Pros and Cons of Professional Corporations

One of my clients recently asked about the best way to conduct his medical practice. For a number of years he had been in solo practice but was now considering joining with another physician. He wanted to know how to organize the new practice--what were the available options and what was the “right” way to do it? Specifically, he wanted to know whether a professional corporation offers advantages over a limited liability company or some other form of doing business.

Since many states now offer a wider range of choices for operating a medical practice, the question of what is the “right” choice for the legal configuration of a medical practice comes up frequently in meetings with my physician clients. This column gives us a good opportunity to discuss the pros and cons of each alternative from the standpoint of liability protection and tax efficiency.

Professional Corporations

The most popular and well-known choice is certainly the professional corporation (PC), a method of organization which is permitted in all 50 states. A PC allows a licensed professional to conduct his or her practice in corporate form and be treated under state and federal tax rules as a corporation. All well and good, but does this really provide any significant tax benefits? Not so much any more. Back in the 1970s when physicians first gained the right to incorporate, the benefits were indeed substantial. In particular, one of the most prized tax advantages of corporations was the ability to establish a corporate retirement plan, allowing large amounts of money to be saved tax-free each year. There was no comparable plan for non-incorporated individuals. IRAs had minimal contribution limits and Keogh plans (for the self-employed) were only slightly better. Corporate retirement plans were the Holy Grail of tax planning because they generated large immediate deductions and the funds in the plan could be borrowed back for any purpose or invested in almost any manner.

Over the years, Congress and the IRS eliminated almost all of the tax advantages associated with the professional corporation option. Although corporate retirement plans are still excellent savings vehicles, the same types of plans and most other benefits are now permitted for non-corporate practices as well, so incorporating your practice to gain supposed tax advantages just doesn't make much sense anymore. If the tax advantages for medical practices organized as professional corporations have mostly disappeared, what about legal benefits? Are PCs useful when it comes to lawsuit protection? The basic rule to keep in mind is that a corporation won't insulate you from your own malpractice or from that of your employees. PCs, unlike general business corporations, do not legally shield the owner from a negligence claim. As a result, for physicians in solo practice, the PC offers no real legal advantage. Every individual physician is liable for his or her own negligence, whatever the legal form of their practice.

However, a PC can be important for physicians who practice in a group or with another physician. In this situation, the use of a PC can protect against personal liability for the negligence of a partner. That is probably the main reason why group practices are often structured as a single PC or as a partnership of PCs with each physician owning his or her own corporation. As I mentioned, this arrangement will not shield you from your own malpractice but it should insulate you from your partner's negligence and that is certainly an important consideration.

Professional Limited Liability Companies

In addition to PCs there are two other entities, both relatively new, that can accomplish the same degree of liability protection in a joint practice arrangement. The Professional Limited Liability Company (PLLC) and the Limited Liability Partnership (LLP) both provide benefits similar to a PC. Although PLLCs and LLPs are not permitted in every state, these entities are appealing options because they are efficient, easy-to-administer, and free of the tax problems often associated with corporations. While corporations (particularly C Corporations) require careful attention to record keeping, accounting, and tax details to avoid potentially disastrous consequences, no such problems exist with the PLLC or LLP. The income of either of these entities is simply passed through to the member or partner who reports his share on his personal tax returns.

So, what should a physician keep in mind when trying to decide the “best” way to organize a practice our conclusions are:

1. Physicians in solo practice have no malpractice lawsuit protection or material tax benefits from practicing as a Professional Corporation, Professional Limited Liability Company, or Limited Liability Partnership. Depending upon the exact details of their configuration, these entities may avoid personal liability for company debts such as leases, loans, or other obligations that are not personally guaranteed and which in some situations may be legitimate concerns.

2. In a joint practice, any of the entities discussed here may be appropriate (depending on the relevant state laws) to shield you from the malpractice of a partner. A PC accomplishes this but comes with a fairly high administrative burden and a variety of tax traps for the inattentive. Configuring the practice as an S Corporation, rather than a C Corporation can avoid a number of potential tax problems and is usually the proper choice if a PC is the only option. If you practice in a state that permits the formation of PLLCs or LLPs, the liability protection and easy maintenance associated with these configurations may make one of them the best legal arrangement for the practice.

Because Professional Corporations no longer hold a tax advantage over other forms of practice, your choice of entity or solo practice should be based on your particular liability risks. For convenience, ease of administration, and tax efficiency a PLLC or LLP (if available in your state) may be preferable to a traditional PC. As always, you are strongly urged to consult with your legal and tax advisors to make sure that your particular circumstances are thoroughly considered.

Robert J. Mintz, JD, is an attorney and the author of the book Asset Protection for Physicians and High-Risk Business Owners . To receive a complimentary copy of the book, call 800-223-4291 or visit www.rjmintz.com.