As a professional about to enter solo practice, it's worth your while to think about what sort of business entity best suits your needs. Both a limited liability company (LLC) and a professional corporation offer advantages and disadvantages depending on your situation and your future goals for your practice.
Advantages of a LLC
All states permit single-member LLCs, and this kind of business is easier to create and requires fewer formalities than a PC. Some states permit (or require) you to form a professional limited liability company, or PLLC, which functions the same way as an LLC. This type of business entity protects your personal assets from the establishment's creditors and protects itself from your personal creditors. The type of entity will not protect you from liability for malpractice, however. Instead, you will be shielded, for instance, from personally having to pay damages to a client injured in a fall on the property.
This type of company also allows you to choose how you want your business to pay taxes. By default, this is treated as a disregarded or pass-through entity for tax purposes. The business itself does not pay income tax. In this scenario, you report the its income on your personal tax returns and pay taxes on it that way. You also must pay self-employment taxes. Alternatively, you could elect to have it taxed as a corporation, in which case it pays income tax. You would then collect a salary, and the company would pay employment taxes. You may want to consult a tax professional to determine which scenario would benefit you more.
Disadvantages of an LLC
In some states, such as California, you cannot engage in professional practice as an LLC or PLLC. In these states, a PC is the only entity open to professionals.
Additionally, in some states, the law is unsettled as to whether a single-member LLC actually protects the assets from personal creditors. It can also be harder to add new members to this kind of business or to transfer your interest in the company to someone else.
Advantages of a PC
A PC offers you the same liability protection that you would get from an LLC, and in some states, it may be your only option for this type of protection. If you hope to expand your practice to include new partners in the future, it is easier for new shareholders to buy into the former than it is for new members to join the latter.
Moreover, if you want to sell your interest in the business or pass it on to someone else, this can often be simpler to accomplish with this kind of venture. Note that some states may have set rules for what kinds of businesses are able to register as this type of venture.
Disadvantages of a PC
As a corporation, a PC's income is subject to double taxation: the company pays income tax, and then you also pay tax on distributions you receive from the company as salary and dividends. Remember, though, that when you collect a salary from your company, the company pays employment taxes, which can sometimes save you money in the end. If your company meets the requirements to be an S corporation, you can elect S corp. tax treatment and enjoy the same kind of pass-through taxation you would with an LLC. In addition, even if you are your PC's sole shareholder, you must observe corporate formalities, such as the requirement to have officers and a board of directors and to hold regular board meetings and keep minutes.
Ultimately, deciding what type of business to go with comes down to which offers you the most favorable tax treatment in your circumstances and which fits better with your future goals. If you wish to remain in solo practice, an LLC can offer you the same advantages as a PC, with the added advantage of being easier to set up and maintain. If you envision expanding, however, the latter may be your best bet.
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