRS). Instead, profit passes through the business and onto the tax returns of the business owners — they pay individual income taxes at the ordinary tax rate, not corporate income taxes.
Anyone can be a member or owner of an LLC. Physicians, on the other hand, should become part of a professional limited liability company (PLLC), which means that only licensed professionals can join as members.
What is a physician LLC?
A PLLC refers to a specialized type of LLC used by licensed professionals in many states — just like for an LLC doctor, creditors cannot go after your personal assets and allow for tax flexibility. The states that allow PLLCs include:
- Arkansas
- Arizona
- Colorado
- District of Columbia
- Florida
- Idaho
- Iowa
- Kentucky
- Maine
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Montana
- Nevada
- New Hampshire
- New York
- North Carolina
- North Dakota
- Oklahoma
- Pennsylvania
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
The other benefit of a PLLC: If one owner in an LLC makes a mistake, others can’t be personally liable. Your state’s secretary of state or business filing agency can share the rules and more benefits for professional entities in your state.
PLLC owners are not liable for malpractice committed by their business partners but liable for claims brought against them for their own malpractice, which means PLLC members should carry professional liability insurance, also known as malpractice insurance.
How do you start a physician LLC?
Members of a potential LLC need to file articles of organization and an operating agreement with their secretary of state and pay a filing fee. Single-member LLCs are considered sole proprietorships for tax purposes and members report business income and expenses on Schedule C, attached to the owner’s Form 1040.
Multiple-member LLCs, on the other hand, file Form 1065. Each member receives a Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., which reports a share of the profits and losses of that particular owner.
When you think you might want to set up an LLC, check with an attorney familiar with LLCs and PLLCs.
Should you incorporate to reduce liability?
Incorporating can help you save from some, but not all tax and liability situations. Again, you still need to have malpractice insurance and you will still need to pay taxes. You can also do other things throughout the year to adjust your taxes for the year, such as contributing to a 401(k) and IRA, keeping track of tax write-offs and giving to charity.
Physician corporations and taxes
Let’s take a look at two other types of corporations you may want to consider: A C-corp and an S-corp.
- C-corp: A C-corp, an entity taxed separately from its owners, means that corporate income tax stays in the business and files its own tax returns, through Form 1120. A C-corp also pays a 21% flat tax on profit. C-corps have no restrictions on the number of shareholders, offer limited liability for all, and have a lower maximum tax rate compared to S-corps. They are taxed through both corporate and individual income tax. No personal write-offs are allowed and it’s also more expensive to get going.
- S-corp: Profits and losses, deductions, credits, and more go through to the shareholder for federal tax purposes in an S-corp, offering pass-through benefits like an LLC and unlike the double-taxation of a C-corp. You file taxes annually instead of quarterly and can get a lower self-employment tax. There is a maximum limit of 100 shareholders.
Incorporation costs
Incorporating a physician LLC means you’ll pay a certain amount of money to get it set up in the form of filing fees (up to $125). You’ll also pay maintenance fees through taxes and for registered agents. All fees vary depending on your state and local area. Hiring a lawyer to do it for you may cost up to $5,000, whereas doing it yourself will likely cost less. However, it’s worth exploring having a lawyer set up the LLC because you can make sure all the “holes” are plugged and that you understand all the ramifications of getting incorporated.
What are the advantages of an LLC?
The major advantage of an LLC is that it “limits liability,” which means that your personal assets are usually exempt from taxation. You avoid the double taxation of a C-corp because you are only taxed once on profits through your personal income.
LLCs also have simplified recordkeeping and profit-sharing rules, and compared to an S-corp, require less registration paperwork and have smaller start-up costs. In short, it offers liability protection, lends credibility to the company, offers tax flexibility, and is fairly easy to set up as well.
Ready to set up your physician LLC?
It’s pretty easy to set up a physician LLC. Look up the Division of Corporations for your state, follow the instructions to file the Articles of Organization document (which lists demographic information about the business), and pay the filing fee. You may choose your attorney or accountant to be the Registered Agent if you choose.
If you still have questions about what type of business structure you should set up if you plan to practice on your own, you may want to consult with a tax professional for more information.
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