The reason a professional such as a lawyer or doctor would incorporate his/her business is
(1) To safeguard his or her assets from unlimited responsibility, a professional such as a lawyer or doctor might incorporate his or her business.
(2) to ensure that, in the event of a hostile takeover, another professional firm would not take control and make decisions.
(3) to limit his or her obligation for other assets.
(4) to be in compliance with the law, as insurance companies need corporations for billing.
Many physicians who work as independent contractors are debating whether or not to incorporate. Physicians are shielded from some sorts of liability and may be able to lower taxes on business profits by incorporating their practice as a distinct business entity.
Some physicians appear to overestimate the benefits of incorporation without taking into account the cost and time involved in the process. Before incurring the additional cost and complexity of incorporating, a doctor should assess a number of legal, financial, and practical issues. We’ll go over the two largest possible advantages of incorporation: lower liability and tax advantages, to assist you decide which company organization is best for your firm.
Know how to shield yourself from liability.
One of the main reasons physicians prefer to incorporate is to reduce their liability. Doctors can assist protect their personal assets from responsibility in a professional lawsuit by switching from a partnership or single proprietorship to a corporation. However, incorporation only reduces some sorts of liability, so it’s crucial to know what’s covered and what’s not.
Pros: In the event of a lawsuit or unpaid debt, LLCs and other corporate structures (e.g., Professional Corporations, Professional Limited Liability Companies) can operate as a barrier between a physician’s personal and professional assets. If an LLC owes money to a vendor, creditors cannot seize an LLC member’s personal assets. In contrast, if a company member or shareholder is sued for hitting and injuring a pedestrian by accident, the plaintiff will not be entitled to seek damages from the medical practice’s assets.
A doctor who is a sole owner or a partner in a medical partnership, on the other hand, is personally liable for an unincorporated practice’s obligations and liabilities. This arrangement exposes physicians to significant professional and personal risk. Partners in a general medical partnership may be held personally accountable for one another’s medical negligence. Physicians who incorporate are protected not just from the business entity’s liability, but also from liabilities arising from the activities of other physicians in the practice. As a result, combining a practice with many physicians is strongly recommended.
Cons: While incorporation can give essential protection from certain sorts of claims, it does not provide any protection against malpractice responsibility for a physician. Malpractice insurance is the only way to protect yourself from professional malpractice lawsuits.
Furthermore, professional corporations may be held liable in the event of an accident or injury on company property or while driving corporate vehicles. However, only the corporate entity’s assets are exposed in such instances, not the personal assets of members or shareholders. Only high liability limits on business, auto, and property insurance can financially protect your company in the event of such accidents, injuries, or other claims. You can also create separate LLCs for rental properties and other assets (such as equipment) with significant liability exposure, separating them from the running side of your business/practice and providing additional protection to the operating entity. However, adding these assets will add to the complexity and cost of the process.
The bottom line: Physician liability is reduced to some extent by incorporation. Other types of insurance, such as malpractice, business liability, property, and auto insurance, cannot be replaced by it. You must compare the time, expense, and effort of incorporation against the value of reduced liability if you are considering it.
Consider your tax advantages.
Another advantage of forming a medical practice is the opportunity for preferential tax treatment. Incorporation, depending on the sort of business you choose and your financial goals for the practice, might result in significant tax savings. The specific tax benefits of incorporation, on the other hand, varies greatly amongst organizations.
Limited Liability Corporations (LLCs)
A simple LLC allows physicians to form a separate corporate entity that distributes profits (and losses due to operational expenses, equipment and real estate depreciation, and other factors) to LLC members directly. The entity itself is not subject to taxation (although it will have to file an informational tax return.) As a result, your federal and state tax burden as a member of an LLC will be similar to that of a single owner.
You must classify your LLC as an S-Corporation in order to reap the tax benefits of getting compensated as a shareholder rather than just an LLC member. Note that certain states do not allow physicians to form LLCs and instead require them to form professional companies.
You can choose to be taxed as an S-Corp if you have an LLC. S-Corps have the option of passing through profits in the form of dividends to company shareholders while still being a pass-through organization. As a result, doctors can divide their earnings between salaries and dividends. Dividends are taxed at lower, more favorable rates and are exempt from payroll taxes such as FICA, self-employment, and Social Security and Medicare taxes, resulting in a nearly 15% savings in taxation.
Given the considerable tax advantages of dividends, you may be thinking to yourself, “Couldn’t I just pay myself a pittance and then divert the remainder of the profits to be paid in lower-taxed dividends?” Because the IRS is fully aware of the temptation to utilize this method, S-Corps are frequently subjected to increased tax scrutiny. Payments from an S-Corp to a corporate officer must reflect “fair compensation” for services provided, according to tax law. If auditors feel your salaried income is too low, you could lose all of your incorporation tax benefits and end up in a nasty IRS battle.
As a result, while having an S-Corp allows you to split your income between pay and dividends, you may only be able to cut a small amount of your income. Otherwise, the IRS will see an abnormally low pay as a clear red flag. S-corps also have more stringent management and operation requirements than a standard LLC, such as corporate bylaws, shareholder meetings, and stock distribution rules. Physicians should weigh the costs and complexities of running an S-corp against the tax advantages of dividend income.
If you’re thinking about starting a business, you’ve probably heard about the benefits of forming a C-corporation. C-Corporations, unlike LLCs and S-Corporations, are not pass-through organizations, and their profits are taxed at corporate rates.
For the most part, a C-corporation tax structure will benefit physicians only if they keep a significant portion of their profits in the practice. You can greatly minimize your taxes on earnings kept within the practice if you plan to keep a major amount of the income in the practice to save up for future needs or expansion. However, if you intend to distribute the majority of the practice earnings in the form of dividends to shareholder physicians, you will be taxed twice.
The Bottom Line: It’s crucial to remember that incorporating isn’t a one-stop shop for immediate tax benefits and liability protection. Forming an LLC protects you from operational liability as well as the misconduct of your fellow members, and certain LLC designs might provide tax advantages. Understanding the scope of these benefits might assist you in deciding whether or not to incorporate.
Physicians should factor in the costs of forming and running a corporation. Depending on the sort of corporation you form, the specific legal and accounting charges will vary. Each year, it might cost anywhere from a few hundred dollars to several thousand dollars.
Only you can decide if the advantages outweigh the downsides after weighing the benefits, costs, and workload of merging your medical practice. You may decide that the convenience of operating as a single proprietor is well worth the somewhat higher liability, depending on the scope of your profits or business ambitions. As the number of partners in your practice grows and your firm grows, you should consult an attorney and/or accountant to evaluate which type of corporation will provide you with the most legal and financial protection.
Another reason a professional such as a lawyer or doctor would incorporate his/her business is limited liability.
What is the meaning of limited liability?
You risk what you put in, is the greatest approach to explain limited liability. In other words, limited liability ensures that a person conducting business does not put his or her personal belongings at danger if the business fails. Any investor, partner, or member of the firm who has limited responsibility under the law cannot be held liable for any unfulfilled company commitments or debts in excess of the amount invested.
Jill and Jack are a couple.
Here’s a straightforward comparison. Jack and Jill are acquaintances. Jill is a fantastic cook, and Jack is a handyman. Both decide to create their own firm in order to profit from their abilities. Renovations are Jack’s main source of income. He purchased his own equipment and used his own name to sell his services. Jack runs his business on his own.
Jill made the decision to create a bakery. Jill has formed a small corporation (an S-Corporation) called Jill’s Cakes, Inc. before entering into business. Jill put her funds into Jill’s Cakes, Inc. as a start-up capital, then purchased her baking equipment and rented her shop on behalf of her business. There are essentially no distinctions between the two ways of doing business as long as things go well for Jack and Jill.
When things go bad, though, the distinctions become apparent. Jack scrubbed the floor before leaving the apartment he had just painted one day, but he forgot to put up a sign. When the owner entered, he slipped on the wet floor and shattered his ankle. He has filed a lawsuit against Jack for medical bills and lost pay. Jill slipped a peanut into the wrong batch of batter, triggering a serious allergic reaction in one of her customers. That consumer has filed a lawsuit against her for medical expenses as well as pain and suffering.
What is the danger to Jack and Jill? Jack is putting everything he owns on the line, including his job equipment, truck, home, and personal items. Jack must sell everything he owns to satisfy the judgment as long as it exists. Jill is just putting her business assets on the line: her culinary equipment, cash reserves, and whatever else Jill’s Cakes, Inc. owns. Her personal belongings, such as her car and residence, are, nevertheless, secure. Her company may go bankrupt, but her life will not be devastated (totally).
This anecdote, of course, depicts the worst-case situation. Many firms thrive without encountering many problems. However, many businesses fail, and it is so simple for a business owner to benefit from limited liability that everyone should.
Keeping Liability to a Minimum
Several forms of company structures provide limited liability protection to their owners. Corporations and limited liability companies are the most common (LLC). Each of these entities has its own set of benefits and downsides, but they both provide limited liability protection to their owners.
In the context of limited liability, there are a few points to keep in mind. To begin, a business must be well-maintained in order to provide the full liability protection that it was created to provide. In other words, if a corporation is simply a shell, but is conducted as if it is one and the same as the person running it, the courts will regard it as a sham, and the owners will be denied limited liability protection.
Second, even with a limited-liability company, an owner may be liable for more than his or her initial investment. When an owner has personally co-signed a loan agreement, this is the case (such as a credit card application). This signature provides the lenders with a personal guarantee of debt repayment, allowing them to pursue the owner’s personal assets in the event of failure. If final repayment is beyond the resources of the business, other owners (or investors) are not accountable, but the owner who co-signed would be responsible for that amount.
Is it possible for everyone to run a limited liability company?
No, in some occupations, the benefit of restricted liability is impossible to obtain. Law and ethics hinder professionals such as lawyers, doctors, accountants, chiropractors, engineers, and architects from minimizing their liabilities. We want these professionals to take personal responsibility for their decisions, so they make them thoughtfully every time.
The final line is that, if at all possible, anyone doing business should consider forming a limited liability company. Consider it a safety net in case the worst happens.