The process of forming a medical practice is different from forming any other type of business. It must be evaluated from several different perspectives. Failing to comply with the laws and regulations applicable to medical entities can result in serious consequences, including charges of fraud.
In New York, medical practices are typically organized as Professional Corporations (PCs) or Professional Limited Liability Companies (PLLCs), although entities such as general or limited partnerships are also permissible. New Jersey allows organization as a Professional Corporation but does not recognize a special professional LLC form. With limited exceptions, licensed medical professionals are prohibited from providing professional services through a general business corporation.
Forming a professional entity in New York involves many nuances and is best handled by a professional. The process of forming a professional entity is three-fold. First, one must obtain a consent or confirmation of licensure from the Department of Education. Then the organizing documents are filed with the New York State Department of State along with the required consents. Finally, the filed certificate of incorporation or articles of organization are filed with the Department of Education. There are also periodic requirements imposed on professional entities by the NY Department of Education. There are significant issues involving the use of names, the proper form of consents, and the like. You would be best-advised to use services of a knowledgeable attorney who will ensure that your professional entity is formed quickly and properly.
One of the first decisions made in forming a medical practice is determining the type of legal and tax entity to be established. Both tax and non-tax considerations must be studied to make the best decision for your particular practice. Today, most new medical practices find that the S Professional Corporation and the limited liability company provide better tax and non-tax advantages under which to operate.
There are significant advantages to organizing a practice as a subchapter S professional corporation. The shareholders of a corporation generally are not liable for any corporate debt which is not personally guaranteed. While incorporating will not shield against professional liability claims, the corporate form of business limits the liability of the non-liable shareholders to their share of the corporation’s assets.
A corporation has continuity of life which means it can operate indefinitely — even after a shareholder dies. Corporation shareholders have the opportunity to transfer their ownership interests to others, usually following the terms of a separate agreement between the shareholders called a shareholder or buy-sell agreement. This agreement generally sets the price of the stock and limits those who can hold the stock, making the transfer more controlled for all parties.
The limited liability company (PLLC in New York and LLC in New Jersey) can offer significant advantages over the corporate form. The formation of an LLC occurs with the filing of Articles of Organization. The members (owners) of the PLLC/LLC will adopt an Operating Agreement to define do’s and don’ts of operating the practice. Limited liability companies, by law, can have such legal characteristics as limited liability, centralized management, continuity of life and transferability of interests.
Some of the advantages of LLC include:
- LLCs do not require any special tax election to pass income through to its owners
- LLCs generally have no restrictions on the type of entities who can own LLC interests (S Corporations limit who can own stock)
- LLCs have no restrictions on the number of its owners
- LLCs can have different classes of owners
- LLCs have much more ability to allocate income, gains and losses
- LLCs have the opportunity for stepped up basis rules under Section 754
- LLCs have more liberal contribution and distribution rules
- LLCs can include debt for which they are liable to their basis for deduction purposes
Some advantages of the S Corporation over the LLC include:
- S-Corps do not have to allocate pre-contribution gains under IRC Section 704(c)
- Calculate discharge of business indebtedness income at the corporation level
- State law is more developed
- Shareholders are employees for tax purposes, receiving a W-2 form for salary paid, reducing the necessity of quarterly estimated tax payments
- Retirement plan calculations are more easily calculated than LLC members
Choosing the right entity will depend on your practice’s facts and circumstances. Before making a decision, discuss the implications with your legal and tax counsel. Making the best decision is crucial to your operations.
Post-formation process is also extremely important. It is critical that the shareholders and members of LLCs enter into appropriate agreements to protect their interests and provide for an orderly operation of the practice. Lack of proper documents frequently leads to costly litigation.
We have a proven track record in forming professional entities and drafting all types of agreements regulating the affairs of medical practices. Contact us at 212-668-0200.