Medical Practice LLC vs S Corp – What is the Difference?

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Jan. 5, 2023, midnight

Medical Practice LLC vs S Corp – What is the Difference?

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Opening up one’s own medical practice can be quite exciting for medical practitioners. Perhaps, you have been working at someone else’s practice for some time, and now you would like to start as an independent contractor. Whatever the case is, you will want to know the difference between medical practice LLC vs. S Corp, as both are popular options for physicians. Get more information on Legal Registration Archives Becoming a physician LLC vs. S Corp can affect many aspects of medical practice operation, including taxes and ownership structure. As a physician, when you choose a legal entity and taxation for your business, it is best to acquaint yourself with the options and choose the one that is best for your medical practice in the long run.

What is an S Corp?

Also known as an S corporation, an S Corp refers to a tax classification that passes income, financial losses, and deductions onto the corporate shareholders for the purpose of federal tax. The unique aspect of S Corp is that it delimits the potential burden of double taxation that can occur within traditional corporations. S Corps also have limited liability as they don’t pay regular corporation income taxes. Rather, the shareholders of the S Corp split the financial income and losses. After receiving the income, the shareholders report it to their respective individual tax returns. Since S Corp is all about partnership, it provides shareholders limited liability protection – irrespective of its tax status. This aspect indicates that the assets of all shareholders in an S Corp are protected from the claims of business creditors.

Setting up an S Corp

S Corp is not so much of a business structure but is a tax classification. Both an LLC and a corporation can choose to be taxed as an S Corp. Now there are single-member LLCs and multi-members LLCs – both can become S Corps. An LLC terms a member as an owner. So, the members of an LLC cannot be employees. In terms of tax, members are not paid a salary – they still work – but they are paid distributions. Additional information Business Licensing When an LLC decides to be taxed as an S Corp, it allows members to be paid a salary as well as a distribution. In an S Corp, salaries and distributions are taxed differently.

Potential Restrictions of an S Corp

There are some potential restrictions that an S Corp has. For instance, S Corps cannot have more than a hundred shareholders. Also, the shareholders must be US citizens – or – permanent legal residents of the USA. Also, the shareholders must be private individuals and may not include LLCs, other corporations, and certain types of trusts. Please contact the LegalRegistration.com team if you have any questions. Moreover, S-Corps can only issue one class of stock. Now that you know the restrictions and if these restrictions work for you, you might want to better understand why or why not you might want to get an S Corp classification.

Potential Benefits of an S Corp

The thing is that the IRS wants to collect employment tax, and they want to collect income tax. Let us look at how the IRS might do that in different scenarios. Suppose you have a single-member LLC – for instance, you might be running your medical practice alone – you are taxed by default as a disregarded entity. This way, money passes through the LLC to you. Since you cannot be an employee, your income is in the form of a distribution. Now, this distribution is subjected to employment tax and income tax. On the other hand, a multi-member LLC is taxed by default as a “partnership” and works the same way. The income passes through – is paid as distributions, and those distributions are subject to employment tax and income tax. If an LLC successfully becomes an S Corp, then the members can be employees. In this case, the income is paid to the members as a salary and a distribution. Now the salary is subject to employment tax and income tax – the distribution, however, is only subject to income tax. Please give LegalRegistration.com a phone call if you need more information. This means that you don’t have to pay employment tax on a distribution in an S Corp. So, on the bright side, you can save money with an S Corp.

Potential Drawbacks of an S Corp

There are also potential drawbacks of an S Corp. The first drawback is salary – or – reasonable salary – the term that the IRS uses. And salary is the amount that you will pay yourself in addition to distributions. The IRS has increased scrutiny of S Corps members’ salaries. If you pay yourself an unreasonably low salary in an effort to pay less employment tax, the IRS can take notice and engage your S Corp status demanding back taxes and fines.

What is an LLC?

LLC stands for limited liability. This business structure offers not only the protection of a corporation but also the regulation of a sole proprietorship. So, LLC is a bit of everything, which makes LLC an attractive choice for small medical practices. Similar to S Corp, the LLC provides a limited liability, which protects the potential members of an LLC from creditors usurping their personal assets if the company goes into debt. Nonetheless, it is important to mention here that this type of asset protection doesn’t work for all liability cases. For more information visit the website LabyrinthTM Fundraising Compliance Now In terms of taxes, an LLC offers more flexibility than an S Corp. Typically, the members of an LLC are taxed like partnerships “by default” or pass-through taxation. More interestingly, an LLC has the option to file as an S Corp or a C Corp with the IRS. If you are wondering about a private practice sole proprietorship vs. LLC, your business is owned by you when you opt for a sole proprietorship. Hence it is a much simpler process than filing for an LLC. Besides, it is also cheaper to file as a sole practice proprietorship.

Setting up an LLC

It is quite easy to set up an LLC. All you need to do is to confirm the Division of Corporation for your respective state. Next, you follow the instructions for filing the Articles of Organization, and then you pay the fee. For instance, if you reside in the state of Florida, you should know that the division of Corporations is Sunbiz.org. On this form you will have to fill out an online form, and once you have submitted the fees ($125), you are all set to set up an LLC. The Articles of Organization contain mostly demographic information of the Registered Agent. The Registered Agent can be the representative of the business as well, such as an accountant or an attorney.

LLC vs. S Corp – The Difference

At first glance, an LLC and an S Corp seem quite similar – but both are different in their foundations. While LLC and S Corps offer their stakeholders protection from liability and prevent double taxation, LLC is a business structure, whereas S Corps describes how the business is taxed. When deciding between an LLC and S Corp, the main factor to consider is whether or not you have sufficient profit to justify the S Corp classification. If your distribution – after paying yourself a reasonable salary is greater than $10 thousand, you have sufficient profit to justify the cost and effort of an S Corp. If you have no idea how much profit your LLC will make, it is pointless to become an S Corp to start off. That said, you can always change your tax status later – if you know for certain that you will have sufficient profit. S Corp is also a great choice if you intend to withdraw all the profit from the company rather than reinvest.

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