Guide to Choosing the Right Business Structure for Your Medical Practice: LLC, S-Corp, and C-Corp Unveiled

Understanding the Differences Between LLCs, S-Corps, and C-Corps

If you are like me, odds are you have received amazing clinical and surgical training. However, you probably have received less than 1 hour of teaching on the business of medicine. I am assuming most of you have no idea what an LLC, S-Corp, and C-corp are. In truth, I still am learning most of it. This is why I had chat-GPT assist me with this article.

Before you decide what business structure to take, let’s first go over the basic definitions,

Basic Definitions: Discovering the Best Business Structure for Starting a Medical Practice

1. Sole Proprietorship – A sole proprietorship is the simplest form of business structure where an individual owns and operates the business. There’s no legal distinction between the owner and the business entity, meaning the owner is personally liable for all business debts and obligations. Sole proprietorships are easy to set up and involve minimal formalities, but the owner has unlimited liability and is taxed on the business’s profits as personal income.
2. LLC – or Limited Liability Company, is a business structure that combines the limited liability protection of a corporation with the flexibility and pass-through taxation of a partnership or sole proprietorship. Owners, called members, are protected from personal liability for the company’s debts and obligations. LLCs are formed by filing articles of organization with the state and typically have less formalities than corporations. They offer flexibility in management structure and can choose to be taxed as a sole proprietorship/partnership or as a corporation.
3. An S-Corporation (S-Corp) is a business structure that provides limited liability protection to its owners (shareholders) like a C-Corporation, but it is taxed differently. S-Corps are pass-through entities for tax purposes, meaning the company’s profits and losses are passed through to the shareholders’ personal tax returns, avoiding double taxation at the corporate level. However, S-Corps have restrictions on ownership: they can have no more than 100 shareholders, who must be U.S. citizens or residents, and there can only be one class of stock. S-Corps are typically favored by small to mid-sized businesses seeking limited liability protection and pass-through taxation.
4. A C-Corporation (C-Corp) is a legal business structure where the company is considered a separate legal entity from its owners (shareholders). This structure provides limited liability protection to shareholders, meaning their personal assets are typically shielded from the company’s debts and legal liabilities. C-Corps have the ability to issue multiple classes of stock, allowing for various ownership rights and investment structures. They are subject to double taxation, where the corporation is taxed on its profits, and then shareholders are taxed on dividends received from those profits. C-Corps are governed by bylaws, hold regular meetings, and have a more complex management structure compared to other business entities.

Key Differences That Matter for Starting a Medical Practice

1. Ownership Structure:
   • Sole Proprietorship: Owned and operated by one individual.
   • S-Corp: Can have up to 100 shareholders, who must be U.S. citizens or residents.
   • C-Corp: Can have an unlimited number of shareholders, including foreign entities.
   • LLC: Owners are called members, and there can be one or more members.
2. Liability Protection:
   • Sole Proprietorship: No legal distinction between the owner and the business, so the owner has unlimited personal liability for business debts and obligations.
   • S-Corp, C-Corp, LLC: Provide limited liability protection, meaning the owners’ personal assets are typically shielded from business debts and lawsuits.
3. Taxation:
   • Sole Proprietorship: Business income is taxed as personal income for the owner.
   • S-Corp: Pass-through taxation, where profits and losses are passed through to shareholders’ personal tax returns.
   • C-Corp: Subject to double taxation, where the corporation is taxed on its profits, and then shareholders are taxed on dividends received from those profits.
   • LLC: Can choose to be taxed as a sole proprietorship/partnership (pass-through taxation) or as a corporation (either S-Corp or C-Corp taxation).
4. Formation and Formalities:
   • Sole Proprietorship: Simplest form of business organization, often requires minimal paperwork and formalities.
   • S-Corp, C-Corp, LLC: Require more formalities such as filing articles of incorporation/organization, adopting bylaws or operating agreements, holding regular meetings, and maintaining corporate records.
5. Management Structure:
   • Sole Proprietorship: Owner has complete control and decision-making authority.
   • S-Corp, C-Corp, LLC: Can have a more complex management structure with directors, officers, and managers, depending on the organization’s bylaws or operating agreement.
6. Transferability of Ownership:
   • Sole Proprietorship: Ownership cannot be transferred since the business is tied to the individual owner.
   • S-Corp, C-Corp, LLC: Ownership interests can typically be transferred, though specific restrictions may be outlined in the organization’s bylaws or operating agreement.
7. Regulatory Compliance:
   • Sole Proprietorship: Generally subject to fewer regulatory requirements compared to corporations.
   • S-Corp, C-Corp, LLC: Subject to state and federal regulations, including annual filings, fees, and compliance with corporate formalities.

If you were able to follow along. Fantastic. In the next post, we will go over why I started my practice as an LLC. Check out the blog for more.

As always, thanks for reading, and please comment below.