Why form an LLC ?

[Freedoc]

Hello all,

I plan to work part time in community Psych as independent contractor while starting my Private Practice. Forming an LLC looks to be a fairly straight forward process. I know I should form an LLC but I don't know that I am crystal clear on the pros/cons of doing this. Any input on reasons to or not to do this are appreciated. Thanks!!


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[heyjack70]

The argument that always gets shot down as worthless is that an LLC (or PLLC) insulates your personal assets in a malpractice case. I guess this doesn't actually work, something about piercing the corporate veil. Basically you can't argue that as an "employee" the corporation is the ultimate entity and holds the ultimate responsibility (This would be beneficial if you lose a big malpractice case and the only thing that can be collected on is some crappy lobby chairs and an old computer running Windows ME). In reality the physician is still on the hook.

The true benefit is that if you are incorporated you can pay yourself a 'reasonable' salary and take the rest of your income as business dividend. This has the advantage of the dividend being taxed less than the salary.

For example: Hard working practice clears $300k/year after expenses
Option 1: Take it all as your income: pay income tax and payroll tax (this is social security, medicare, and unemployment taxes) on the total amount.
Option 2: Take $180K Salary: (pay income tax and payroll tax), and take $120K Dividend (Pay ONLY income tax). I think this saves you about 15% a year on the dividend.

Caveat, I'm not an accountant as you can probably tell.

 

[TexasPhysician]

The argument that always gets shot down as worthless is that an LLC (or PLLC) insulates your personal assets in a malpractice case. I guess this doesn't actually work, something about piercing the corporate veil. Basically you can't argue that as an "employee" the corporation is the ultimate entity and holds the ultimate responsibility (This would be beneficial if you lose a big malpractice case and the only thing that can be collected on is some crappy lobby chairs and an old computer running Windows ME). In reality the physician is still on the hook.

The true benefit is that if you are incorporated you can pay yourself a 'reasonable' salary and take the rest of your income as business dividend. This has the advantage of the dividend being taxed less than the salary.

For example: Hard working practice clears $300k/year after expenses
Option 1: Take it all as your income: pay income tax and payroll tax (this is social security, medicare, and unemployment taxes) on the total amount.
Option 2: Take $180K Salary: (pay income tax and payroll tax), and take $120K Dividend (Pay ONLY income tax). I think this saves you about 15% a year on the dividend.

Caveat, I'm not an accountant as you can probably tell.

I think you are describing an s-corp and not an LLC. I've yet to find a benefit for physicians making an LLC if they are only an independent contractor.

 

[heyjack70]

I think you are describing an s-corp and not an LLC. I've yet to find a benefit for physicians making an LLC if they are only an independent contractor.

LLC's can file taxes as various types of corporations (S, C, whatever else). But I think you have to be incorporated to do it.

 

[TexasPhysician]

LLC's can file taxes as various types of corporations (S, C, whatever else). But I think you have to be incorporated to do it.

Right. You have to file federal irs paperwork for your LLC to be considered an s-corp to treat it as such.

That is certainly an option, but to not lose an audit, you will need to understand this entity quite well. If you make substantially more money than the average physician in your specific niche, what you describe may be worthwhile as you could take the excess as distributions. If you make average or less, I'm not sure you could win an irs audit with distributions, but I have not researched this thoroughly.

For most people, you incorporate when you have something to protect. Medical malpractice insurance is your protection. An LLC does not prevent someone from being able to bring a lawsuit against you. Now if you buy the building you practice in, you may want to buy the building through an LLC and you pay this LLC rent. I think that would make it less likely to lose the building in a lawsuit against you.

 

[notdeadyet]

LLCs are handy for folks looking to stay off the grid. Some folks in forensics and corrections psychiatry form LLCs as you can buy houses, register for utilities and all the other stuff that shows up in public records so that you are much harder to locate by folks trying to find you.


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[Freedoc]

The argument that always gets shot down as worthless is that an LLC (or PLLC) insulates your personal assets in a malpractice case. I guess this doesn't actually work, something about piercing the corporate veil. Basically you can't argue that as an "employee" the corporation is the ultimate entity and holds the ultimate responsibility (This would be beneficial if you lose a big malpractice case and the only thing that can be collected on is some crappy lobby chairs and an old computer running Windows ME). In reality the physician is still on the hook.

The true benefit is that if you are incorporated you can pay yourself a 'reasonable' salary and take the rest of your income as business dividend. This has the advantage of the dividend being taxed less than the salary.

For example: Hard working practice clears $300k/year after expenses
Option 1: Take it all as your income: pay income tax and payroll tax (this is social security, medicare, and unemployment taxes) on the total amount.
Option 2: Take $180K Salary: (pay income tax and payroll tax), and take $120K Dividend (Pay ONLY income tax). I think this saves you about 15% a year on the dividend.

Caveat, I'm not an accountant as you can probably tell.

Interesting. So what is it that is different in the real world about income and dividend? Must one wait to access the dividend money until the end of the financial year? Is there an expectation that the dividend be used differently?

If there is not much other experiential difference I wonder why one would not minimize salary further. Can this keep you out of the higher income tax brackets?

Also, are there any differences in terms of what one can put away into sep IRAs or other various investments?


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[Gpan]

OK, Ive been thinking and doing a lot of research on this LLC thing. Of course I will talk with a lawyer or CPA, but I want to hear your opinion/experience on this.
-I will be full time attending this summer. Most probable job for my first year out of residency will be employee, W2 type. Is there any benefit for me to open an LLC ? And Can Doctors even open an LLC or does it have to be PLLC only?
-With an LLC, can I put my house in it? any benefit in doing this?
- With an LLC, how can I get tax deduction from my W2? Can I deduct stuffs?
- AND what kind of business can my LLC be about? I heard some people use theit house and rent that out to themself as a business and the rent money is the LLC 's income. Is that what Doctors usually do with their LLC?

 

[Shikima]

OK, Ive been thinking and doing a lot of research on this LLC thing. Of course I will talk with a lawyer or CPA, but I want to hear your opinion/experience on this.
-I will be full time attending this summer. Most probable job for my first year out of residency will be employee, W2 type. Is there any benefit for me to open an LLC ? And Can Doctors even open an LLC or does it have to be PLLC only?
-With an LLC, can I put my house in it? any benefit in doing this?
- With an LLC, how can I get tax deduction from my W2? Can I deduct stuffs?
- AND what kind of business can my LLC be about? I heard some people use theit house and rent that out to themself as a business and the rent money is the LLC 's income. Is that what Doctors usually do with their LLC?

Not as a wage slave coming out of residency working W2. As you grow in your experience and develop your network, you may start doing more 1099 type of work as an independent contractor. At that time you'll want your accountant to assist you in setting up a PC for your tax purposes.

 

[Gpan]

Not as a wage slave coming out of residency working W2. As you grow in your experience and develop your network, you may start doing more 1099 type of work as an independent contractor. At that time you'll want your accountant to assist you in setting up a PC for your tax purposes.

Thank you for the reply.
I actually have job offers that give me the 1099 pay option. But as a new attending, I'm kinda gunshy about being an IC. W2 guarantees salary.
Lets say 2 jobs, one offers W2 pay and the other offers 1099. Both give me a potential $300,000. Could some one tell me the highest potential $ take home total from one vs the other?

 

[michaelrack]

For example: Hard working practice clears $300k/year after expenses
Option 1: Take it all as your income: pay income tax and payroll tax (this is social security, medicare, and unemployment taxes) on the total amount.
Option 2: Take $180K Salary: (pay income tax and payroll tax), and take $120K Dividend (Pay ONLY income tax). I think this saves you about 15% a year on the dividend.

Caveat, I'm not an accountant as you can probably tell.

SS caps out at approx 115-120k, so assuming your acct lets you use this strategy, you are only saving medicare and unemployment taxes on the dividend.

 

[nitemagi]

I do believe LLCs, S-corps, and C-corps are all independent entities. You can't file as multiple ones. The benefits are in limiting liability if you are sued. You can always be enjoined personally in a lawsuit, but that doesn't mean the judge won't throw it out if the work was done under the employment of a corporation. Most solo practitioners do s-corps in this neck of the woods. LLCs I believe have a distinction between stockholders and management, and S-corps have only one class of stock (unlike a C-corp). Talk to an accountant or a lawyer.

 

[Shikima]

Thank you for the reply.
I actually have job offers that give me the 1099 pay option. But as a new attending, I'm kinda gunshy about being an IC. W2 guarantees salary.
Lets say 2 jobs, one offers W2 pay and the other offers 1099. Both give me a potential $300,000. Could some one tell me the highest potential $ take home total from one vs the other?

That's what I did for my first year working about 65-70 hours a week. I scaled back to just PP which is 1099 and a little bit of W2 work to get my benefits that way. It'll take about 9-10 months before you'll understand what earnings you are bringing in via PP from the lag via collections (unless you're cash only) and building your practice case load.

 

[TexasPhysician]

OK, Ive been thinking and doing a lot of research on this LLC thing. Of course I will talk with a lawyer or CPA, but I want to hear your opinion/experience on this.
-I will be full time attending this summer. Most probable job for my first year out of residency will be employee, W2 type. Is there any benefit for me to open an LLC ? And Can Doctors even open an LLC or does it have to be PLLC only?
-With an LLC, can I put my house in it? any benefit in doing this?
- With an LLC, how can I get tax deduction from my W2? Can I deduct stuffs?
- AND what kind of business can my LLC be about? I heard some people use theit house and rent that out to themself as a business and the rent money is the LLC 's income. Is that what Doctors usually do with their LLC?

You need to do a lot more research. Also some answers vary by state. In some, LLC's are useless for physician practices because PLLC's or PA's are required.

Some LLC's can be taxed as a s-corp. This is probably only worthwhile if it earns significant profit. Otherwise these entities are lawsuit protection only.

Incorporate things of value that have a likelihood of getting taken in a lawsuit. The primary residence is not touchable in many states regardless, so incorporating may be a waste of money. Rental homes you own - incorporate.

In general, incorporating is a hassle. You will need an attorney and training on how to always treat the corporation as a corporation. This may mean it's own bank account, clear accounting, annual minutes/meetings.

 

[DD214_DOC]

I'm not a lawyer or CPA but I have some experience with LLCs.

You won't be protected in the event of a malpractice lawsuit. However, those assets that do NOT fall under an LLC/S-Corp are protected in a non-malpractice lawsuit, theoretically. So, if you're an IC doing 1099 and you somehow do something that gets you sued, only the corporation and its assets are at risk, assuming the work was done between your corp and the other corp.

A really big reason, however, is that going through a corporation keeps your personal information out of public records. If you think this isn't a big deal, think again -- your name and other information will be all over google and easily accessible to patients. Using the corporation and it being paid instead of yourself also utilizes a Federal EIN in lieu of a SSN, which is also good.

I have read that there are also tax benefits and such, but I don't know the details. It may be possible to claim a home as doubling as a, "home office" and provide some tax benefits, but I have no idea if this changes its risk in the event of a lawsuit.

 

[TexasPhysician]

A really big reason, however, is that going through a corporation keeps your personal information out of public records. If you think this isn't a big deal, think again -- your name and other information will be all over google and easily accessible to patients. Using the corporation and it being paid instead of yourself also utilizes a Federal EIN in lieu of a SSN, which is also good.

I have read that there are also tax benefits and such, but I don't know the details. It may be possible to claim a home as doubling as a, "home office" and provide some tax benefits, but I have no idea if this changes its risk in the event of a lawsuit.

You can use home office deductions as a sole proprietor without paying to incorporate.

In my state, a personal residence can not be taken in a lawsuit. While putting it in an LLC would make it harder to find you (your name would not be in county records), it would cost more and possibly make it easier to get in a lawsuit. Texas has 100% homestead exemption. An LLC with no business purpose can be pierced.

Physicians need to individually research their state laws and plan, then contact an attorney. It is complicated and requires extensive research. It is worth it though to protect your assets.

 

[DD214_DOC]

It doesn't help that you can form a corp in any state