The Benefits of Incorporation for Physicians in the U.S.

When considering incorporation, there are several benefits for physicians in private practice (even as a contractor) under the S-Corporation (S-Corp) structure (C-Corps are used for large, publically traded companies and have double taxation, so are generally not appropriate for physician practices).

S-corps may be the preferred professional corporation in some states (such as California), while LLC's may not meet the state requirements. It is important to check with you individual state medical board. This incorporation type may come into play if you are providing supervision or other services (as with the California Board of Behavioral Sciences, which requires supervisors of psychologists to be a professional corp) This entity type offers several compelling benefits for physicians, from tax advantages to liability protection, making it a consideration worth exploring. for those in the medical field.

Getting Started in Private Practice

If I'm just getting started, do I need to incorporate?

No. Incorporation is not required to start in private practice. However, if you are doing any form of billing or providing superbills to your clients, you might consider creating a "sole proprietorship" so you can have a professional Tax ID Number, rather than putting your SSN on these forms. It's been said that you should consider incorporation once your income is above $100,000, but you should consider your specific circumstances with tax an legal advisors.

Why Incorporate with an S-Corp?

There are several benefits to incorporation with an S-Corp for physicians:

1. Tax Advantages - One of the primary benefits of an S-Corp is the tax structure. Unlike C-Corporations, which face double taxation at both the corporate and individual levels, S-Corps enjoy pass-through taxation. This means the corporation's income, deductions, and credits pass through to shareholders' individual tax returns, avoiding the double taxation pitfall. For physicians, this can lead to significant tax savings, particularly when it comes to self-employment taxes. Only the salary paid to the physician shareholder is subject to employment taxes, while the remaining income that passes through as distributions is not. This setup can lead to considerable savings on Social Security and Medicare taxes.


2. Liability Protection - Incorporating as an S-Corp provides a legal distinction between the physician as an individual and the medical practice as an entity. This separation offers a layer of protection against personal liability for the debts and obligations of the corporation. In the litigious environment of healthcare, this protection is invaluable. It means that in most cases, a physician's personal assets are shielded from lawsuits or business debts, providing peace of mind and financial security.


3. Retirement Plan Contributions - S-Corps allow for more advantageous retirement plan contributions. As employees of their own corporations, physicians can contribute to retirement plans like 401(k)s both as employers and employees, potentially leading to higher total contribution limits than self-employed individuals. This can significantly enhance a physician's ability to save for retirement in a tax-efficient manner.


4. Business Expenses - Operating as an S-Corp enables physicians to deduct normal business expenses before income is passed through to them as individuals. This can include a wide range of expenses associated with running a medical practice, such as equipment purchases, office rent (including home office), employee salaries, insurance premiums, and continuing education costs. These deductions can lower the overall taxable income, providing further tax efficiency.


5. Credibility and Professionalism - Incorporating as an S-Corp can enhance the professionalism and credibility of a medical practice. Patients and other stakeholders may perceive the incorporated practice as more established and reliable. This perception can be beneficial for building trust, attracting new patients, and establishing partnerships with other healthcare providers and institutions.


6. Flexibility in Ownership and Management - S-Corps offer flexibility in terms of ownership and management structures. Physicians can bring in partners or investors by issuing stock, and the S-Corp structure allows for different classes of stock, providing flexibility in how rights and dividends are distributed among owners. This can be particularly advantageous for practices looking to expand or diversify their ownership.

Overall, incorporating as an S-Corp presents a strategic opportunity to maximize tax efficiency, protect personal assets by reducing liability, enhance retirement savings, and bolster the practice's professional image. However, it's crucial to consider the specific circumstances of the practice and consult with legal and financial professionals to ensure that this structure aligns with the practice's goals and compliance requirements. But, with careful planning and execution, incorporation can be a powerful tool in a physician's professional and financial arsenal.