April 23, 2024
Choice of Business Entity For Attorneys and Doctors

by Denis Kleinfeld

Starting a solo practice means I must pick the best business entity. It will greatly affect how I handle legal and financial tasks. I’m exploring various options for the right entity type.

For attorneys and doctors, the top picks for structure are LLCs and PCs. Each comes with its good points and drawbacks. It’s vital to look closely at them before choosing.

LLCs combine limited liability with tax benefits. They guard my personal assets from the debts of the business. Also, they are easy to manage and make decisions with. PCs, on the other hand, shield against malpractice claims. But, they bring more paperwork and corporate taxes.

Finding the right business setup is key for me and others in my field. It’s crucial to really understand LLCs and PCs. And to see which fits best with my practice and where I want to go. Picking the right structure will protect me legally and make sure I get all the tax advantages for my practice.

Key Takeaways:

  • Choosing the right business entity is crucial for attorneys and doctors starting a solo practice.
  • Options include Limited Liability Companies (LLCs) and Professional Corporations (PCs).
  • LLCs provide combined benefits of limited liability and tax advantages.
  • PCs offer liability protection against malpractice suits but have more administrative burden and are subject to corporate tax.
  • Evaluating the advantages and disadvantages of each option is essential in making an informed decision.

What is a Limited Liability Company (LLC)?

A limited liability company (LLC) mixes the perks of both a corporation and a partnership. It shields owners from personal debts. This makes it a smart pick for those working on their own. Besides, LLCs let you run things your own way more than corporations do.

LLCs offer the perfect balance of tax benefits and personal liability protection. As an LLC owner, you can enjoy the advantages of pass-through taxation while safeguarding your personal assets from business debts and legal claims.

You can go solo or partner up in an LLC, suiting your situation. Plus, keeping up with LLC rules is simpler compared to other business types. This cuts down on paperwork, giving you more time for your business.

Making an LLC shields what you own from your business’s risks. You get tax perks and a lot of control. For lawyers and doctors aiming for less risk and better taxes, it’s a top choice.

Key Features of an LLC:

Feature Description
Liability Protection Owners’ personal assets are separate from business debts and legal liabilities.
Tax Advantages Profits and losses flow through to the owners’ personal tax returns, avoiding double taxation.
Flexible Management Owners can choose a management structure that suits their preferences and business needs.
Less Compliance LLCs have fewer formalities to follow compared to corporations, reducing administrative burdens.

What is a Professional Limited Liability Company (PLLC)?

Some states tell professionals like doctors and lawyers to start a PLLC, not just any LLC. PLLCs offer the same perks as LLCs. Yet, they need certain rules for who can be in them and how they’re run.

If you’re in a PLLC, everyone in it must share the same professional license. This setup stops different professionals from sharing risks. For instance, a PLLC run by a lawyer group would need all members to be lawyers. This makes sure each professional is accountable and looks out for their clients. Being in a PLLC lets a professional enjoy the benefits of an LLC while directing on their career.

It’s key to know that each state decides its own rules for PLLCs. So, be sure to check what your state wants. Not following these rules could lead to legal problems or losing your license.

For places with tough rules on who can do business, a PLLC is often the best choice. But in some states, like California, professionals might have other business types to pick from.

If you think a PLLC might be right for you, it’s smart to talk to a business formation lawyer. They know all about the rules and licensing in your state.

Key Features of a Professional Limited Liability Company (PLLC)

Licensing Requirements: Everyone in a PLLC must have the same professional license.

Limited Liability Protection: Just like an LLC, a PLLC protects your personal assets from business debts.

Flexibility: PLLCs let professionals choose how they want to manage and make decisions for the company.

Taxation: PLLCs can pick a pass-through tax, avoiding extra taxes. This lets earnings and losses go through to member’s personal taxes.

Operational Requirements: PLLCs have to follow certain state rules, like updating files yearly and keeping good records.

Knowing the good and not-so-good with PLLCs helps professionals choose the right business form. This way, they can focus on their careers while doing business the right way.

What is a Professional Corporation (PC)?

A professional corporation (PC) is a special type of corporation. It lets licensed professionals turn their practice into a business. Professionals like accountants, attorneys, and doctors can form a PC. This way, they protect their personal money against the debts of the business.

There are benefits and downsides to choosing a PC over other business types. Although a PC offers tax advantages, it’s not as popular as an LLC. This is because LLCs are simpler to run and have seen tax law improvements for their owners.

The Advantages of a PC

Creating a professional corporation brings many upsides for licensed professionals. It gives them a way to protect their personal wealth from business debts. Here’s why forming a PC can be a good idea:

  • Liability Protection: PCs keep the personal assets of their owners safe from the business’s debts and legal troubles.
  • Professional Image: Being a PC can make a practice seem more professional. This could lead to increased trust from clients.
  • Tax Advantages: Owners of a PC can use special tax breaks and retirement plans. This can save them money come tax season.

Shareholder Requirements

Setting up a PC also involves rules for who can be an owner. Here’s what to keep in mind:

  1. Profession-Specific: Everyone who owns and leads a PC must work in the same profession. This ensures everyone has the know-how to run the business together.
  2. Licensing and Credentials: To own a PC, you must have all the right licenses and certifications your job needs.
  3. Shareholder Agreements: Owners can make agreements among themselves. These agreements outline who does what and who decides on what within the company.

Comparing Liability Protection

Both PCs and LLCs keep their owners from losing their personal stuff over business debts. But they do this in different ways:

Aspect PC LLC
Personal Liability Protection PCs protect owner’s personal assets from the business’s debts and lawsuits. LLCs do the same for their owners, keeping their personal money and belongings safe from the business’s troubles.
Professional Liability Protection PCs don’t stop owners from being personally sued for professional mistakes. This includes errors or misconduct in their work. LLCs have a similar issue. Owners could still get personally sued for their professional errors or negligence.

PCs and Taxation

PCs face different tax rules compared to other businesses:

  • C-Corp or S-Corp Status: PCs can choose to pay taxes like a regular corporation or like a small business (if they qualify). This gives them tax planning options.
  • Double Taxation: Corprate profit in PCs may be taxed twice. Once at the business level and again when distributed to owners as dividends.
  • Pass-Through Option: But, PCs can also choose to be taxed as a special kind of corporation. In that case, profits are not taxed as business income; they pass through to owners who pay taxes on them individually.

Becoming a PC can be a smart move for professionals looking to protect their money and save on taxes. Yet, it’s important to fully understand the rules, tax effects, and get advice before jumping in.

Differences in Taxation and Personal Liability

Choosing between a limited liability company (LLC) and a professional corporation (PC) is important. You need to get the tax and personal liability differences. Each offers its own pros and cons in these fields.

Taxation

LLCs are great because they use pass-through taxation. This means owners report the company’s profits and losses on their personal taxes. It offers more flexibility and might save you money on taxes.

“LLCs offer the combined benefits of limited liability and tax advantages.”

PCs deal with a different ball game. They face double taxation. The company pays taxes first, then shareholders pay on their dividends. This could mean more taxes for those with shares in a PC.

Personal Liability Protection

Both LLCs and PCs protect owners’ personal assets from the business’s debts and claims. So, if your company runs into financial or legal trouble, your personal stuff is safer.

“Both LLCs and PCs offer personal liability protection, shielding owners’ personal assets from business debts and claims.”

But, this doesn’t cover personal wrongdoing, malpractice, or negligence. So, doctors or lawyers might still be on the hook for mistakes in their work.

LLC vs Professional Corporation taxation

Aspect LLC PC
Taxation Subject to pass-through taxation Subject to double taxation
Personal Liability Protection Offers personal liability protection Offers personal liability protection
Protection Against Professional Liability Does not protect against personal liability for malpractice or professional errors Does not protect against personal liability for malpractice or professional errors

Considerations for Choosing a Business Entity

Choosing a business entity involves many aspects. You need to think about legal and tax effects. Each type of structure comes with pros and cons. It’s key to pick one that fits your goals and needs.

Start by learning about the laws in your state. Know which types of businesses are allowed. This knowledge helps prevent legal problems later.

It’s also important to look at what both LLCs and PCs offer. They both protect against certain liabilities. But they work in different ways. Pick one based on your professional work and protection needs.

Consider your growth and how you want to manage your business. LLCs give you more freedom for decision-making. They’re good if you want to control everything. PCs might be better if you want to bring in investors or grow fast.

Don’t forget about taxes. Different business types mean different tax rules. Getting advice from a tax expert is a smart move. They can help you understand your tax responsibilities with each option.

“Choosing the right business entity is about considering the legal, tax, and other implications, including state laws, and how they fit your professional requirements.”

To pick the best business structure, you need to look at many factors. Think about the laws, taxes, your professional work, and future plans. Talking to a lawyer and other experts can simplify this process. They can help you pick the best option for you.

Business Entity Comparison Table

Considerations LLC PC
Liability Protection Offers personal liability protection Provides liability protection against malpractice
Taxation Pass-through taxation, profits and losses reported on owners’ personal tax returns Double taxation, corporate-level taxation and personal income tax for shareholders
Management Flexibility in management and decision-making More structured management with options for ownership and financing
Growth and Financing Suitable for solo practitioners and those seeking more control over operations More options for ownership and financing, potential for attracting investors
Compliance Less administrative burden More administrative requirements

Note: The table presents a comparative overview of key considerations between LLCs and PCs. It is not an exhaustive list and should not serve as the sole basis for decision-making. Consulting with legal and financial professionals is recommended.

Starting a PLLC or PC

Starting a PLLC or PC involves important steps to set up your practice. You need to meet each state’s specific rules. This is key to starting your PLLC or PC right.

Here are the main steps to begin a PLLC or PC:

  1. Choose a Unique Name: You must pick a special name for your PLLC or PC. This name must follow state rules. Make sure it shows what your practice does.
  2. Designate a Registered Agent: Picking a registered agent is vital. They will get legal papers for your business. These can be things like lawsuits or important letters.
  3. File Formation Documents: You’ll need to file some papers to start your PLLC or PC. These include articles of organization for PLLCs or articles of incorporation for PCs.
  4. Obtain Approval from Professional Governing Body: For some professions, your PLLC or PC might need approval. This is to make sure you follow your professional rules.
  5. Obtain an EIN: Getting an Employer Identification Number (EIN) is important. You get this from the IRS. It’s your business’s tax ID number.
  6. Draft Operating Agreement or Corporate Bylaws: Making an operating agreement or bylaws is key. These documents discuss how your business is run. They talk about who owns it and how decisions are made.
  7. Ongoing Compliance Responsibilities: After starting your PLLC or PC, you have to keep up with certain things. This can include filing yearly reports, having meetings, and keeping good records.

Starting a PLLC or PC needs close attention to state rules. It’s wise to work with a business formation expert. They can guide you through correctly setting up your practice.

forming a PLLC or PC

Advantages and Disadvantages of PLLCs and PCs

Choosing between a Professional Limited Liability Company (PLLC) and a Professional Corporation (PC) requires careful thought. Each has its own benefits and downsides that can shape your work as a professional. It’s crucial to know these before you decide.

Advantages of PLLCs

PLLCs protect licensed professionals from being personally liable in malpractice or misconduct suits. Your personal assets are kept safe from business-related debts. They also enjoy pass-through taxation, lessening your tax load.

Advantages of PCs

PCs stand out for their ownership and finance options. When you form a PC, you can sell stock, making it easier to attract investors and grow your business. They also offer a clear corporate structure for decision-making and management.

Disadvantages of PLLCs and PCs

However, both PLLCs and PCs come with their downsides. PLLCs are simpler to set up and operate than PCs but they have fewer perks. PCs need more paperwork and can face a higher tax rate, leading to potential double taxation.

Choosing the right structure depends on your goals and preferences. Getting advice from legal and financial experts is the best way to fully grasp the implications. This ensures you make a choice that suits your practice best.

Next, we’ll look at key factors to consider when picking a business entity for your legal or medical practice.

Conclusion

Choosing the best business type is key for lawyers and doctors. It’s between a PLLC and a PC, depending on many things. These include rules in your state, how much you want to be taxed, and how you want to manage. Talking to experts can really help you make the right choice.

For the best legal help and tax breaks, pick the right business type. A PLLC offers good protection from being sued. A PC gives you more ways to manage and find money. Make sure you look at your state’s special rules and think about what you want your business to be in the future.

Finding the right business type is a big first step for working on your own. Do your homework and get advice. This way, lawyers and doctors can start their business knowing they’ve picked what’s best for them. So, choose wisely and build a strong business.

FAQ

What is the best business entity for attorneys and doctors?

The best business entity for attorneys and doctors varies. It depends on state laws, how much protection you want, taxes, and how you like to run things.

What is a limited liability company (LLC)?

A limited liability company (LLC) combines the best of both worlds. It has the protection of a corporation but the tax benefits of a partnership. This means less personal risk and more control over your decisions.

What is a professional limited liability company (PLLC)?

A professional limited liability company (PLLC) is like an LLC but for certain professionals, like doctors and lawyers. It keeps your business safe from your personal issues and makes sure everyone follows the same rules.

What is a professional corporation (PC)?

A professional corporation (PC) lets licensed professionals form a company. It shields personal assets from the company’s problems, with tax perks. But, it usually means more paperwork than an LLC.

What are the differences in taxation and personal liability between LLCs and professional corporations?

LLCs and professional corporations (PCs) differ in tax treatment. LLCs usually just pay taxes once, on the owners’ personal statements. PCs pay taxes both as a company and at the personal level. Still, both keep personal assets separate from business risks.

What should I consider when choosing a business entity?

Think about state laws, what you do, where you want to go, how you want to run your company, and the tax effects. These factors are key in picking the right business type.

What are the steps to starting a PLLC or PC?

To set up a PLLC or PC, you need to pick a name, appoint a registered agent, file papers with the state, get professional approval, get a tax ID number, and lay out how you’ll work together.

What are the advantages and disadvantages of PLLCs and PCs?

PLLCs shield personal assets, have tax breaks, and are simple to handle. PCs let you have more owners and l end more money, but they’re tougher to run and you’ll face corporate taxes.