Corporations: C or S ?

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Eyefixer

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I was hoping someone could provide an insight on which is better for a professional medical corporation? I know the "double taxation issue" with the C. However, I heard this can be legally minimized by controlling business account balance at the close of the year. C also provides more 401K tax advantages, from what I was told.

Any thoughts?

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Medical corporations MUST be S-type Corps in most states.

Do not start a C-corp or you will set sail for epic fail.
 
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I was hoping someone could provide an insight on which is better for a professional medical corporation? I know the "double taxation issue" with the C. However, I heard this can be legally minimized by controlling business account balance at the close of the year. C also provides more 401K tax advantages, from what I was told.

Any thoughts?

Why not do a professional LLC, less formal hoops to jump through. Is there a reason this wouldn't work for you?
 
The big problem with PCs not electing to be taxed as an S-Corp is that they are taxed as "personal service corps".

Here's a little history that might shed some light on the C-Corp/S-Corp issue. Twenty years ago, the Tax Reform Act of 1986 created Personal Service Corps (PSC). Prior to 1987, many doctors maintained C-Corps since the first $50k of income was taxed at just 15%. So most medical corporations showed $50k of profit each year, with the physician taking the remainder of the profit as salary.

Starting in 1987, the tax rate for PSC's jumped to the highest personal tax rate plus 1 percent. So it no longer made any sense to keep any profit in a physician's corp.

Due to this higher tax rate, most accountants began to recommend S-Corps to their physician clients - especially once shareholders of S-Corps could write off 100% of their health insurance premiums.
 
That's a great point. However, don't forget that a "more than 2% shareholder" or an S-Corp can deduct 100% of their health insurance premiums just like a sole proprietor.

That being said, my understanding is that an owner of an S-Corp can't participate in their company's HRA (health reimbursement accounts). So if a person has a lot of unreimbursed medical expenses, the C-corp would let them set up an HRA and make those costs deductible.

The pitfalls of a C-corp usually outweigh that advantage. A C-corp is subject to the risk of double taxation on any profits kept in the corp one year and then paid out to the owner the following year. Plus, the corporate tax rate on Personal Service Corps, which includes physician corporations, is the highest individual tax rate plus 1%. Finally, the year you sell your practice, you might not get the full benefit of the lower capital gains rate since the assets of your practice are held by the C-Corp.

Let's say you want to purchase a car for your practice. You take $30k of profits and purchase the car. The problem is that the first year depreciation for an automobile is limited to just $11k in 2008. So, if you start the year with no money in your practice's bank account, and end the year with no money in your bank account, the corporation will show $19k of profit thanks to the auto purchase. The PSC tax on $19k at 35% is $7k!!! That's a big pitfall of not electing S-Status.
 
The important thing here is that the choice of business organization should consider two factors: tax planning and liability planning. I'm usually a guy to do my own taxes and some minor legal work because I'm an experienced attorney. This is a far too important topic for an amature (I wouldn't do it). If you are approaching your first attending job as a junior partner, employee or a solo-practioner setting up a practice, you need an expert to help you. The idea person is someone who is both a CPA and an attorney who handles professional employment. That person can advise you on these issues. If you are doing a significant amount of moonlighting, talk to your tax advisor as there are some ways to structure your finances to help with deducations.

Finally, I will admonish everyone: do not even consider signing an employment contract or partnership agreement without having a lawyer who represents you review the deal. This should not be a general practice attorney, but should be someone who represents professionals in similar situations every day. If it's a partnership, you also must have an accountant look at the books. If they won't let you look at the books, run like hell. This may cost you a few thousand dollars, but it will be the best money you ever spent.

Ed
 
I don't think that choosing a corporate structure has any effect on shielding liability for medical malpractice. As to other forms of liability the answer will be different depending on corporate structure. Agree withn your statement about competent representation.

Yes, you can only shield your own liability so much, but as you note there are plenty of other ways you can get tagged. If you are in an old-fashioned partnership, you can get tagged by your partner's actions. What about employees? Slips and falls? Sexual harassment? Depending on your jurisdiction, there are PCs, LLPs, LLC, and traditional corporations. I'm happy to pay someone to help me.

Ed
 
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