Partnership or corporation?
By Deborah Green, Esq.

My friend and I are graduating soon and plan to start a chiropractic practice together. Should we form a corporation? Our accountant said there would be no tax advantage because after taxes are paid, including unemployment insurance on ourselves, we’d break even.

Your accountant is correct concerning the tax aspects of forming a regular C-corporation. Under a C-corporation, the income to the corporation is taxed and then you are personally taxed on the money distributed to you by the corporation. This results in double taxation.

If you form an S-corporation, however, the income and loss are passed directly through to the shareholders. You are personally taxed on the income based on your bracket, but the corporation is not taxed at all.

A more important reason you may want to form a corporation is to limit your liability. A professional corporation (PC) will not protect you in the event you commit malpractice; it will, however, protect you if the other shareholder commits malpractice.

Only the PC’s assets may be attached if a malpractice judgment exceeds the limits of the malpractice policy. A PC can also shelter you from liability with respect to other situations.

For example: If someone trips and falls while on the premises and the liability insurance coverage is insufficient, the injured person is limited to the assets of the PC. The injured party may not pursue your personal assets such as your car, house, bank account, or other valuables.

In a partnership, not only are the partnership’s assets available to a judgment creditor, your personal assets are available as well. If your partner is a deadbeat with no attachable assets and you, as an upstanding citizen, have a lot of assets, a smart judgment creditor would bypass your partner completely and go directly after your personal assets if the partnership assets were not enough to satisfy the judgment amount.

A professional limited liability company (PLLC) may be the best of both worlds: You have the same type of limited liability that you would get with a corporation, but you are taxed as if you were a partnership.

The only hesitation I have with the use of a PLLC is that, unlike corporations, PLLCs have not been around very long. It is possible that a court may choose to impose its own interpretation on a PLLC, and that interpretation may not be favorable to you.

As a general rule, I do not recommend incorporation for solo practitioners if they are carrying sufficient liability insurance (do not confuse with malpractice insurance). On the other hand, I always recommend forming a PC (if the appropriate criteria are met) when two or more practitioners go into business together.

If you do not meet the criteria, you need to examine your tax situation to determine whether you are better off with a regular C-corporation or a PLLC. I would advise strongly against the traditional type of partnership because of the potential unlimited liability.

Deborah Green practices law in New York and Florida. If you have any questions concerning legal healthcare issues, e-mail her at healthattorney@aol.com or call 954-923-0923.

DISCLAIMER: This column is provided for educational purposes only. The information presented is not as legal advice with respect to any matter and that no attorney-client relationship is hereby established.