If you’re starting a new healthcare practice, including a med spa, intravenous (IV) hydration business, a wellness clinic or another clinic type, you might be considering which business structure to choose. Limited Liability Companies (LLCs), Corporations, Professional Corporations (PCs) and Professional Limited Liability Companies (PLLCs) are popular options. Though they share some similarities, they have many differences that can impact your practice’s operation and tax treatment. Here’s a closer look and how to determine which entity type is best for your business goals.
Both LLCs and Corporations offer their owners the benefit of a shield of liability, which is generally why people choose to form business entities instead of operate under their own name. In addition to acting as a liability shield, forming an entity can also help separate assets and financials of different economic activities.
What are LLCs?
A Limited Liability Company (“LLC”) is a business structure that protects individual assets of its owners from creditors and lawsuits related to the company’s business debts and assets. When someone sues the LLC, they have access to the assets of the LLC instead of the assets of a shareholder of the LLC. This is a significant benefit of LLCs.
Formation: Anyone can own an LLC–either as individuals or entities. While formulation requirements vary from state to state, the first thing owners must do is choose a name. Articles of Organization can then be filed with the LLCs home state. This document provides basic demographic information about the LLC, such as the name and addresses of LLC members, the statement of purpose for the business, and the registered agent. An Operating Agreement of a LLC will outline operational, structural, and financial decision-making processes as well as the duties of each member (e.g., voting, management, distributions and allocations, etc.). Banks and financing institutions generally request an operating agreement when an LLC applies for a loan or financing.
Taxation: LLCs are typically classified as “pass-through” entities for tax reasons, meaning the business profits and losses will flow through to the personal tax return of each member. However, an LLC has the added benefit of also being able to elect to be taxed as an S-Corporation or a C-Corporation
What are Corporations?
A corporation is a legal entity incorporated by a group of shareholders. Shareholders own the corporation through stock shares and profit through dividends and stock appreciation, but they are not individually liable for the corporation’s debt.
Formation: While each state has its own laws regarding forming a corporation, typically owners file Articles of Incorporation with the state. Stock in the company is then issued to shareholders, the shareholders elect a Board of Directors, and they hold annual meetings.
Taxation: Corporations default to being taxed as C-corporations, which means the corporation itself pays taxes on its income, and shareholders pay personal income taxes on dividends—resulting in “double taxation.” Alternatively, certain corporations can elect to be taxed as an S-corporation, where only shareholders pay personal income taxes, avoiding the double taxation issue.
What are PLLCs, and PCs?
Professional Limited Liability Companies (“PLLCs”) and Professional Corporations (“PCs”) are corporate structures designed specifically for licensed professionals such as doctors and lawyers. Both structures offer personal asset protection and limit ownership to licensed individuals within the profession. However, they differ in several key ways explained below.
PCs (Professional Corporations)
PCs allow licensed professionals to form a legal entity that is treated under state and federal tax laws as a corporation. Here’s how PCs work:
Formation: To create a PC, you need to have your attorneys draft Articles of Incorporation outlining your corporation’s purpose, create corporate bylaws detailing how the corporation will operate, appoint a Board of Directors, and schedule regular meetings. The PC will be formed to offer the professional service authorized for it to perform by law. This is typically the professional service of its owner or owners but can vary state to state.
Taxation: PCs will share the same tax options as corporations discussed above.
PLLCs (Professional Limited Liability Companies)
Many states–but not all–allow corporate owners the option to form a PLLC. PLLCs, like PCs, allow licensed professionals to operate as a corporation.
Formation: Setting up a PLLC involves filing Articles of Organization with the appropriate state agency, which is particularly useful for opening a corporate bank account or securing a loan. It is a great idea to draft an operating agreement for the PLLC as well. Operating Agreements outline management, voting, allocations and distributions, as well as other important aspects of the PLLC. Banks and financing institution typically request an operating agreement when a PLLC applies for a loan or financing. Unlike PCs, PLLCs do not require corporate bylaws, a Board of Directors, or regular meetings. The same can be said with respect to banks and financing institutions for PCs as well, but the document requested would be a shareholders’ agreement and/or bylaws.
Taxation: PLLCs share the same tax options as LLCs discussed above.
State Availability of PCs and PLLCs: While PCs and PLLCs are recognized in most states, not all states recognize PCs and PLLCs for medical professionals. For example, California does not provide a PLLC option, and in Texas, a Professional Association or Professional Limited Liability Company is recommended. Consult with Lengea Law to determine if a PC or PLLC is an option in your state.
Which Option is Best For My Practice?
For many smaller practices or solo practitioners, PLLCs are often the more advantageous choice due to their ease of formation, reduced administrative burden, and favorable tax treatment. PCs might be more suitable for larger practices with numerous shareholders, as they can offer more investment opportunities and a formal structure.
Ultimately, the right choice depends on the size of your practice, your administrative preferences, and your long-term goals.
Contact Lengea Law today to discuss whether a PC or PLLC is the best fit for your practice’s unique needs. We can guide you through the decision-making process and help ensure your business is set up for success.