Tax and Business Advisory Support that Every Physician-Owned Practice Needs

Begin with the End in Mind

One of the first decisions is to choose the right entity structure. While entity structures can be changed, it can lead to unanticipated tax implications, so it’s important to begin with the end in mind and understand why you made the selections that you did and what the future impacts of this choice can be.

You may be consulting with legal counsel regarding what type of asset protection the practice could benefit from. Should you set up a PC (professional corporation) or a PLLC (professional limited liability company), or an LLC (limited liability company)?

Taxpayer Entity Types

Once that decision is made, it is important to know what type of taxpayer the practice will be. What are the pros and cons of each type, and what is a good fit now and why? This is a personalized consultative process customized for you and your specific situation. Here are some of the taxpayer types that will be considered:

• C Corporation: Pays income taxes at the entity level, and income can be “double taxed.” Owners receive a W-2, and generally, personal income taxes are paid via withholdings.
• S-Corporation: Passes net K-1 income, generally not subject to self-employment tax, through to qualified shareholders who pay tax on their personal tax returns. Form 2553 is filed to elect S-Corporation status. An S-Corporation can become a C-Corporation through an inadvertent termination, which can have negative tax repercussions. A reasonable salary should be paid, subject to payroll taxes. Generally net K-1 income is allocated pro-rata based on ownership. Distributions can be paid, but generally must be paid pro rata. Income allocation for this entity type can get more complicated with many S-Corporation restrictions. Start-up losses can be limited when using bank debt, and the debt basis rules are complicated. The operating agreement should be customized to an S corporation structure if an LLC is used.
• Partnership: Requires more than one owner; foreign individuals can be owners, and certain entities can be owners. Professional service net income is generally subject to self-employment tax and is passed through to the owners via a K-1, who pay income tax on their personal tax returns. Owners may want more self-employed income to optimize retirement plan contributions. Partnerships can be more technically complicated to prepare, but allow for a more flexible income allocation model among partners.
• Single Member LLC / Sole Proprietor: Reports net income on the owner’s personal tax return by filing form Schedule C. Net income is subject to self-employment tax. Borrowed funds can provide a tax basis for deducting losses in a start-up year. A single-member LLC (SMLLC) is easy to transition to other taxpayer types as the business grows. However, it can be one of the most audited taxpayer types.

Planning for Growth and Transactions

An experienced tax CPA can help the practice remain compliant as it operates and grows. For example, proper treatment of owner fringe benefits, such as group medical, vision, dental, and retirement plan contributions, has different reporting requirements depending on the taxpayer type. As your management staff turns over, it is important to have an experienced tax CPA educating practice leaders so compliance can be maintained. When it comes time to transact, a compliant practice can attain higher practice valuations and mitigate any unwanted surprises for owners.

A CPA can assist in acquiring or selling a practice or restructuring in anticipation of a transaction. The CPA can play a role in the due diligence process, which assesses the financial performance, compliance, and risk profile of the business being acquired.

As the practice grows and adds new providers, the CPA can assist in modeling tax implications of certain ownership buy-sell provisions, assist in the determination of ownership purchase and sale prices, and explain complicated calculations and methods in ways that are understood.

Business Advisory Services

Once new provider owners have been added, the CPA can also help the practice with income allocation models, which determine how the income and expenses are allocated to producers. Since there are many ways to allocate income and expenses, a CPA can help model out options for your practice to consider, help document for you to approve, and implement to avoid any confusion going forward.

A CPA can help you evaluate potential business partnerships, what the tax implications could be, while assessing strategic contributions like contract acquisition, administrative infrastructure, and growth potential.

If your practice is growing and opening new locations, your CPA will work with you to develop scalable financial frameworks to accommodate expansion while maintaining operational control. You may want to add subsidiary structures for new locations with standardized reporting while creating a centralized service entity.

Key to Your Success

For physicians contemplating practice ownership or acquisition, engaging a healthcare specialty CPA early in the process gives you the necessary ongoing education you need to build a successful financial roadmap for the future.

At O’Keefe Business Advisory, PLLC, we work in collaboration with you and others on your team, which may include legal counsel, the bookkeeper / Controller / CFO, and the attest and business valuation CPA. We provide timely and accurate tax compliance and tax planning services for businesses, high-net-worth individuals, and trusts.

We look forward to meeting you and providing you with a preliminary consultation to learn about your specific practice goals and needs and how we can help.