Pros and Cons of Incorporating
We often recommend partnership arrangements, but not necessarily the partnership legal structure.
As a healthcare provider, you can form your group practice as a legal partnership with legal partners OR form it as a professional corporation (PC) with shareholders.
As a PC, your practice can enjoy certain benefits, but you will have some liabilities, as well. These benefits and liabilities are different from those of a regular business corporation.
So consider the following points when determining the best legal structure for your practice.
Pros of Incorporating
- Partner liability. Your personal assets are protected if a shareholder or employee in your PC is sued for malpractice, as long as you had nothing to do with the patient or did not supervise the treatment. If your practice is formed as a general partnership, and your partner is sued, you can be included in the lawsuit even if you had nothing to do with your partner’s actions.
- Lawsuit prevention. An attorney, who wants to go after the group’s assets because of one member’s acts, will discover your corporate shield. He or she may spend less time and money on the case if the other shareholders’ assets are unavailable.
- The PC can protect your personal assets in non-malpractice lawsuits. For example, if someone slips and falls in your corporate office, he or she may be able to get your corporate assets, but not your personal assets. This protection may also cover your personal assets when a fellow shareholder is sued for sexual harassment, wrongful employee dismissal, lawsuits from hospitals or plans, and so on.
- Tax benefits. Your PC can be formed as a “C” or “S” corporation and pay a corporate tax each year. Because you are an employee of your corporation, you may enjoy more tax-deductible benefits than you can as an owner or partner. For example, lower personal income taxes, insurance cost deductions and so on.
- Employee liability protection. Under certain legal circumstances, your status as an employee (not a shareholder) of the corporation can give you legal protection in lawsuits against the corporation.
Cons of Incorporating
- Extra paperwork. You need to follow the rules for incorporating for it to do its job. For example, you cannot mix personal and corporate funds and you need to keep your corporate minutes up to date. If you fail to follow the rules, you can lose any benefits you expected from the corporation.
- Corporate tax returns are more expensive to prepare than sole proprietor or partnership returns.
- Corporate taxes. Depending on your current tax strategy, you may end up paying more in taxes.
- You become an employee. While this may carry some tax benefits, it also requires you to get workers’ compensation insurance and unemployment insurance for yourself. As a sole proprietor or partner, you do not need to worry about employee-required insurance, tax withholding and so on.
- Flexibility. A sole proprietorship or partnership can make just about any kind of arrangement it likes. For example, how profit is counted or shared. A corporation has rules you must follow.
- Costs. Even though they are tax deductible, filing fees, tax preparation fees, bookkeeping costs and attorney fees can add up to thousands each year just to keep the corporation in existence.
Of course, you should discuss these pros and cons with your attorney and CPA before making a change to your practice structure.