LLC vs PC for Doctors - Which Business Structure Is Best?

Deciding between a limited liability company (LLC) and a professional corporation (PC) is an important decision that has tax implications for a new business. The choice of LLC vs PC for doctors can impact your bottom line and how much you can reinvest into growing your practice.

Limited liability companies are popular among doctors for the personal liability protection they offer. However, a PC or PLLC may also be worth considering if you live in a state where doctors can form them.

What Is a Professional Corporation?

A professional corporation is a legal entity formed by either a group of licensed professionals or a single professional. PCs are commonly formed by doctors or other licensed healthcare professionals.

A PC is subject to the laws of the state where it was formed. For example, a doctor's practice that is set up in Jacksonville, Florida may be subject to different rules than another PC over the border in Georgia. Check the requirements for PCs in your state as there is some variation in the eligibility criteria and requirements for setting up professional corporations (or professional associations as they’re called in Florida).

Shareholders in a PC have personal liability protection against debts incurred by the company and other professionals' malpractice. This added layer of protection is important for professionals working in industries like medicine which are susceptible to malpractice lawsuits. Be aware though that personal liability protection in a PC doesn't extend to your own malpractice.

Set Up Strong Foundations for Your Doctor's Practice

It's comforting to know that your personal assets aren't at risk if unforeseen circumstances occur in your business. The best way to avoid financial problems is to set up a solid foundation for financial stability.

Getting the support you need from tax planning experts will give you the backup you need to run your healthcare business with confidence while ensuring it's built on strong foundations. A tax professional can advise on the best business structure for your practice and ensure you optimize your tax return by taking advantage of the top tax deductions for physicians and more.

What Is a Limited Liability Company?

A limited liability company is a business structure that separates business assets from the owners’ personal assets. This allows owners to avoid personal liability if their business faces legal or financial problems. If limited liability companies have mounting debts or are in legal problems, the business owners' own assets aren't at risk. This reduces the legal risks connected with setting up a doctor's practice.

LLCs for Doctors

Some states don't allow licensed professionals to form an LLC. This is because the LLC structure allows professionals like doctors to escape personal responsibility for professional malpractice. For example, California and Wisconsin only allow doctors to set up their practices as a corporation.

Other states offer a compromise for licensed professionals like doctors in the form of a professional limited liability company (PLLC).

Professional Limited Liability Company

The main difference between PLLCs and LLCs is that only licensed professionals can register a PLLC. PLLCs are also subject to some state-mandated limitations on ownership. For example, some states may require all PLLC members to be licensed professionals while others only require 50% of the PLLC ownership to hold a license.

Doctors who wish to set up a PLLC must also get approval from the state medical board before filing with the secretary of state.

LLCs and PLLCs both provide personal limited liability protection. However, a PLLC doesn’t protect individuals against claims of malpractice. On the other hand, a PLLC protects members against the wrongdoing of another partner, meaning one doctor isn’t liable for the malpractice of another member.

Main Differences Between LLCs and PCs for Doctors

The two main differences between LLCs and PCs for doctors (professional liability aside) are how each kind of company is formed and how each is taxed.

1. LLC vs PC Company Formation

New LLCs and PCs must file all the necessary paperwork with their secretary of state to form a new business entity. LLCs must file articles of organization, while PC owners file articles of incorporation. These articles specify the company’s services and include details about the members or owners.

There are additional regulations surrounding the naming of LLCs and PCs. You may need to include "LLC" or "PC" in the name of your company.

Until this point, the formation of an LLC and a PC are fairly similar. However, setting up a professional corporation requires some additional steps. Apart from the previous paperwork, a PC must also:

1. Appoint a board of directors

2. Form corporate bylaws and records

3. Hold regular board meetings

2. Taxation of LLCs and PCs

How your doctor's practice is taxed has a significant impact on your bottom line. An expert in accounting for medical practices can help you optimize your finances and taxes in either case.

PC Tax Considerations

Professional corporations classed as C corporations pay a flat corporate tax rate of 21%. However, the drawback is that profits are essentially taxed twice. PCs pay corporate tax on their profits, and the owners then pay taxes individually on their distributions. This is known as double taxation.

Can PC Owners Choose to Be Taxed as an S Corporation?

Yes, PC owners who meet the eligibility criteria can elect to file as an S corp to avoid double taxation by filing Form 2553 with the IRS. In this case, shareholders pay tax at the individual income rates on their share of the profits from their doctor's practice.

LLC Tax Considerations

LLCs offer several tax benefits that stem from their flexibility. LLC owners have various options depending on how many members make up the LLC. For example, a single doctor who sets up an LLC would be taxed as a sole proprietorship, while a multi-member LLC can elect to be taxed as a partnership, C corp, or S corp.

Just like with a PC, doctors in an LLC can elect to be taxed as an S corp. This tends to reduce their tax burden as they’re considered employees of the corporation. This means not having to pay self-employment taxes on the portion of their income that’s classed as distributions.

Do LLCs or PCs Offer the Most Tax Benefits?

It’s almost impossible to answer this question as the answer depends on so many factors. That’s why working with a tax professional is crucial to get the best conditions for your practice.

Generally, both LLCs and PCs offer pass-through taxation (depending on the tax classification), meaning that business profits and losses flow through to the owners' personal tax returns. However, one option may be more advantageous depending on factors such as:

• State laws: Tax laws and regulations can vary significantly from state to state.

• Nature of the business: The type of business and its operations can influence tax implications.

• Ownership structure: The number of owners and their relationship can affect tax treatment.

• Other factors: Factors such as employee benefits, retirement plans, and investment strategies can also impact the tax consequences.

Pros and Cons of a PC for Doctors

PROS	CONS
Liability protection: As a PC owner, you’re not personally liable for any malpractice suits brought against other owners.	Personal liability: Partners can be held personally liable for their own malpractice.
Ownership transfer: Ownership can be easily transferred by buying and selling ownership interests or stocks.	Taxation: PCs are typically subject to double taxation and may end up with higher tax bills than pass-through tax entities.
Self-employment tax: Owners aren’t subject to individual self-employment taxes on income classed as distributions.	Corporate tax rate: The corporate tax rate is potentially higher than individual income tax rates.

Pros and Cons of an LLC for Doctors

PROS	CONS
Easy to set up: Forming an LLC is generally more straightforward than other business entities.	State regulations: LLCs are required to have at least two members in some states.
Limited liability protection: Personal assets are separate from business assets. If your LLC is involved in a lawsuit, liability is limited to your investments in the business.	States taxes or fees: You may be liable to pay state taxes, a franchise tax, or a yearly registration fee depending on the state where you operate.
Tax flexibility: Doctors in an LLC can choose to pay taxes as a sole proprietorship, partnership, or corporation (if they meet the eligibility criteria).	Renewal: LLCs expire in some states and may require you to renew or re-establish them.
Inclusivity: Non-U.S. citizens and non-permanent residents can form an LLC.

Understand the Tax Benefits of LLCs and PCs for Doctors

Choosing between an LLC and a PC for a medical practice involves careful consideration of various factors. While both structures offer significant benefits, the optimal choice will depend on individual circumstances, including the size of the practice, the nature of the services provided, and where you operate.

Working with tax professionals allows physicians to make informed decisions that align with their specific needs and objectives. Optimize your tax liability given your chosen business structure so that you have more money to reinvest in your business at the end of the day.