When branching out on your own to start a private practice, you have to evaluate many different questions. Where should I operate? Am I going to be virtual? What papers must I file with the state? Where will I find clients? But you also must consider what’s the business structure for your private practice.
This question is something that people may not put a ton of thought into in the early stages of the business. They may only consider a limited liability company (LLC) or a professional limited liability company (PLLC), if they think about it at all.
If you’ve taken the steps to create an LLC or PLLC, you’ve made an important decision in the business building process. Now it’s time to figure out what value you actually get from either the LLC, PLLC or another entity, like the S-Corp.
What the PLLC Doesn’t Provide
Often people opt into an LLC or PLLC because they hear that it provides liability protection. There’s some truth to that. But as a business owner, you should understand just how much liability protection you have under the setup.
The business structure is meant to provide a layer between you the individual and you the business. A PLLC, however, is a pass-through entity. What does this mean? Anything you make passes along to you.
In other words, whatever you make in your business, you will pay taxes on the full amount. This also impacts your business and your personal finances if, say, you were sued. It can have a dramatic effect on both the business and personal, since it’s essentially one person – especially in a solo operation.
But the PLLC does protect against some personal assets, like the home. So it has value in that regard.
The Value of the PLLC
By opting into a business structure, the real value comes from being able to treat the business like its own entity.
Through the PLLC building process, you will then obtain an Employer Identification Number or EIN through the IRS. This is essentially a Social Security number for your business.
With this number, you can then take out a credit card under the business’s name. You can open a 401k under the business. Or you can obtain a line of credit – if needed – under the business.
This will also allow you to build credit under the business, instead of under you. While this is minor – because, again, it’s a pass-through entity – it can provide you with the ability for the business’s spending power to grow as revenues grow.
And the ability to save for retirement through a 401k allows you to cut taxes and save for the future.
Plus, it gives you the opportunity through an S-Corp opt-in to tell the IRS that you want to be taxed like an S-Corp, even though you operate as an LLC. This reduces the amount of paperwork and cost you would need to run S-Corp, but you can get the tax advantages that an S-Corp provides.
It’s a powerful step in the right direction.
What Are the S-Corp Advantages
The reason you may want that S-Corp designation has to primarily do with taxes, at least early in your private practice journey.
The S-Corp is very valuable because it’s a pass through entity. But you can put parameters on the entity, to ensure you pay less in taxes.
To understand the S-Corp, let’s first talk about self employment taxes.
Now when you work for an employer, you have to give back about 7.65% of your income beyond paying income tax to the IRS. Your employer pays another 7.65% of your salary to the IRS as well, on your behalf. This helps fund Social Security and Medicare.
When you work for yourself though, you have to pay it all, or 15.3% to the IRS in order to fund those future benefits. This is what’s called self-employment tax.
Now, the S-Corp is a little different, because you’re the owner of the S-Corp, but you’re also an employee. When you do your taxes, you designate what income you took from the business as an employee. In other words, what did you pay yourself for the work? This receives that self-employment tax.
But you also can pay a portion of the revenues in the form of dividends. This is essentially your return on your investment in the business as the employer. This money isn’t taxed with self-employment tax. And it has a lower tax rate – 20% – than most individual marginal tax rates.
It’s a huge savings.
To run an S-Corp, there are certain rules that apply and you need to remain up-to-date on certain regulations, depending on your state.
But, again, you don’t need to run an S-Corp to get this benefit. That’s where evaluating your business structure can provide you with a significant benefit, especially as your private practice or small business grows.