Partnership or corporation: Making the call

Practice Pointers. By Rita M. Schwager, AMNews contributor. Dec. 17, 2001.

PRACTICE POINTERS

Answers to questions about the business side of your practice

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Question Our practice is a hospital-based physician group planning to leave the hospital system to start a private practice. We are struggling with the choice of legal structure for our practice. Could you give us advice on which type of business entity we should form?

Answer Your practice has several choices available to you. The legal entity you choose would depend on the flexibility and limitations of those legal structures, and the income tax characteristics of each. Below is a summary of the different types of legal entities available and some of the advantages and disadvantages of each.

The choices available to most practices are the corporation, the partnership and the limited liability company (or partnership). Some states also allow a single-member limited liability company.

All of these legal structures provide protection from legal suits outside of those connected with medical malpractice. Which entity you choose will determine how your practice reports the practice's income tax information to the government. (For our purposes we will discuss only the federal government reporting.)

If you choose the corporate structure, the IRS allows two types of tax reporting, as a C-corporation or as an S-corporation.

A C-corporation reports its annual activity to the government, and if there is a tax liability, the corporation pays the tax. The IRS categorizes a C-corporation medical practice as a personal service corporation. The IRS taxes any profit of a PSC at 35%. [...]