S-Corp vs SMLLC

[homanga]

As a graduating resident I am working on getting all my ducks in a row for post residency life. I previously posted a post residency planning plan/guide with the help of others input https://www.whitecoatinvestor.com/forums/topic/post-residenct-planning/.

 

My question now is someone had mentioned a SMLLC vs S-Corp; which do I want and what exactly are the benefits I would expect to see by establishing one or the other vs none at all. Income wise I expect to have a 350-400k IC 1099 job as my sole source of income.

 

And now that we have picked either of these as the preferred option can anyone provide a step by step guide as how best to set this up and if I am moving in 2 months should I wait to establish once at my new state of residence (where my attending job will be paying me).

 

Thanks Again

[jfoxcpacfp]

Probably a SMPLLC (the P is for Professional), unless you are moving to CA, in which case that is not an option.

With all due respect, this is not a DIY process. You need to be working with a professional (best bet is a CPA) who has a lot of experience in this area (including multi-state taxation). There is a lot more than a step-by-step list to check off and it takes quite a bit of discussion to ensure you are making the best choices for your particular situation and that you are structured to optimize your tax situation.

[gsastow]

I concur with jfoxcpacfp.  I am a health law attorney with over 20 years of experience in this area and the decision is not a DIY process.  The choice of entity is driven by tax and liability considerations that vary from state to state.  Accordingly, an experienced CPA and attorney should be consulted in the state in which you will be practicing.  When it comes to professional entities, many states will not allow a professional entity formed in another state to operate in their state.  Therefore, at a minimum, I can advise to wait until you determine the state in which you will be practicing and then seek professional advice as to what the available choices of entities are available in that state and which one will work best for you.  Please feel free to contact me to discuss further.  Thanks, Gary Sastow.

[jfoxcpacfp]

I should have mentioned a business attorney - Gary is correct.

[childay]

The two are not mutually exclusive.  A PLLC is for liability protection.  Whether you need that will depend on your type of practice, if you have any liabilities it will actually protect (it won't protect you against your own malpractice).  The LLC can then be taxed as an s-corp or not.  Setting up the LLC may be quite easy but agree you should talk to your CPA or others about the S-Corp decision.

[Docbeans]

If OP works as an IC without employees and without owning/leasing physical practice property (ie., practicing either in a hospital or an outpatient location- in which she/he has no stake), does it make sense to operate simply as a sole proprietor? Or is that decision affected by the income in question?

[gsastow]

Docbeans, depending upon the individual circumstances, there may in fact be little or no benefit from having a legal entity and being a sole proprietor may work.  This is particularly the case since there is no escaping professional liability in any event.  This is where insurance considerations come in which should be reviewed with an insurance professional.  Going back to the original post, this is not a DIY undertaking.  Working with an accountant, lawyer and insurance professional is strongly advised.

[jfoxcpacfp]

Docbeans wrote:

If OP works as an IC without employees and without owning/leasing physical practice property (ie., practicing either in a hospital or an outpatient location- in which she/he has no stake), does it make sense to operate simply as a sole proprietor? Or is that decision affected by the income in question?

Click to expand...

It might, depending upon specific facts and circumstances (insurance coverage) and annual cost of SMPLLC. If you have a home office, you would need to coordinate your liability policies (home and umbrella).

For only $175/yr in KY, for example, I would prefer to have the LLC wrapped around the business activities - you'll still be filing a schedule C. Some states are lower, others charge more.

[The White Coat Investor]

"It's not a do it yourself process. You should hire me to do it!" I've heard that about a lot of things in life. It's probably true about some of them but I dislike it as a blanket answer. Why not just explain what it takes to do and let the person decide if they want to try to do it themselves or not instead of trying to generate business?

I don't know. It's not that complicated. It cost me $70 to form an LLC and $15 a year to maintain it. It was very easy to form. But if you're not educated on the topic enough to know which of those entities you want, hiring a pro is probably a good idea.

Here's the basic idea behind either forming a corporation (and choosing to have it taxed as an S corp) or choosing to have your LLC taxed as an S corp. You're trying to save on Medicare taxes. The income you call "distribution" you don't owe Medicare taxes (2.9%) on. So if you call $200K of your $400K income wages and $200K distribution, you can still max out an individual 401(k) but you get to save $5800 every year in Medicare taxes compared to a sole proprietor or an LLC taxed as a sole proprietor or a C corp which distributes all $400K of income as wages.

Hope that helps.

[docnews]

Sadly WCI, S corps are not really do-it-yourself operations (to give it a try: https://www.irs.gov/pub/irs-pdf/i2553.pdf) due to need for precise accounting which sometimes calls into question whether you should do it at all. So first the costs of setup ($6k?) must be less than the benefit. For a physician who sets a reasonable wage this means saving only on Medicare taxes. So saving 2.9% with a setup cost of $6k means the first $200k in dividends has no savings.

Secondly, and most importantly, the cost of state tax law, must not be forgotten. Please see: http://www.scorporationsexplained.com/how-do-states-treat-s-corporations.htm which outlines some basic principles. I'm in a state that does not recognize s corps so if you file one it would fall under c corp laws so for me an s corp would increase my tax bill.

On another matter, I personally do not see any benefit of an LLC for a physician. If I am personally sued all my assets would be at risk no matter an LLC.

So for those who do not understand the language of this discussion, if you work as independent contractor and you do not elect to setup a pass through you are by default a sole proprietorship, and you can still deduct business expenses.

[Docbeans]

Thank you all for bringing forth and explaining the different aspects of this matter!

[The White Coat Investor]

docnews wrote:

Sadly WCI, S corps are not really do-it-yourself operations (to give it a try: https://www.irs.gov/pub/irs-pdf/i2553.pdf) due to need for precise accounting which sometimes calls into question whether you should do it at all. So first the costs of setup ($6k?) must be less than the benefit. For a physician who sets a reasonable wage this means saving only on Medicare taxes. So saving 2.9% with a setup cost of $6k means the first $200k in dividends has no savings.

Secondly, and most importantly, the cost of state tax law, must not be forgotten. Please see: http://www.scorporationsexplained.com/how-do-states-treat-s-corporations.htm which outlines some basic principles. I’m in a state that does not recognize s corps so if you file one it would fall under c corp laws so for me an s corp would increase my tax bill.

On another matter, I personally do not see any benefit of an LLC for a physician. If I am personally sued all my assets would be at risk no matter an LLC.

So for those who do not understand the language of this discussion, if you work as independent contractor and you do not elect to setup a pass through you are by default a sole proprietorship, and you can still deduct business expenses.

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A corporation is more complicated to set up than an LLC. The LLC can be downright trivial. Either can elect to be taxed as an S Corp. It's an 11 question form for an LLC. https://www.irs.gov/pub/irs-pdf/f8832.pdf

 

Not a huge deal. But nothing wrong with hiring someone to help if you need it.

Whether you do this yourself or hire help you should at least read up on what it involves and the pluses and minuses of doing it. That's free.

And that link to Nelson's article is great.

[jfoxcpacfp]

The White Coat Investor wrote:

“It’s not a do it yourself process. You should hire me to do it!” I’ve heard that about a lot of things in life. It’s probably true about some of them but I dislike it as a blanket answer. Why not just explain what it takes to do and let the person decide if they want to try to do it themselves or not instead of trying to generate business?

Click to expand...

WCI, sometimes the best answer really is "This is not a DIY process." I was not trolling for business. I was trying to be helpful. Trying to go further on a free-advice forum without knowing more would be, imo, bordering on an ethical violation. The OP also asked for "a step by step guide as how best to set this up". At the very least, that would be a 1,000+ word article and even then I would not be comfortable giving specific information without knowing a lot more. (You know that's true because I've sent you a guest post on this topic.) I know it's your nature to look up the answer and then decide whether you need to hire somebody. Everybody is not you. People can cause themselves a lot of grief by trying to do what you're not capable of doing because you don't know what you don't know.

I realize you've been burned but your anecdotal evidence should not be a blanket answer, either. Reading deceit into what I believed (and continue to believe) was an appropriate response is a bit insulting. Jeez! The decision of whether to form an LLC or S-corp goes a lot deeper than filling out an 11-question form. That is the end result of a very fact-dependent and personal situation. A doctor of all people should realize the danger of DIY when a professional is called for.

[Slav4ikMD]

If I may hijack the thread with a side question, maybe JoHanna can help with this:  so I've had my PLLC taxed as an S-corp, which I am not realizing was not the way to go - you were the one who told me that this is something to look into and I have, by looking for a new accountant and now starting to interview a few.  The guy I met with today also advised me that I should have just done schedule C - BUT says that now that I've elected to do the S-corp, I cannot simply switch to doing schedule C, so I married to doing what I've been doing.  Which sort of sucks, as I am barely saving anything and paying a lot of money for the quarterlies.  Do you know if what he said is accurate.  He said he is "almost sure."  Thanks!

[jfoxcpacfp]

Actually, yes, you can shut down your s-corporation and continue to do business. It is called a "dissolution" and you file articles of dissolution with your SOS (Secretary of State) and a final tax return for the corporation. It sounds as if your accountant does not have a lot of experience with busines taxation.

There are certain issues you must be aware of to prevent taxation on the shutdown, particularly in regard to assets the corporation owns. If you have no appreciated assets and if you do not sell any of them in the next 10 years, you will likely have NO problems. For more specifics regarding your particular situation, however, this is a conversation to have with your CPA. Again, this is not a DIY process :-)