Physiatry Practice Management Resources

Because of such concerns, says Mr. Kroner, none of the physicians he represents does business as a regular C corporation; instead, they use S corporations or LLC's. "Physicians who practice by themselves tend to use S corporations, bringing all the net income of the practice to their taxable returns."

Physicians in group practice tend to use LLC's, Mr. Kroner says. "With an S corporation, all of the net income is allocated by shares. However, you may not want the doctor who has 40 percent of the shares to get 40 percent of the income. With an LLC, you have more flexibility in allocating income among the physicians."

Although LLC's may offer considerable flexibility to a group practice, other issues must be weighed. "An S corporation might be favored if you are seriously concerned about protecting your personal assets," says Andrew Westhem, chairman of Wealth Transfer Planning in La Jolla, Calif. "Although LLC's theoretically provide shelter, they're too new to have a track record in this area. S corporations have proven over the years that they can provide liability protection, and some attorneys feel more comfortable with precedents they can cite."

With either an S corporation or an LLC, you'll forgo some tax advantages enjoyed by C corporations, especially the deduction of health insurance premiums, but that might not be a major loss. "In our area, doctors tend to get professional courtesy, so their expenditures for health insurance may not be significant," says Mr. Westhem. "What's more, taxpayers who have to include the value of health insurance in their income can deduct 60 percent of the cost this year, an amount that will increase to 100 percent by 2003."

Mr. Doran says the choice of business entity may depend on the stage of your career. Suppose, for example, that three physicians are creating a group practice. "The primary concern when creating a group practice is to have a full understanding of how income and expenses are to be allocated among the doctors," he says. "I generally suggest that each receives the revenue that's personally generated, offset by an equal sharing of the practice's fixed costs, as well as a share of variable costs based upon each doctor's use of the practice's resources. Generally, LLC's are the most flexible arrangements and, therefore, probably make the most sense, although in some groups, a C or S Corporation may be logical."

What about a 60-year-old doctor who plans to cut back, seeing patients, say, two days a week, in addition to some teaching and research? "Because a 60-year-old would probably want to minimize exposure to costs and investing in long-term assets, it may make sense for such a physician to associate with an existing practice as an employee, drawing a salary based upon revenues or profits," says Mr. Doran. "It would also make sense for the doctor, as an employee, to have his business expenses reimbursed, as opposed to trying to deduct them as 'employee business expenses' on his personal tax return. Because of the various limitations on such expenses, such expenses may not generate any tax advantages."

LLC vs. LLP

With all the emphasis on corporations and LLC's, is there any room for limited liability partnerships (LLP's), which are first cousin to LLC's? "The LLP form has been adopted by some professional firms," says Mr. Westhem. "LLP's protect each partner's personal assets from exposure to the misdeeds of other partners or employees. In some states this protection is limited to malpractice claims, while in others it includes protection from trade creditors as well."

In general, LLP's make sense in states where doctors can't form LLC's or in cases where a practice is already set up as a partnership: for an existing partnership, going to an LLC might mean starting over with new documents relating to procedures, profit-sharing formulas, etc. If you are going to make such a switch, be sure that you are going to get your money's worth in terms of asset protection, operating flexibility and ongoing tax savings.

Written by:Donald Jay Korn