Which business structure is best?
By Mark E. Battersby

What is the best entity for operating your chiropractic practice? For tax purposes, the predominant forms of business enterprise are the regular sole proprietorship, partnership, C-corporation, S-corporation and limited-liability company.

But taxes are only one consideration in determining the best form of business for your practice. Other considerations include paperwork, personal liability and the practice's ability to raise money.

GOING IT ALONE

The easiest structure is the sole practitioner, which usually involves just one individual who owns and operates the chiropractic practice. The tax aspects of a sole practitioner are especially appealing because income and expenses from the business are included on the sole practitioner’s personal income tax return.

Of course, as a sole practitioner, you must also file Schedule SE with Form 1040. Schedule SE is used to calculate how much self-employment tax is owed. And, don’t forget that you have to pay quarterly payments of estimated taxes.

Naturally, this structure has a few disadvantages. The owner is solely liable for the practice’s liabilities and places his or her own assets at risk, subject to seizure, to satisfy a business debt or legal claim.

PARTNERSHIPS

Partnerships come in two varieties: general and limited. In a general partnership, the partners manage the practice and assume equal responsibility for the partnership’s debts and other obligations.

A limited partnership has both general and limited partners. In a limited partnership, the general partner owns and operates the practice or business and assumes the liability for the partnership, while the limited partners serve as investors only; they have no control over the operation and are not subject to the same liabilities as the general partners.

One of the major advantages of a partnership is the tax treatment it enjoys. A partnership does not pay tax on its income but “passes through” all profits or losses to the individual partners. Each partner is required to report profits on his or her individual tax return. Even though the partnership pays no income tax, it must complete and file a partnership informational return, Form 1065.

Personal liability is a major concern especially those in a general partnership. Similar to a sole practitioner, general partners are personally liable for the partnership’s obligations and debt. Partnerships are also more expensive to establish than sole proprietorships because they require more extensive legal and accounting services.

INCORPORATIONS

Using the corporate structure is more complex and expensive than for other types of business entities. The resulting corporation, however, is an independent legal entity, separate from its owners. As such, the corporation must comply with more regulations and tax requirements.

The biggest benefit for the owner of an incorporated business is liability protection. Another plus is the ability of a corporation to raise money. When permitted by local licensing regulations, a corporation can often sell stock, either common or preferred, to raise funds. Corporations also continue indefinitely, even if one of the shareholders dies, sells his or her shares or becomes disabled.

The corporate structure also comes with a number of downsides: higher costs, more regulations and double taxation.

• C-corporation. Of all business entities, the so-called C- (or "regular") corporation is subject to the toughest tax bite. Earnings are taxed twice. First a corporate income tax is imposed on the practice’s net earnings and then, after the earnings are distributed to shareholders as dividends, each shareholder pays taxes separately on his or her share of the dividends.

Naturally, a corporation can reduce, or even eliminate, its federal income tax liability by distributing its income as salary to shareholder-employees who actually perform valuable services for the corporation.

Although this can reduce taxation at the corporate level, those who receive profits from a corporation in exchange for services must pay tax on the amount received, which is treated as salary.

• S-corporation. An S-corporation is merely an incorporated chiropractic practice that has chosen to be treated as a partnership for tax purposes. With an S-corporation, income and losses are passed through to shareholders and included on their individual tax returns. As a result there is just one level of federal tax to pay.

On the downside, S-corporations are subject to many of the same requirements corporations must follow. They must also file articles of incorporation, hold director and shareholder meetings, keep corporate minutes and allow shareholders to vote on major corporate decisions.

S-corporations can only issue one class of stock despite the possibility of having up to 100 shareholders.

• LLC. The limited liability company or LLC, introduced in 1997, is a fairly recent phenomenon. An LLC is a hybrid entity, bringing together some of the best features of partnerships and corporations.

LLCs were created to provide business owners with the liability protection corporations enjoy without the double taxation. Earnings and losses of an LLC pass through to the owners and are included on their personal income tax returns.

The LLC has no limit on the number of shareholders it can have.

To set up an LLC, articles of organization must be filed with the secretary of state where the practice or business will operate. Some states also require the filing of an operating agreement, which is similar to a partnership agreement.

Like partnerships, LLCs do not have perpetual life. Some states stipulate that the operation must dissolve after 30 or 40 years. Technically, LLC dissolves when a member dies, quits or retires.

Despite its popularity and the attractions, LLCs also have disadvantages. Since an LLC is a relatively new entity, its tax treatment varies by state.

DECISIONS, DECISIONS

Changing circumstances, changes in the tax laws and even the success of the chiropractic practice might prompt a reassessment of the form your chiropractic practice operates under. It makes sense to ensure you are using the best entity to provide your practice with the most benefits and consistently lowest tax bill.

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal or accounting advice. Please consult your professional advisor about issues related to your practice.