Which Corporate Structure Is Best For Self-Employed Doctors? Part 1

Today, we are going to tackle the idea of which corporate structure is best for your self-employment work

To answer this, you must first take a look at the income you earn as a self-employed, because it can come from various sources and not all of it will necessarily be 1099 income. Understanding the different forms of income and the corresponding tax implications is crucial for a self-employed physician operating as a micro-corporation to understand. Here’s a detailed breakdown:

Types of Income

1099 Income:

• Independent Contractor Payments: If a you provide services to hospitals, clinics, or other healthcare facilities as an independent contractor, these payments are typically reported on Form 1099-NEC (Nonemployee Compensation). This is the most common form of 1099 income for self-employed doctors.

• Consulting Fees: Income from consulting work or providing expert opinions is often reported on Form 1099-NEC.

• Speaking Engagements and Workshops: Fees for speaking at conferences, workshops, or seminars might also be reported on Form 1099-NEC.

• Rent and Royalties: If the doctor rents out medical equipment or property, or earns royalties from books or other intellectual property, this income is usually reported on Form 1099-MISC.

Other Forms of Income:

• Direct Payments: Payments received directly from patients for services rendered might not always be reported on a 1099 form. This includes cash, checks, or credit card payments directly from patients.

• Insurance Payments: Payments received from insurance companies, including Medicare and Medicaid, for patient services are usually not reported on 1099 forms. These are generally considered regular business income.

• Partnership or S Corporation Income: If the self-employed doctor is part of a partnership or an S corporation, their share of the business income, deductions, and credits will be reported on Schedule K-1 (Form 1065 or 1120S).

• Miscellaneous Income: Income from ancillary activities like selling medical supplies, supplements, or other health-related products may not be reported on 1099 forms but still constitutes business income.

When you earn and receive 1099 income, you are signaling to the government that you are engaged in business-to-business activity.

That is because 1099 income means you are an independent contractor; by definition, that means you are a micro-business of some type. The IRS will require you to declare which type on the IRS form W-9. You can check out my post on How To complete a W-9 Form: Tax Advantages For The 1099 Employee

If you are not ready for this, you need to know that you will default to being considered a sole proprietor business owner unless you form a different business structure. While being a sole proprietory is better than earning the dollars as a W-2 employee, a micro-corporation will allow you to retain more of those earnings than as a sole proprietor. Check out my blog post that breaks it all down for you in my blog post: How To Pay No Taxes On Your Side Job Income: The Tale of 3 Doctors

The past generation of our tribe has been conditioned to behave only as employees—thus, you are typically business illiterate. Therefore, asking you to embrace the mindset of working as a micro-business is both intimidating and challenging.

My message to you is that you not only have the capacity to own and operate a professional micro-corporation, but your life will be better off if you do. I want to inspire you to see what is possible because owning a professional micro-corporation is a built-in privilege associated with your professional status.

This post will inform you about your options on how to best receive your 1099 income as a micro-business.

In my last post, Medical Contracting: Doing Business as Sole Proprietor vs Incorporating I reviewed the basic framework for business options as a contractor, which is based on the bifurcated choice of operating as either a sole proprietor or incorporating. Incorporating is typically better for doctors due to the associated liability and asset protection.

There is a gamut of options for incorporation that can range from the simplicity of a single-member LLC, which passes through an individual's social security number, to corporate structures that have their own tax identification as a business entity separate from your individual identity.

My Recommendation

Let me begin with my recommendation that a single-member professional micro-corporation (PC or PLLC) taxed as an S-Corp will be the best option for most of you to channel your medical contracting work through. There are several physician-specific reasons for this—asset protection, tax strategies, and larger retirement funds are just a few to mention.

It is important to note that there are various business structure options available, and the most suitable choice depends on your specific circumstances. While this particular option is being presented, it is advisable to continue exploring the details to determine if it truly aligns with your individual needs. Different business structures offer distinct advantages and considerations, so a thorough evaluation is recommended to ensure you make an informed decision that optimally supports your goals and objectives.

Let's start things this week by beginning with the single-member LLC option, which is tied to your personal social security number. Then, we'll compare and contrast it with the two most common corporate choices that require employer identification numbers separate from your social security number: a single-member Professional Corporation (SMPC) and a single-member Professional LLC (SMPLLC).

What Is A Single Member LLC?

A single-member LLC, or limited liability company, is a business structure that offers personal liability protection to its sole owner. This means that the owner's personal assets, such as their home, savings, and investments, are legally separated from the business and cannot be targeted in the event of a lawsuit or debt incurred by the LLC. This feature makes the single-member LLC an attractive option for professionals like doctors, who often choose this structure to safeguard their personal wealth while operating their practice. Additionally, establishing a single-member LLC typically involves less paperwork and lower costs compared to other business structures, making it a relatively straightforward process. The flexibility and asset protection provided by this structure allow business owners to focus on running their operations without the constant worry of personal financial risk.

It is considered a disregarded corporate entity and therefore is taxed through your individual social security number and tax filing.

Simplistically it provides you with liability protection, and business deduction expenses via Schedule C, but allows you to do it without all the administrative and tax responsibilities of a corporation.

Doctors considering establishing a single-member LLC should be well-informed about the potential drawbacks associated with this business structure. While it offers certain tax advantages, there are also risks and downsides, particularly for medical professionals. One notable concern is that a single-member LLC may not provide the same level of personal liability protection as other business structures like corporations or partnerships. Additionally, all profits earned from the business may be subject to self-employment taxes, which could be higher than what would be owed under alternative structures. It is also important to note that single-member LLCs face a significantly higher risk of being audited compared to single-member professional corporations or single-member professional LLCs. Careful consideration of these factors is crucial for doctors evaluating the suitability of a single-member LLC for their practice.

Now let’s consider some of the alternative business structures.

What is a Single Member Professional Corporation?

A professional corporation is a type of corporation that is specifically designed for professionals to provide you with the same legal protection and tax benefits as a regular corporation. However, unlike a regular corporation, a professional corporation is subject to certain restrictions, such as limiting ownership to licensed professionals in the same field.

A single-member professional corporation (SMPC) is a company that is owned and operated by a single individual. It is a business aligned to just 1 person (you), and it offers liability protection for the owner. This means that the your personal assets are protected from the business’s debts and obligations.

To create a single-member professional corporation, you must have an independent medical license in your state, and then file articles of organization within the state where the business is located. This is a simple process that can usually be completed online or by mail. Once the articles of organization are filed, the you must create an operating agreement, which is a document that outlines how the business will be run. You can do this yourself via inexpensive online legal companies, but in my opinion, it is well worth hiring a legal professional familiar with physician micro-corporations to help you do this. We have sourced a network of professionals who work with our SimpliMD community to do this.

The rules, regulations, and names for forming a professional corporation vary by state and profession.

The best approach is to hire a business guide & coach like SimpliMD who exclusively works with physicians because we will help you build a professional corporation that best suits your individualized needs, and connect you to concierge style legal network to make it happen. Every professional corporation uniquely reflects the owner and thus a personalized approach to creating it is much better than a generic model—which can be cheaper—but not nearly as robust.

The best guide is an experienced physician who coaches you and surrounds you with an entire team of legal and accounting professionals who work out of the same playbook. I suggest SimpliMD for this kind of comprehensive work.

You can schedule a $99 business consultation meeting with SimpliMD here if you not sure what your next step should be and want to talk about it 1:1.

What Is A Single Member PLLC?

A PLLC stands for Professional Limited Liability Company. It is a type of business entity structure that combines the liability protection of a limited liability company (LLC) with the benefits of a professional corporation (PC).

A PLLC is typically used by licensed professionals, such as doctors, lawyers, accountants, and architects, who are required to form a professional corporation or register as a professional association in order to practice their profession. However, a PLLC offers the added benefit of limited liability protection for its owners, similar to that of an LLC.

Professional LLCs offer a number of advantages to you, for instance, they provide asset protection and tax benefits. Additionally, professional LLCs can help you maintain your professional reputation by separating your personal assets from your business assets. This is especially important if you are ever subject to malpractice suit or other legal issues related to your practice. Furthermore, a professional LLC allows you to retain control over the decisions made in your micro-corporation while still enjoying the benefits of having a limited liability company structure.

In most states, the PLLC is subject to the same requirements and regulations as a professional corporation, including state licensing requirements and the need for all owners to be licensed professionals in the same field.

Single-Member Corporate Options

As a self-employed physician considering your corporate structure options, it's important to note that the three most common choices involve being a single member, meaning you have complete control over the corporation. In all three business structures – a single member LLC (SMLLC), a single member PC (SMPC), or a single member professional LLC (SMPLLC) – your earned income will either flow directly into your individual personal tax return (in the case of an SMLLC) or into your corporation first (in the case of an SMPC or SMPLLC) before being reported on your personal tax return.

When it comes to structuring your business, you have two primary options: a single-member LLC or a professional micro-corporation such as a single-member Professional Corporation (SMPC) or a single-member Professional LLC (SMPLLC). The single-member LLC offers a simpler approach, allowing you to report your earnings through your individual tax return.

However, the professional micro-corporation route, while slightly more complex, provides additional tax and business advantages. With a SMPC or SMPLLC, your income flows through the corporate entity, potentially offering benefits such as increased liability protection, tax deductions, and credibility in certain industries. Ultimately, the choice depends on your specific business needs, goals, and willingness to navigate the additional complexities of a professional micro-corporation.

Single Member PCs and Single Member PLLCs have the flexibility to choose their tax treatment, either as a C-Corporation or an S-Corporation. It is advisable to consult with a business and tax professional to evaluate which option would be most advantageous for your specific circumstances, considering factors such as tax implications and potential household benefits. This assessment can help you make an informed decision that aligns with your financial goals and maximizes the benefits for your business structure.

Pass-Through

A Single Member PC or Single Member PLLC taxed as an S-Corp is considered a "pass-through entity" for tax purposes. This means that the business income and expenses are reported on the owner's individual tax return, rather than being taxed at the business level. While not technically a "disregarded entity" like a Single Member LLC, the end result is similar – the tax responsibility for the business activity is associated with the owner's personal tax return. This distinction is important when comparing the tax implications of different business structures.

There are distinct tax codes applicable to different types of corporate entities. The specific tax code that would be most advantageous for your individual situation should be thoroughly discussed with a qualified tax professional. They possess the expertise to analyze your unique circumstances and provide guidance on the optimal corporate structure from a taxation perspective.

Which Is Best?

The answer to this question is that it just depends… because there are are multiple professional and personal considerations, tax optimization components, and wealth accumulation planning variables that all inter-connect with each other, and influence the choice of what is best. The bottom line is that every one of you is unique and that uniqueness needs to be taken into account.

Listen, I understand this can all be a little complicated, but let me convince you why taking me up on this $99 business consult is an opportunity you can't afford to miss. Together, we'll dive deep into your unique situation and craft a tailored strategy that aligns perfectly with your goals. But that's not all – after our session, I'll personally connect you with top-notch accounting and legal professionals who specialize in working with physicians organized as micro-corporations. This level of expertise and insider access is invaluable, and it's all part of the package. Don't let this chance to take your business to new heights slip away. Trust me, investing in this consult now will pay dividends down the line.