Debating the Pros and Cons of C Corps, S Corps, and LLCs

Q: What are the advantages or disadvantages of two physicians forming a partnership and working under one business ID number versus working under a C Corp, S Corp or LLC?

A: Two physicians forming a single entity must balance many competing objectives in selecting their organization’s structure. Examples of these competing objectives include tax treatments, individual liability, continuity in the event of death, and retirement planning, among others. In most cases, a partnership does not meet the objectives that physicians want to achieve by creating a separate entity.

While inexpensive to create, a partnership means that each partner is jointly and severally liable, meaning that individual assets of partners may be attached for the entity’s liabilities. Additionally, a partnership terminates upon a partner’s death, which may result in large cash-settlement consequences. Also, partners cannot fund a pension plan in the practice, since there is no employer/employee relationship.

On the other hand, C Corporations, S Corporations and LLCs all benefit from continuity in the event of a partner’s death and the physicians' ability to participate in pension plans. Specifically, C Corps feature a trade-off between the possibility of double taxation -- corporate income and individual dividends -- and protecting individuals from certain liabilities, such as malpractice claims.

S Corps eliminates the double-taxation problem by taxing the income only at the individual level, while still providing liability protection. Additionally, S Corps may actually result in the physicians paying less in taxes, because the members of an LLC may be subject to self-employment taxes.

With LLCs, each state has varying laws pertaining to the structure, so an attorney with expertise in establishing physician groups is strongly recommended. As with C Corps and S Corps, consulting a legal expert means an additional expenditure, but having an attorney is highly recommended. In the end, the entity you choose will be based on balancing the competing objectives to meet the physicians' goals.

Beverly A. Miller, CPA, CAPPM, is a manager at Hayflich & Steinberg CPAs, PLLC, based in Huntington, W.V.

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