Chose the Best Entity Type for your Pratice – Part 3

By Andrew Schwartz, CPA

In the first two parts of this series, we covered the basic types of entity choices you have when setting up a practice and the benefits and pitfalls of S-Corporations.? Let’s wrap up by looking at deducting losses,?other considerations you should have, and a final scorecard.

Deducting Losses

It?s not uncommon for healthcare professionals to lose money in years that they open a practice from scratch, purchase an existing practice, or expand their current practice.? Assuming you borrow money to fund these transactions, the type of entity determines how much of these losses the you can claim each year.

To maximize the upfront losses you can claim, an S-Corp might not be the best choice.? If you set up your practice as an S-Corp, you can only claim losses to the extent of the money you invested into the practice.? Guaranteeing loans or other liabilities is not sufficient to allow you to claim these losses.

Running your practice as a LLC or a Sole Proprietorship allows you to claim larger losses up front.? The only catch is that you need to be personally liable for paying off these loans.

If you borrow money to purchase, open, or expand a practice, the S-Corp tends to be the better option with respect to managing the tax burden while repaying the loans.? Since the losses are not allowable up front for the S-Corp, those suspended losses are released as you generate profits to pay down the loans.? With a LLC or a Sole Proprietor, you?ll claim the losses in the early years which will not provide you with any tax shelter as you pay down your loans.

Other Considerations

Do you have children under the age of 18?? If so, going with the Single Member LLC or Sole Proprietor will let you take advantage of a quirky tax break.? While you get to deduct ?reasonable? wages paid to your child for services provided, neither you nor your child owes Social Security or Medicare taxes on wages paid. Plus, he or she does not owe any federal income taxes on the first $5,800 of wages earned (in 2011).?? (We wrote about this opportunity in our May 2007 Newsletter.)

This is true arbitrage.? You move money from your practice?s bank account to your child?s bank account, and the government gives you a tax break on that money.? You can also contribute money into a Roth IRA for your child based on the wages you report.? Assuming the Roth rules don’t change during your child’s lifetime, your child will benefit from decades of compounded growth within these tax-free investment accounts.

Caveat employer.? Keep in mind that you are only supposed to pay your child a fair wage for services actually performed.? You will also need to complete and file quarterly and annual payroll tax forms, as well as prepare a W-2 form for your child.

Flexibility of a LLC

LLCs?are very flexible entities.? With a LLC, you can start as a disregarded Entity, and your practice will be treated as a Sole Proprietorship for tax purposes.? When the time is right, you can then elect treat your LLC as an S-Corp by filing a Form 8832.? The beauty of this strategy is that you can continue to use same EIN and NPI, and don?t need to re-credential with any insurance companies you submit claims to.

Entity Selection Scorecard

Choosing the correct entity for your practice is a tough decision.? You should definitely reach out to a lawyer and an accountant who are familiar with your state?s rules and regulations prior to making your final decision.

Even so, here is an Entity Selection Scorecard to help you with your decision:





Save Medicare Taxes on Earnings


Possibly avoid paying quarterly?estimates


Minimize accounting fees and state ? corporate taxes



Maximize deductible losses funded by debt




Manage taxes better? during loan repayment


Pay child under the age of 18 ? tax-free



Ability to deduct 100% of expenses? not paid by practice




Avoid doubling up on FICA Taxes




S.P. = Sole Proprietor, S LLC = Single Member LLC, M LLC – Multiple Member LLC

Chose the Best Type of Entity for your Practice – Part 2

By Andrew D. Schwartz, CPA

To read Part 1 of this series, click here.

In my previous article, we covered the basics of the most popular entity selections.? Let’s dig deeper into the benefits and pitfalls of S-Corps.? Remember: S-Corporations have the requirement of filing a separate tax return each year and are separate legal entities.

Benefits of S-Corporations

When your practice is set up as a sole proprietorship or LLC, you pay Social Security and Medicare taxes on 100 percent of the income that you report on your tax return.? By setting up your practice as an S-Corp, you have the option of taking a portion of the profits as an ?S-Corp Distribution? instead of as salary.? By doing so, you avoid paying these two taxes.? Currently, the maximum combined tax rate for these two taxes is 13.3%.? Take a salary of more than $110,100 (in 2012), and the rate drops to 2.9%.

Keep in mind that the rules require that you pay yourself no less than a ?reasonable salary? and then only take the excess income as S-Corp distributions.? Have the S-Corp issue you a distribution of $50k instead of a paycheck and you?ll save from between $1,450 and $6,650 in Social Security and Medicare taxes, depending on your total annual salary from the practice and other sources.

Pitfalls of an S-Corporation

There are some pitfalls with S-Corps to consider.? For starters, expect to pay higher accounting fees since the S-Corp needs to file its own tax return each year.? You should also look into the minimum tax that an S-Corp will need to pay in your home state as well as any other states where you operate your practice.

When it comes to deducting certain types of expenses, staying away from the S-Corp might be prudent.? It?s actually easier for people who operate their practice as a Sole Proprietor or LLC to claim the home office deduction or to deduct their automobile expenses.

If there are multiple owners to the practice, maintaining a LLC allows the owners to claim any professional expenses not run through the practice directly against their share of the practice income.? For practices set up as an S-Corp, each owner would need to claim these expenses as a miscellaneous itemized deduction, which are only allowable to the extent they exceed 2% of each owner?s income and then are capped for any owner subject to the Alternative Minimum Tax (AMT).

And you need to be careful if you earn a good salary working outside of your practice, and also own a profitable practice.? Since an S-Corp is required to pay its owners a reasonable salary, there is a chance that someone earning more than the FICA max might end up paying extra Social Security taxes if your salary from all sources exceeds $110,100.? Yes, you will get back the Social Security taxes withheld from your pay, but you don?t get back the Company match of 6.2%.? The cost of this tax could be as high as $6,93 ($110,100 * 6.2%).

In the last part of this series, I’ll discuss deducting losses and other considerations to think of when selecting an entity type.

Series: Choose the Best Entity Type for your Pratice – Part 1

By Andrew D. Schwartz, CPA

For doctors in practice, making a lot of decisions every day is just part of the deal.? While some practice management issues come with only one obvious solution, most require that you spend time researching a variety of options only to learn that there is more than one correct answer.? Selecting the best type of entity for your practice is one of those issues with multiple correct answers.

If you are in the process of opening or purchasing a practice, now is the time to determine which type of entity would work best for your practice over the long-term.? Or, if you have owned a practice for a number of years, why not take this opportunity to determine if you have selected the best type of entity for your situation.? Let?s take a look a pros and cons of the various entities available to healthcare professionals in practice.

Most Popular Entity Selection

Most healthcare professionals operate their practice as a Sole Proprietorship, a Limited Liability Company (LLC), or an S-Corporation.? Different rules apply to the different type of entity.? The first question, however, is why even bother to create an entity for your practice.? Why not just go with a sole proprietorship or a general partnership?

If you are involved with partners in your practice, setting up an entity is a must.? While asset protection laws vary by state, running your practice as an S-Corp or LLC should protect your personal assets from your business partner?s mistakes.? Without forming an entity, you would be running the practice as a General Partnership which offers no protection to that risk.

For practices with one owner, setting up an entity helps keep your practice separate from your personal finances.? Some people who own a practice and also own the real estate where their practice is located actually end up establishing two entities – one to hold the assets of the practice and a second to hold the real estate.

The Basics

Let?s start by looking at two major characteristics for these three options.? While Single Member LLCs and S-Corporations are separate legal entities, only an S-Corp comes with the requirement of filing a separate tax return each year.? Sole proprietors and Single Member LLCs report their income and expenses on a Schedule C filed as part of the owner?s individual income tax return.

Type of Entity

Separate Legal Entity

Files Own Tax Return

Sole Proprietorship



Single ? Member LLC






For Part 2 of this series, we’ll discuss the Benefits and Pitfalls of S-Corps.? Stay tuned!


When you set up your practice, you need to decide which type of entity to establish. Whenever you have business partners, setting up a legal entity for your practice is a must. While an entity won’t generally protect you from your own malpractice, operating a practice as a Corporation or LLC will shield your assets from mistakes made by your business partners. Another benefit of setting up an entity is to separate your practice from your personal finances.

Currently, here are the most commonly used entities to choose from:

  • S-Corporation
  • C-Corporation
  • Limited Liability Company
  • Sole Proprietorship

There are pros and cons to each type entity. For C-Corps, there are a variety of limitations and pitfalls including:

  • During the early years, when your practice might be?generating losses
  • In each subsequent year, when they your practice is?hopefully generating profits
  • When your practice is sold

Due to these pitfalls, we don’t see many small healthcare professionals that choose to run their practices as a C-Corp. For that reason, let’s focus on the other three entity options: sole proprietors, S-Corps, and LLCs.

Please note that like most of the tax rules, the C-Corp issue is not completely black and white. Some healthcare professionals do opt for a C-Corp to be able to deduct their disability insurance premiums and their family’s health expenses through a Health Reimbursement Arrangement; as well as to participate in certain pre-tax benefits not available to sole proprietors and owners of S-Corps and LLCs. These professionals need to be very careful to navigate around these pitfalls, however, to avoid paying excess taxes.

In part 2, we’ll compare the advantages of Sole Proprietor vs. LLC. vs. S-Corp