What Business Structure Should I Use?

Because you're offering professional services, it's a good idea to setup an official business and structure it properly from the start - for both liability and tax purposes.

Remember - I'm not an attorney (see our disclaimers and terms), so any advice or suggestions here aren't meant to be offered as official legal advice. It's just what I have learned from experience. Please do your own due diligence!

What works for most businesses

In 99.9% of cases you'll want to run as a PLLC (Professional Limited Liability Company) or an LLC (Limited Liability Company) in the state where your clinic is operating. You'll want to look up whether your state offers a PLLC option (most do), and whether your business services fit underneath that structure (again, most do).

What's the difference? A PLLC is reserved for those businesses that require a 'professional license' (like physicians, attorneys, accountants, etc.) to operate, whereas an LLC can be owned and operated by anyone else.

Why a PLLC / LLC?

Your business structure is partially for tax purposes, and partially for liability purposes.

Specifically, the PLLC / LLC structure is about protecting your personal assets. While it's not bulletproof protection against lawsuits, as long as you operate your business separately from your personal assets and follow best practices, if for some reason you find yourself in a lawsuit the accuser won't be able to touch your personal assets - only those that are under the business.

A PLLC / LLC is also better for new businesses for tax purposes, as they are "pass-through" entities. This means that the entities themselves don't pay taxes - they are "passed through" to the owner(s) of the business, and you would then report any taxable income from the business on your personal taxes.

After you've been in operation a while and start making a certain amount of income, it may make sense to transition your tax structure to an S-Corp - read more about that below.

For now, the best option for you is likely a PLLC / LLC.

Where to register your business

The easiest option is in the state where your clinic is located and where you're practicing. If you operate in multiple states, choose the one where you are located most often and where you have a mailing address.

Why in your home state and not in Delaware or Wyoming? It's just easier.

Delaware and Wyoming are better for large corporations (although Delaware is losing its attraction because of some recent lawsuits) and the ease of operating under the laws of those states. For your own practice that's likely going to be less than $10,000,000 in gross revenue, your home state will be just fine. If you have questions, a tax attorney or CPA should be able to point you in the right direction.

What about S-Corps?

Remember the other part of business structure is about taxes? That's where S-Corps come into play.

As a reminder... when you're starting your business, stick with the PLLC / LLC option. The S-Corp option is a federal tax classification you can elect later - and it has nothing to do with your state registration, operating agreement, or anything about starting the business.

So, don't register your business as an S-Corp to start - it's unnecessary.

If you want to be as efficient as possible with paying taxes, then working with your accountant on the timing of converting your business to be taxed as an S-Corp for federal tax purposes should be on your list of items to discuss and plan for.

How does an S-Corp save on taxes?

A regular PLLC / LLC is going to pass all of your business income through to you for all federal income taxes - including Social Security and Medicare taxes.

An S-Corp limits Social Security and Medicare taxes to only what you pay yourself through payroll at a 'reasonable wage.' The remainder of the business income is paid to you via distributions, and then only federal income tax applies.

So, there are some extra administrative steps and potentially costs involved with operating as an S-Corp. You now have to run yourself through official payroll like you would an employee - which means paying state and federal taxes on those paychecks (you already would be paying - just in a different way).

But instead of paying Social Security and Medicare tax on, let's say, $20,000 per month of total income, you would pay Social Security and Medicare tax on the 'reasonable wage' that you give yourself of $10,000 per month, and the other $10,000 that you receive is only subject to federal income tax - helping you save on Social Security and Medicare taxes.

This method doesn't make sense until you're making a significant income, and it's best to discuss with your accountant when it makes sense to make the switch. The numbers above are for example purposes only.

How much will it cost?

Plan on around $200 or so to establish your PLLC / LLC with your secretary of state. If you want to pay an attorney to write an operating agreement or other documents for you, that cost will rise significantly.

If you only have one owner in your business, finding an operating agreement online for either free or a flat fee is probably OK, but you won't know what you're missing.

If you're going into a partnership (you'll have a partner or more), then I suggest either paying for a trusted online partnership agreement, or hiring an attorney to draft one for your group.

Partnership is a whole other can of worms. If you're starting a business with partners, or taking them on later, that decision deserves its own careful planning before you file.

Best Practices

There are a few best practices that will make your life easier and ensure that your liability protection stays in place.

• Keep all business finances separate from personal finances. Set up a separate business checking account and business credit card accounts. If you plan on keeping larger balances within your business, then savings or investment accounts can also be opened under the business.
• Any transactions that are for business purposes go into and out of that account. You can transfer money to yourself (called a 'distribution') - just make sure that no personal purchases are made out of the business accounts.
• Keep your operating agreement fresh and updated. You should make a note to meet at least once per year in your operating agreement, and document that meeting. If you're the only person, note what day you visited your operating agreement and write that down.
• If you're in a partnership, document all of your meetings, and note which meeting counted toward your annual meeting. Having an agenda and then taking notes on that agenda works just great - even if it's only a couple sentences. You want to show and prove that you're meeting for the purpose of reviewing the business and operating agreement. That keeps your LLC in compliance with the state.

Go do it!

If you're like me (and you might be if you've read this whole article!), you want to make sure all of your i's are dotted and t's are crossed before starting. They won't be - and that's OK! If you know you want to be in business, get the paperwork filed and get started. Just do it!

Read our guide on Getting Started Quickly and you'll be up and running in no time!