Radiologists in private practice can be regarded as both physicians and a business.
A radiology practice can use one of several legal forms of organization available to other types of businesses. It’s important to note, though, that the available forms and particular legal requirements or designations can vary significantly by state.
A radiology practice can legally organize in one of the following ways [1,2]:
1) Sole proprietorship
2) General partnership
3) Limited partnership
4) Limited liability company (LLC)
5) Limited liability partnership (LLP)
6) C corporation (standard corporation)
7) S corporation
What should you consider when choosing a form of legal organization?
Selecting the entity that would work best for you is a very individual decision. Of course, before choosing a business structure for a new practice, you’ll probably need to consult both a tax advisor and legal advisor.
With each form of legal organization, there are certain advantages, disadvantages and varying degrees of individual risk.
Key factors to consider among the different forms include:
- Potential risks and liabilities to the business and individuals
- Costs and administrative requirements of maintaining the entity
- Limitations on number of owners
- Permanence and transferability
- Tax ramifications of the entity
- Tax ramifications and benefits to the owner
This post will cover partnerships and limited liability companies, with a brief summary of each entity and its key elements.
Quite simply, in a sole proprietorship there is one owner. It is a simple and inexpensive form of organization.
Under this model, the individual and business risks are unlimited. As with all legal forms of private practice organization, malpractice insurance is required. The owner does not get a W-2 and must make estimated tax payments to the IRS. She also must pay both the employer’s and employee’s share of self-employment taxes.
A general partnership is for two or more owners and similar to a sole proprietorship in most aspects. One is not an employee of the practice but rather a sole proprietor. It is relatively simple to operate, carries the same degree of risk and is not, in itself, a taxable entity. Profits and losses are attributed to individual partners and each partner is liable for their share of the taxable income.
This arrangement eliminates the dividend tax imposed upon owners of a corporation, but participants are afforded no protection from liability and are therefore at risk from acts committed by a fellow partner. The entity also dissolves if a partner leaves.
In a limited partnership, there is centralized management of business and a general partner who usually has most of the power and unlimited liability for company losses and debts. There are also one or more limited partners (often silent partners) who are liable only up to the amount of their investment. This is in contrast with a limited liability partnership (LLP, see below), where all partners have limited liability protection against company obligations and debts.
Limited liability company (LLC)
Frequently the favorite choice for small businesses, an LLC is a legal entity that combines the limited liability protection of a corporation with the tax benefits of a partnership.
An LLC can have one or more owners (referred to as members), and can consist of individuals (including a sole proprietor), corporations, or other LLCs, depending on the state.
Some states do not allow licensed professionals (and physicians, as such) to form an LLC. However, licensed professionals who want the same benefits as an LLC can form a professional limited liability company (PLLC) in most states, except California.
Although LLC members are protected from personal liability for business debts and claims, if a member commits an act that is legally actionable, both the LLC and its members can be held liable.
In terms of tax benefits, an LLC has the flexibility to file as a partnership or a corporation. By not filing a corporate return, it is treated like a partnership and the business earnings are passed through to the members who report the profits and losses on their personal federal income tax returns. By filing as a partnership instead of as a corporation, LLCs can avoid double taxation (i.e., paying corporate taxes and personal income taxes on earnings).
Limited liability partnership (LLP)
An LLP is a general partnership formed by two or more owners (a.k.a. partners). As with LLCs, LLPs are also a cross between a corporation and a partnership, and partners enjoy some limited personal liability.
Most states allow the formation of an LLP and it is a common form of organization for professional businesses, although some states limit what professions can form an LLP.
While both LLCs and LLPs provide limited liability protection, a key difference is that each partner in an LLP is personally liable only for their own negligence (and is protected against liability for acts of other partners). In some states, however, partners in an LLP can be personally liable for partnership debts.
An LLP is not recognized as a business entity by the IRS and the entity itself doesn’t pay income taxes. Partners receive untaxed profits and must pay the taxes themselves. As with LLCs, LLPs filing as partnerships avoid double taxation.
Both LLCs and LLPs are more expensive to create and maintain than the aforementioned entities, but of course, also offer their own distinct advantages.
So now, with bated breath, you are probably thinking, ok, but what about private practice corporations, and how do they differ from partnerships and limited liability companies?
Fear not! Those burning questions and more will be answered in the next post. Don’t you just love/hate cliffhangers?
- Radiology career handbook. ACR Resident & Fellow Section, 1st edition. 2008. American College of Radiology, Reston, VA. Available at: https://www.acr.org/-/media/ACR/Files/Career-Center/Radiology-Career-Handbook.pdf. Accessed June 26, 2019
- Piper M. LLC vs. S-Corp vs. C-Corp: explained in 100 pages or less. 2018 Simple Subjects, LLC