For any medical professional working as an independent contractor, it’s worth looking at forming a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC). The decision to do so should be based on your 1099 income, long-term strategy, tax implications, and advice from an accounting professional.
This article answers many fundamental questions clinicians have when forming an LLC or PLLC. This article is meant for practitioners who intend to form single-owner or single-member LLC or PLLC, not for those who are creating partnerships, sharing equity with others, or splitting company shares.
Forming an entity (LLC or PLLC) legally turns any solo practitioner into a small business. Depending on your situation, there may be some advantages to forming an entity. It is vital to understand that not all practitioners must form an LLC or PLLC, as you can take advantage of many of the same things as a “sole proprietor.” We recommend you review the following items when considering incorporating as an LLC or PLLC.
Should I consider forming an LLC or PLLC?
Any medical practitioner that makes 1099 income can consider incorporating as an entity. The benefits of forming an LLC or PLLC are not seen with those that only work as a W2 employee.
Do I need to form an LLC or PLLC?
No, not all practitioners that make 1099 income must form an LLC or PLLC. Many advantages of running a small business can be done as a “sole proprietor.” Filing taxes as a sole proprietor is free and does not require paying the fees to start up or maintain a business entity.
How much 1099 Income should I make before considering incorporating?
It depends. This is something to ask a tax consultant, as there are many variables to consider. In general, most advise that you are making at least $150,000 in 1099 income.
Does an LLC or PLLC protect against malpractice claims?
Don’t be misled! Neither an LLC nor PLLC protects against medical malpractice; only malpractice insurance does.
Although you may be able to take advantage of some tax advantages, legally, you will not be treated the same. Unlike other small businesses, the “corporate veil ” will not protect your personal assets.” Even if you get business liability insurance, it does not cover your personal assets from a malpractice suit. Whether you form an LLC or PLLC, please ensure that you also have malpractice insurance. ONLY malpractice insurance can protect you against a malpractice claim.
Should I continue as a sole proprietor or form an entity?
Since neither an LLC nor PLLC protect against medical malpractice, one might avoid the hassles of forming an entity. Instead, a practitioner can file their taxes as a “sole proprietor.” A sole proprietor is basically an unofficial, single-owner small business. Unlike an LLC or PLLC, a sole proprietorship does not protect your assets against liability claims not associated with malpractice.
Many tax advantages to LLCs and PLLCs are also available to sole proprietors. This includes tax deductions, business write-offs, and some retirement funds. Check with your tax advisor if it is worth forming an LLC or PLLC based on your income, tax strategy, and long-term plans. It may be just as beneficial to you to file taxes as a sole proprietor rather than needing an entity.
Do I form an LLC or PLLC?
When registering a single-owner business, it’s best that you do your research. Each state will be different rules and regulations for medical professionals. You must select the state that will be your primary state of business. As a medical professional, some states will require you to form a PLLC. They will generally ask for proof of medical licensure. If your primary state of business does not require you to file as a PLLC, it may be best to register as an LLC. Registering a PLLC does take a bit longer to get as the state will have to verify your licensure with the medical board. If you choose to work in other states, you will register your entity as a foreign business in those other states. Click on the link below to research if your primary state of business requires a PLLC or LLC.
What do I name my new entity?
Once you select your primary state of business, you can research whether there are rules for naming a PLLC or LLC. Some states are strict about how you name your PLLC. Most states do not have specific regulations about naming an LLC as long as the business name has not already been taken. There are online services to check if your name has been taken. Please recognize that you must follow the naming rules in each state you register. The link below allows you to see the naming rules in some states.
How to register your new LLC or PLLC?
First, determine which state you want to register your LLC or PLLC. You can register your business in the state you live or work in or a business-friendly state like Delaware or Wyoming.
There are three ways to register your new entity. In order from cheapest to most expensive.
- On your own, go to the state’s website and register your entity.
- Find an online service to register the entity for you.
- Ask a lawyer or accountant to register the entity for you.
There is not much complexity involved when forming a single-owner PLLC or LLC. Thus, consider doing it yourself or utilizing an online service rather than an expensive lawyer or accountant.
What is the EIN, and when will I get it?
Once you register as an LLC or PLLC, the state will provide you with an Employer Identification Number (EIN) to identify your business. The EIN can be used to create a business bank account. Other 3rd parties and medical facilities may request the EIN if you are contracting thru your entity.
How much does it cost to register and maintain an LLC/PLLC?
Most states will charge around $200 or less, but some will charge up to $500 to form a new entity. This does not include the additional fees you will encounter if you work with an online service, accountant, or lawyer. The states will also assess yearly maintenance fees. Once again, these fees will be higher if you work thru a 3rd party.
Do I need a registered agent?
Yes, whether you are registered as an LLC or PLLC, you need a registered agent to receive legal, state, and tax documents. The registered agent can be you, another individual, or a company. If you choose not to act as your own registered agent, then the registered agent becomes responsible for promptly forwarding any important documents to you. The registered agent must have a physical address and be available during regular business hours. In most states, the registered agent must have a physical address in that state. Thus, you will need a registered agent if you live in a different state than where your entity is registered. If you are a medical professional that does not have a fully staffed office, consider getting a registered agent, so you don’t have to list your home address. You will need a registered agent in each state where your business is registered.
Please recognize that if you act as your registered agent, your physical address will be publicly available. Thus, everyone will know where you live if you list your home address.
Consider using an online service as your registered agent if it’s too expensive to list your accountant or attorney as your registered agent. Online service costs around $100-200 annually, whereas lawyers and accountants might charge much more.
Do I need to form an S-corp or C-corp?
If you have a single-member LLC or PLLC, you can elect to file taxes as a corporation rather than an individual. The LLC or PLLC can be taxed as an S-corp or C-corp. Corporate tax laws allow single-owner LLCs and PLLCs to be paid as company employees and potentially save on taxes.
Many practitioners will consider filing taxes as an S-corp, which behaves as a “pass-through entity.” This means that single-member owners will pay personal income tax without paying corporate tax. As an employee, you can set a lower salary to minimize your self-employment taxes and then pay fewer taxes on the company’s profits. It is recommended that you speak with an accountant about filing as an S-corp, as it may or may not be worth it. Additional expenses are related to filing as an s-corp, including accountant fees and payroll. Remember that you must pay payroll in each state you work in. Declaring as an s-corp will have some tax advantages, such as saving on self-employment taxes. The expense of filing as an s-corp must be weighed against the savings.
Most single-owner LLCs or PLLCs will NOT file as a C-corp as they must pay corporate taxes and taxes on their distributions.
Are tax deductions available to an LLC/PLLC and not a sole proprietor?
Most tax deductions for a sole proprietor are also available to a single-owner LLC/PLLC. Since an LLC and PLLC are treated as pass-through entities, the tax deductions will be similar.
Can I take advantage of the “Pass-through Deduction?”
The pass-through deduction allows for a 20% deduction on your net taxable income. If you are single, you can use this 20% deduction if your net taxable income is less than $164,900. If married, you can use the 20% deduction if your net taxable income is less than $329,800.
Whether you are a sole proprietor, single-member LLC/PLLC, or S-corp, you can take advantage of this deduction. Please speak with a tax consultant about taking advantage of the pass-thru deduction.
Do I need an entity to write off my business expenses?
No. Business expenses can be written off whether you are a sole proprietor or single-owner LLC/PLLC.
What do you do for banking, credit cards, and accounting software?
When running a small business, either as an entity or a sole proprietor, it is essential to keep your financials in line. With an LLC or PLLC, you can open a business account at the bank to help keep your accounts straight. You could easily open a separate personal bank account if you are a sole proprietor. It behooves each medical professional to keep their business bank accounts separate from their personal spending accounts. The reason is that you don’t want money going back and forth from your business and personal accounts repeatedly, as it will add to the confusion when doing your taxes or going thru an audit.
As an LLC or PLLC, you can open a business credit card, whereas a sole proprietor can use a personal credit card.
It’s recommended that you have accounting software or another way to track your income and expenses, no matter if you are an entity or sole proprietor.
How will I be taxed as a single-member LLC/PLLC?
The IRS considers single-member LLCs and PLLCs as “disregarded” entities meaning that no separate tax return is required for your entity. A single-member entity is regarded as a “pass-through entity” that processes taxes similarly to an individual rather than a corporation. A pass-through business means that any profits or losses from the entity are passed on to the owner, who then pays their personal tax returns. Thus, if you have a single-member LLC or PLLC, you are basically filing as an individual or sole proprietor. This means you will be required to pay self-employment taxes on your taxable net income just as a sole proprietor.
If you are a single-member LLC or PLLC, you can choose to be taxed as a corporation. Most commonly, medical practitioners will choose to be taxed as an S-corp. As an S-corp, you will be an employee of your company to minimize your payment of self-employment taxes. S-corps will have to file separate tax documents, including K-1forms for each employee.
Does my small business require business liability insurance?
Business liability insurance is recommended for activities you participate in outside the practice of medicine. Whether you are a sole proprietor or associated with an entity, you should have liability insurance for income-producing activities that are not associated with the direct treatment of patients. Please remember that business liability insurance does not cover medical malpractice, so make sure you have a separate malpractice policy when treating patients.
Can my car be a business expense?
Yes, your automobile can be a business expense, whether you are a sole proprietor or an entity. Please recognize that if the automobile was purchased through your business entity, you might require commercial auto insurance. Speak with your auto insurance carrier about this potential issue.
Are there special retirement funds available to sole proprietors and single-member entities?
Whether you are a sole proprietor or LLC/PLLC, you can access similar pre-tax retirement funds. This includes self-funded 401k, SEP-IRAs, and defined balance plans.
Can I employ by family members?
You can hire your family members as independent contractors if you are a sole proprietor or an entity (LLC/PLLC). On the other hand, if you file your entity as an S-corp, you can employ your family members and offer employee benefits (i.e., health insurance and retirement funds).
Can I contract with medical facilities through my business entity?
Yes, you can contract with a medical facility as your business entity, just like a staffing agency or large privately contracted group.
Can you convert from a sole proprietor to an LLC or PLLC?
Yes, it’s easy. Register your LLC or PLLC with the state then you are in business. If you are making a career change, don’t feel pressured to form an LLC or PLLC immediately. Take your time to determine if your new lifestyle is right for you, then convert from a sole proprietor to an entity.
Can you convert an LLC/PLLC to a sole proprietorship?
Yes, it’s easy to convert back to a sole proprietor. Once you dissolve the business with the state, you can return to sole proprietor status. You may need to alter or change your contracts, bank accounts, business assets, credit cards, etc., so they are no longer linked to your business name.
It is only sometimes advantageous for all clinicians to incorporate as an LLC or PLLC. Many advantages of forming a business entity are available to those that file simply as a sole proprietor without an entity. On the other hand, filing an LLC or PLLC as an S-corp may offer some tax savings not available to sole proprietors. It is worth seeing if your specific situation warrants the incorporation of a business entity. More so, it’s wise to explore with a tax advisor what business arrangement is best based on your income, tax strategy, and long-term plans.