Business Entities for Doctors: A Very Brief Primer By W. Michael Young, Esq., Ladd ▲Young, Attorneys at Law
A doctor starting in business for him or herself has many business decisions to make: where to locate, acquiring office space, staff, equipment, insurance, marketing, and a myriad of other things, not the least of which is what kind of business form to adopt. The kind of business you will be is important for primarily three reasons: taxes, liability, and operating concerns. There are three basic business forms to consider. A medical practice can be a sole proprietorship, i.e., a single doctor practicing on his own. A practice can be a general partnership, or a group of doctors practicing as a group under an agreement to share in some manner costs and revenue. Finally, a medical practice can be a corporation, a legally separate entity owned in shares by one or more doctors. In California, a medical practice cannot be a limited liability company or a limited liability partnership, and being a limited partnership is impractical. Taxes A sole proprietor is taxed much like any other individual. The costs of doing business are deducted from the revenue, and the remainder is income subject to taxes. The members of a general partnership are also taxed much like individuals. The profits and losses of the partnership are passed through to the partners as provided by their agreement. A corporation may be one of two general types for tax purposes: a general or C corp., and a small or S corp. Both a C and S corp. register with the State and so pay franchise taxes, which begin at $800 per year, but which can be higher depending upon income. A medical C corp. will be treated as a personal services corporation, so it will be taxed at a flat rate of 35 percent, but it gets to use cash basis accounting. With a C corp. the dividends to shareholders will be taxed, so there is a double tax. Also, since the corporation employs the doctor(s), there will be income tax paid on the salaries. Salaries and bonuses can be used to reduce profit, though. Deductions also are available for certain fringe benefits such as health insurance, disability and retirement benefits. An S corp. is created with an election by the shareholders, and there must be less than 100 of them. Profits, losses and credits are passed through to the shareholders of an S corp. and are not taxed at the corporate level. Fringe benefits in an S corp. are generally treated as if the shareholders are selfemployed, but an S corp. may have retirement plans for employees. Liability Liability may arise because of contracts entered in the course of business, and because of wrongs inflicted in the course of business such as negligent injury. For most kinds of liability other than contracts, though, the first line of defense is insurance. A sole proprietor always will be liable for the obligations of the business, whether arising through contract or negligence. In a general partnership, each partner is liable for
the obligations of the partnership, and each partner can bind the others to a liability assumed in the ordinary course of the business. Thus each partner is liable for the agreements and mistakes of the others arising from the business, and each partner’s business and personal assets are at stake. A corporation offers the best protection from liability because it is treated as an entity separate from its shareholders. There is no personal liability of the shareholders for corporate obligations arising in contract or tort (like negligence), so long as the tort is not your own. Creation and Operating Issues Starting up and operating each business form is different. There is no cost to starting and operating a sole proprietorship as such. There are no special issues arising from operating as a sole proprietor. A sole proprietorship requires no State of California filing to start, although most municipalities require any kind of business to obtain a local business license. A general partnership also requires no State of California filing to start up, but a written partnership agreement defining the relationship in detail is highly recommended. All partners will manage the partnership unless the agreement provides otherwise, and there is flexibility in proportioning distributions from the partnership. A corporation is the most formal form of business entity, and requires formation documents: special articles of incorporation, bylaws, initial shareholders’ and directors’ minutes, share issuance exemption, share issuance, a repurchase agreement in case of a shareholder’s death or lost professional license, and likely a buysell agreement. There are upkeep requirements as well, such as shareholders and directors meetings, annual statement of information, annual minutes and the election of officers and directors. If there it to be a Subchapter S election, that must also be agreed to among the shareholders. There also is much less flexibility in proportioning distributions among shareholders.
Ladd ▲Young assists SDCMS members in the areas of: • • •
Real Estate Purchase and Sale, Leasing, Finance, Management and Operations Business Acquisition and Sale Corporation, Limited Liability Company and Partnership Formation and Operation
SDCMS Member Benefits at Ladd ▲Young: Free initial consultation, and a 20 percent discount against attorneys’ fees if the SDCMS member pays by credit card. For more information, contact Jon K. Ladd or W. Michael Young Ladd ▲Young 3444 Camino Del Rio North, Suite 100 San Diego, California 921081711 (619) 5646696