Is an LLC even necessary for an Independent Contractor?

[JK]

Brand new attending. About to start my job as an independent contractor paid on 1099 at an outpatient office. I've listed to a few WCI podcasts and just finished reading Mike Piper's excellent "LLC vs S-corp vs C-corp" short book but had a couple questions I was hoping the group could help me with. Piper says that by default, I am a sole proprietor if I haven't done any other steps.

1) There is lots of discussion on the forum and mention throughout the book of LLC's. But is it really necessary for physician independent contractors? An LLC does nothing for your taxes. An LLC does nothing if you practicing bad medicine - hence why I have malpractice. LLC does have some other steps/fees to establish though. I'm trying to envision a scenario where it makes sense to have the LLC in this setting for the extra liability protection (protect personal assets). I don't want to create the LLC unless there is a compelling reason why I should.

-If you are negligent practicing medicine -> malpractice insurance--> no need for LLC.

-If a staff member is negligent (MA, LPN, RN)--> I am the only member of my business and the staff is employed/paid by the practice itself--> the practice would be responsible for liability as they aren't MY employees--> no need for LLC

-The book mentioned if you had a physical address for your business and someone got hurt on the property--> I don't have any personal office space--> I have renter's/umbrella insurance at home where I may occasionally do patient charts, etc...--> no need for LLC

2) Do I actually need a designated checking account and credit card for business use?

-Since I am the only member of the sole proprietorship (unless I'm convinced to be LLC), do I really need a separate business checking account? I currently have a personal Ally account (shared with my wife) I used throughout residency and was just planning to have all paychecks deposited there.

-Credit Card: do I really need a separate work credit card? I was planning on keeping track of my business expenses (white coats, conferences, etc...) in a spreadsheet and then submitting to accountant at tax time. Do I really need a dedicated credit card for that, other than the fact that it might make tracking a little easier.

-Does your answer to separate accounts change if I end up becoming an LLC? Piper mentioned the term "Piercing the corporate/LLC veil" and that having meticulous banking and financial records may help avoid this. Thoughts?

Thanks for the input.

[spiritrider]

If you have an LLC, you do need to separate personal and LLC financial accounts. This not strictly necessary for a sole proprietor, but it is still a best practice to separate personal and business accounts.

You are correct that an LLC provides little if any benefit to an IC providing professional services with no office or employees.

LLCs and/or S-Corps are over-hyped, under-perform and sometimes counter-productive. This is a personal circumstance and jurisdiction dependent determination.

[Steven Podnos MD CFP]

I see two potential benefits of an LLC:

 

Your personal return will be "cleaner."  Your many business deductions will be on the LLC return, which I'm told is less likely to be audited.  Small benefit perhaps

Depending on your income-you might be able to take advantage of the 199A exclusion of some wages by using a pass through entity such as an LLC.  Consult on this with an accountant.

[jfoxcpacfp]

Steven Podnos MD CFP wrote:

Your many business deductions will be on the LLC return, which I’m told is less likely to be audited.  Small benefit perhaps

Click to expand...

First time I've ever heard this.

Steven Podnos MD CFP wrote:

Depending on your income-you might be able to take advantage of the 199A exclusion of some wages by using a pass through entity such as an LLC.

Click to expand...

LLCs do not pay wages to the owner. The 199a will be available to sole proprietor pass-through income same as for LLCs.

100% agree with spiritrider. In OP's situation, there is no need for LLC and that is how we counsel our clients. We have discussed this multiple times on the forum.

[spiritrider]

By default an LLC is considered a disregarded entity by the IRS. A default single member LLC files as a sole proprietor on Schedule C/SE of Form 1040.. A default multimember LLC files as a partnership on Form 1065. Both can elect elect to be taxed as a subchapter S corporation filing on Form 1120s.

Small businesses in general are audited more frequently than W-2 employees. There are more opportunities to under-report income and take unsupported deductions. I am unaware of any difference in audit frequency of small businesses based on the entity type.

While the IRS has not published any guidance or forms/schedules implementing the Section 199A pass-through deduction. The consensus view is that on the same business profit. Self-employment will have a higher Qualified Business Income (QBI) than an S-Corp.. This is because shareholder-employee W-2 wages will not be included in QBI

[DMFA]

A business name takes a few minutes to create.  You don't necessarily need to make that an LLC.  An independent contractor who is only practicing medicine has practically no means to separate any liability from the person and business entity.  If there will be any real property or business activity that would specifically pertain to the business and not your work or person, then you might benefit from it.  Legally and for tax purposes, however, a single-member business and you are the same entity with different names.

It *is* easier to keep business expenses and holdings separate, but all you need from that is a business name and federal EIN to open business accounts.

People too often associate some sort of magic with the term LLC and conflate the term with any sole proprietorship.

*If* you think you as a businessperson will do more than simply practice medicine, such as own properties for rent or employ another person, then you'll need an LLC since those invite liability that is not personally yours, and an LLC would indeed likely shield you from that.  This is one reason why so many people establish an LLC: the "better to have it and not need it" mentality.

[cgossage]

spiritrider hit the nail on the head.  For a single member LLC there is no business tax return.  It is simply a Schedule C filing as if you were a sole proprietor.  For tax purposes, LLC's offer no advantage to a sole proprietorship.  They also offer a limited amount of legal protection.

For most, simply remaining a sole-p with good Malpractice and Umbrella Insurance will offer you the protection you need and allow you the best opportunity to maximize your Section 199A deduction (which is where pretty much all business tax planning should be focused at this point.

[JK]

Thanks for all the opinions and verifying what I had already read.

DMFA wrote:

*If* you think you as a businessperson will do more than simply practice medicine, such as own properties for rent or employ another person, then you’ll need an LLC since those invite liability that is not personally yours, and an LLC would indeed likely shield you from that.  This is one reason why so many people establish an LLC: the “better to have it and not need it” mentality.

Click to expand...

In regards to DMFA's comment - do I need to do this now? Can't I wait until any of those scenarios becomes a reality and just do it then?