Before we start, do not use this document as legal advice. I am sharing with you the knowledge I acquired when I was making a personal decision. Before moving forward, consult your accountant and an attorney that does this type of law.
Types of Medical Professional Corporations
“C” Corporation – A traditional corporation that has many strengths that are not important to physicians. A C-corp is taxed on all funds left in the corporation at yearend. This double taxation, at both the corporate and personal levels, negates its advantages.
“S” Corporation – Also known as a pass-through corporation, a S-corp is used by small business because of its simplicity. Payroll is subject to Social Security, Medicare and other withholding. Distributions are not subject to Medicare or Social Security withholding.
Limited Liability Company (LLC) – Another business entity. Some sources say that you can’t have a LLC for a Professional Corporation in California. A LLC has fewer recordkeeping requirements than a corporation and are more flexible to manage. Although they can have more than one member, this may negate some of the reasons individual physicians may be looking into them. A disadvantage is that all income that comes into a LLC is taxed; as a sole proprietorship for individuals, or as a partnership for groups.
Doctors are high earning individuals that can be a target of lawsuits. Professionally, we purchase malpractice insurance. This can help protect us from losses from professional lawsuits. However, this isn’t the only risk to our financial net worth. We need to also consider personal liability (like sexual harassment) and business liability, such as a HIPPA fine.
When we are Employees, being paid with a W-2, the corporation we work for shield us from the risk from other malpractice by other employees. The Professional Corporation adds complexity, not benefit.
In a Partnership, if the partnership, or any of the partners, gets sued, everyone is at risk to help pay. There is joint and several liability, which means that that those with deep pockets have the most liability. A Professional Medical Corporation can limit the risk to monies in the Professional Corporation only. All personal funds are protected.
For Independent Contractors receiving 1099 income, the Dynamex decision has muddied the waters. The Dynamex decision forces employers to make the assumption that all of their employees are W-2 based, and they need to make the following criteria to be 1099 Independent Contractors. A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. At this time, it looks like most Anesthesiologists will be classified as Employees. This may evolve.
A Professional Corporation is a business. It has a payroll, collects taxes, and can hire employees. A Corporation can provide benefits such as automobile, insurance, pension, home office, cell phone service, internet and Continuing Medical Education benefits.
By paying for benefits at the corporate level, you are using pre-tax dollars instead of after-tax dollars. For Californians, with the 12.3% tax rate, coupled with federal tax rate or 37%, you get double the purchasing power when you use pre-tax dollars. Likewise, by reducing taxable income, you reduce your taxes.
Everyone has different risk tolerances or desires for pension contributions. When you work for a large entity, there can be limits on individuality as the entity insures compliance to protect the larger entity. When doctors are truly independent, they can create more creative pension alternatives. These are best left for individual tax advice.
Corporations have their own overhead cost. These include payroll, meeting requirements, tax reporting and returns. There is a cost to have an attorney set up the corporation. None of this is onerous, but it adds to overhead.
The biggest benefit of a Professional Corporation is liability protection. In addition, there is the potential for monetary savings. Physicians working as an Independent Contractor or joining a Partnership should consider the benefits of forming a PC.