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  • #16


    How long is the delay on a cash only business? Even credit cards are 24- 3 days. Many businesses have vendor payments that are once or twice a month. The size of the operating expense is really important in a cash only business. Using “rule of thumb cash basis “ without understanding the business (FSER are more a business than medicine) is not advisable. The product sold is convenience, not higher quality medicine.
    Click to expand...


    That is an excellent point. I need to adjust my frame of reference, also! Thank you!
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #17
      I like to recommend PLLCs or the equivalent (depending on the state).  That is what I learned as a young attorney and I still believe in it.  If you do it yourself, its a $300 insurance policy for business related liabilities; not malpractice liabilities.  (Malpractice is covered by insurance.).  In law school when we discussed various business liabilities, we learned every cab in NYC is a separate LLC and they can only be sued for the value of the assets held in the LLC.  (Like a wrecked cab.). When you run a practice you have a business and that business can be sued for all types of things that are not related to medical treatment.  I think of a privacy breach (state law not federal HIPAA).  This can be super expensive.  It is not really a malpractice issue but might be covered by your policy.  You can also think of a slip and fall or breach of contract claim.  Having the LLC "limited liability" is a good tool and allows you to walk away and hand someone the keys.  (You can recreate your practice pretty much over night and your patients would not really know.  The billing may be delayed until the new entity get credentialed but you could just recreate the practice under a new entity.  While this does not happen often, I can see this as being a larger as regulatory issues begin to create more liability.

      Hiring an attorney to set up an PLLC does cost more but not much.  I also represent a lot of smaller clients who are similar.  Their initial practice grows and having the right business entity can help it grow and scale. Having the right entity lets you do this smoothly if you get a wild hair to grow, get space and hire employees.  All this crazy stuff to make a sole proprietorship work in this format is stress.  It is weird and does not fit.  You have a business treat it like a business.  I understand that this is not the standard approach of this blog; pushing trading boundaries and DYI is. I love that stuff to but not in this case.

      To follow up on the other questions/issues.  All this can be under one PLLC.  Like the other posters stated, cash accrual is the only accounting method I would use.  Anything else is not common and will eventually screw things up.  I would further recommend a S Corp election.  Yes, there will be a K1, which will cost a little more money, but I think it is worth it.

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      • #18




        I like to recommend PLLCs or the equivalent (depending on the state).  That is what I learned as a young attorney and I still believe in it.  If you do it yourself, its a $300 insurance policy for business related liabilities; not malpractice liabilities.

        I would further recommend a S Corp election.  Yes, there will be a K1, which will cost a little more money, but I think it is worth it.
        Click to expand...


        And this is the typical problem with many CPAs and tax attorneys. They have steered many first-time WCI forum members wrong. They always default to an LLC and/or S-Corp without looking at the particular facts and circumstances.

        An LLC/PLLC is often unnecessary, provides no real benefit and can even be counter-productive. An independent contractor such as an ER doc receives little to no liability protection from an LLC for their personal acts. Such an LLC would almost never receive credit without a personal guarantee. In some states, precedence has established that LLC liability protection only extends to multi-member LLCs with at least one non-spouse member. Often a sole proprietorship is the optimal choice.

        Once an S-Corp 2% shareholder-employee's reasonable compensation exceeds the Social Security maximum wage base (2019 = $132,900). They are only saving 2.9% FICA taxes and later possibly the 0.9% Medicare surtax compared to the a sole proprietor's SE taxes. Not to mention, they have to pay attorney fees, unemployment insurance, payroll costs, accounting fees for (Form 1120S, K-1, and state related filings), state annual fees and possibly additional state taxes.

        Now lets add in that if they are eligible for the qualified business income (QBI) deduction. An S-Corp 2% shareholder-employee is only eligible for the deduction based on their distributions. Far less than they would have a sole proprietor. In most circumstances, if a physician's taxable income makes them eligible for the QBI deduction, they do not have a high enough income where an S-Corp would be beneficial.

        Bottom line: The determination of whether an LLC and/or an S-Corp is necessary, beneficial or counter-productive is always subject to the individual's particular facts and circumstances. Not a CPA or tax lawyer's default recommendation. In fact, more often than not one or both is not the right choice.

        Comment


        • #19
          @spiritrider,
          With all due respect(sincerely), you are 100% correct, it needs clarification. OP works as a 1099 BUT was adding a “cash based practice”. That is very vague.
          Default to any choice is incorrect.
          Cordovamx described the two scenarios. Providing services in an existing facility is one thing, having employees, facilities and running a business is completely different.
          Choosing “cash basis accounting” or “sole proprietorship” have real consequences that are different than just the typical ED compensation for services as employee vs contractor status. The legal structure will impact the taxes, but the GL protection may or may not be worth it.
          Making the assumption that an LLC provides little protection seems true for being paid only for services at someone else’s facility.
          By the way, JDKelso is not a tax attorney. Nor do I do taxes. OP would be better served getting specific advice.
          Not enough info provided.

          Comment


          • #20
            Hello,

            Thank you all for your input.

            Some clarification on my particular situation is this.

            I am an ED physician getting paid as a 1099 as an Independent contractor when I work in the ED.  Currently as a sole proprietor and that has a separate business account and CC set up to assist in tracking expenses.

            To clarify on the "cash based practice".  Establishing an Aesthetic Practice in which I will be getting paid via cash/cc at the time of service.  I will be owner/provider and then hire ancillary staff.  It is for this business for which I was asking for clarification regarding setting up an S corp for this type of venture and creating a separate bank account/cc to keep everything transparent and organized.

             

            Thank you

            Comment


            • #21
              @JDKelso clearly states that they make business entity recommendations. They should be well-versed in the liability, tax and other financial impacts of LLCs and/or S-Corps if they are going to do so.

              You are 100% correct about the practice. The practice with premises, employees, etc... would receive significant liability protections from an LLC/PLLC and/or an S-Corp.

              However, my post was clearly targeted at the tendency for some CPAs and lawyers to always recomend LLCs and/or S-Corps. Even when it is unnecessary, provides no clear benefit, and/or is counter-productive.

              We have seen time and time again where LLCs have been recommended for independent contractors providing 100% personal services. We have seen time and again S-Corps recommended with net profits and taxable income when a sole proprietorship would be far more beneficial. The most egregious case is when an S-Corp is recommended for a moonlighting business of a W-2 physician.

              I am not addressing the cash or accrual basis issue.

              Comment


              • #22
                @spiritrider your comments are helpful and I think a good reminder.  I saw more of the future growth of a practice in relation with my comments.

                While I appreciate your passion, I think it would be helpful to use some numbers to see the differences.  I don't do numbers very well.  Would you be willing to run them on let's say a part-time ER physician (services only) making $300k per year 1099 SP versus PLLC/S Corp?  This may have been done in another post somewhere.  It would be interesting to see the cost.  Maybe just on the actual tax ramifications.

                I don't know that all of these fees you mentioned would be reasonable to throw into the calculations.  You wrote: "Not to mention, they have to pay attorney fees, unemployment insurance, payroll costs, accounting fees for (Form 1120S, K-1, and state related filings), state annual fees and possibly additional state taxes."  I would drop the attys fees state annual fees and additional state taxes.  I don't see any future attys fees here and the person could set it up on their own.  The last two are not really fees in my state.  Most of the time an accountant will do the payroll so I am not sure about that either as a separate cost.  It would probably be part of a general accounting fee.

                This may not be easy to do.  It may be hard to quantify in the end.

                Comment


                • #23
                  Clearly there are costs associated with establishing a separate legal entity. You would need to take your specific numbers (projections) and have the alternate scenarios analized.
                  In the past, several “experts” have mentioned benchmarks where the volumes in income are decision ranges for when tax strategies might justify different legal forms. Johanna and Spiritrider are highly skilled.
                  Legal protection is a different question. Specific would be needed, unless either chooses to offer benchmarks.
                  I agree keeping separate books makes it tremendously cleaner and separate accounts are cheap as well.
                  I just don’t want you to blindly get taxed on December revenue and pay the expenses in January. That is tax on revenues not net income. I think the size of your business will determine if the additional expense of a separate entity will justify it.

                  Aesthetic Practice - pretty cool. That was a changeup.
                  Never expected that. Good luck.

                  Ae

                  Comment


                  • #24




                    Hello,

                    Thank you all for your input.

                    Some clarification on my particular situation is this.

                    I am an ED physician getting paid as a 1099 as an Independent contractor when I work in the ED.  Currently as a sole proprietor and that has a separate business account and CC set up to assist in tracking expenses.

                    To clarify on the “cash based practice”.  Establishing an Aesthetic Practice in which I will be getting paid via cash/cc at the time of service.  I will be owner/provider and then hire ancillary staff.  It is for this business for which I was asking for clarification regarding setting up an S corp for this type of venture and creating a separate bank account/cc to keep everything transparent and organized.

                    Thank you
                    Click to expand...


                    As your income from both businesses will be aggregated for purposes of tax planning, including section 199a calculations, and retirement contributions, you need to approach this from 2 levels - overall + appropriate steps for your new business. Since you will have employees, your new business needs to be either PLLC or s-corp. Which you choose is partially based on overall income from both businesses. I am leaning toward PLLC to begin as it will (probably) take time to be really profitable.
                    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment


                    • #25




                      Would you be willing to run them on let’s say a part-time ER physician (services only) making $300k per year 1099 SP versus PLLC/S Corp?  This may have been done in another post somewhere.  It would be interesting to see the cost.  Maybe just on the actual tax ramifications.


                      Why could you possibly think it is accurate to exclude costs for most of the other expenses. I can see excluding attorney fees if you want because the amortized cost over many years may not be that much, but the other costs are annual costs that reduce the individual's net income. How can they not be included?

                      In some states PLLC annual fees are $500 - $1,000. In some states such as California, a physician can not use an LLC, they must use a PLLC. LLCs/PLLCs and S-Corps in California must pay a 1.5% franchise tax with an $800 minimum. Other states also have franchise taxes for non-self-employed entities.

                      Here is a 2019 comparison for a self-employed physician IC making $300K in gross business profits exclusive of payroll/SE taxes:

                      • Sole proprietor

                        • Income subject to SE taxes: $300K * 92.35% = $277,050.

                        • SE taxes: ($132,900 * 15.3% = $20,333.70) + (($277,050 - $132,900 = $144,150) * 2.9% = $4,180.35) ~= $24,514.

                        • 1/2 SE taxes: $24,514 / 2 = $12,257.

                        • Self-employed earned income: $300K - $12,257 = $287,743.

                        • Net income: $300K business profit - $24,514 SE taxes = $275,486.



                      • S-Corp

                        • Reasonable salary of $180K subject to FICA.

                        • FICA taxes: ($132,900 * 15.3% = $20,333.70) + ($180K - $132,900 = $47,100) * 2.9% = $1,365.90) ~= $21,700.

                        • Employee/employer share FICA taxes: $21,700 = $10,850.

                        • Unemployment insurance: $7K * 6% = $420.00.

                        • Distribution: $300K business profit - $180K W-2 wages - $10,850 FICA employer share - $420.00 Unemployment insurance = $108,730.

                        • Net Income: $180K W-2 wages - $10,850 FICA employee share + $108,730 distribution = $277,880.




                      This means S-Corp payroll taxes vs. a sole proprietor SE taxes on $300K business profits saves a whopping $2,394 before even considering the other expenses. Add in payroll software $300 - $500/year, $1000 - $2000 additional accounting fees for federal Forms 1120S/K-1 and state filings and annual state fees and taxes. You have virtually wiped out any savings from reduced payroll taxes. In California, you would pay $108,730 * 1.5% $= $1,631 just in franchise taxes. Now throw in the hassle factor. I would never recommend an S-Corp for a physician with $300K in gross profits.

                      That is even before factoring in the qualified business income (QBI) deduction. Assuming that the individual is eligible because they are married and their taxable income is <= the QBI phase out range (2019 = $321,400 - $421,400) for specified service trade or business (SSTB). The maximum* difference in the QBI would be:

                      • Sole Proprietor: $287,743 self-employed earned income * 20% ~= $57,549.

                      • S-Corp: $108,730 distribution * 20% = $21,746.

                      • Difference: $57,549 - $21,746 = $35,803


                      At their 24% marginal rate, $35,803 * 24% ~= $7,161 in additional tax savings from the sole proprietorship dwarfs even the S-Corp's gross payroll tax savings.

                      *A sole proprietors QBI is reduced by any pre-tax retirement savings, but even then the sole proprietorship QBI would be > twice the S-Corp's QBI. Also, as their income increased into the phaseout range, both the sole proprietorship's and S-Corp's QBI deduction would be reduced, but proportionately.

                      Comment


                      • #26
                        •Spiritrider, you are amazing.
                        •Johanna, your point of the combination of the 1099 income with the cash basis business is valid. The employee SS tax will be recovered .
                        •PLLC’s require separate franchise, payroll and tax returns as well. But that is state specific.

                        Assuming OP makes $300k in his 1099 employment, is the conclusion that sole proprietorship the least expensive option for adding the cash aesthetic business.
                        I would assume a separate EIN would be needed for state and federal payroll tax reporting of employees.
                        Then it becomes a choice, PLLC with liability protect at a cost or sole proprietorship with liability exposure.

                        JDKelso, Johanna, and Spiritrider my intent is simply provide OP a general consensus answer to what seemed to be a simple question. Point him in the direction for seeking advice. Thank you all for the education.

                        Not sure the liability exposure in this type of business.

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