Thinking of starting your own private practice? Your main focus may be the clients, but you are still establishing a business, so there are certain responsibilities you have to consider. And that includes the structure of the business.
Many choose to register their private practice as an LLC. An LLC provides certain tax benefits and legal protections, but it isn’t your only option. In this guide, we’ll take a look at the benefits and disadvantages of registering as an LLC.
What Is An LLC?
Let’s start with the basics: what is an LLC? If you’re thinking of setting up a private practice then you might have come across the term “LLC,” without fully understanding it.
An LLC is a Limited Liability Company; not a corporation, and not a sole proprietorship. Instead, an LLC combines the two. The business is treated as a sole proprietorship for tax and financial purposes, and a separate entity for litigation.
Do I Need An LLC For Private Practice?
No, you don’t need an LLC for a private practice, but it may be the best choice for your company. Alternatively, you could become a sole proprietor.
This is often seen as the easier option, as the business is tied to you as an individual. However, it limits growth, and leaves you as an individual open to litigation.
Another potential option is the S-Corp. Registering as an S-Corp is more work, but you do get better financial protections.
So, while an LLC isn’t necessary for a private practice, it may be the best option. An LLC offers benefits including potential tax advantages, and personal protection against litigation.
Learn Your State Requirements
Some states don’t allow therapists, counselors, doctors, and similar licensed professionals to establish LLCs. Instead, you will be required to form a PLLC—a Professional Limited Liability Company.
While the overlap between the two is high, the term PLLC is intended to distinguish professional standard companies from other entities.
The Advantages Of An LLC For A Private Practice
One of the major advantages to the LLC is it offers certain liability protections. As the LLC exists as a separate entity to the individual, if someone sues the practice, they won’t necessarily be suing the individual.
For example, if someone had an accident on the property, they’d sue the practice, not the individual. With sole proprietorship, the owner is vulnerable in litigation.
An LLC is also an excellent choice if you plan on starting your private practice with a business partner, or multiple partners. An LLC allows you to share the costs and profits while remaining separate tax entities.
There are also potential tax benefits to an LLC, particularly if you plan on expanding the business. You do have to pay to register as an LLC, and to file as an LLC yearly, so these tax advantages are complex for part-time businesses. However, the overall tax benefits are definitely worth considering.
The Disadvantages Of An LLC For A Private Practice
One of the biggest disadvantages of the LLC is that it requires extra work to establish. You have to form the practice as a legal entity, and register the company with the state.
Not only does this take time, but it also takes money. Additionally, if you do choose to register as an LLC, you must first check whether your state will require you to form a PLLC.
While the LLC is more difficult to set up than a sole proprietorship, it is easier than registering an S-Corp. An S-Corp allows for the same pass-through of profits and losses as an LLC, and is better for practices with employees.
An LLC also offers limited protection against financial issues. The LLC is considered the same financial entity as the owner, so all profits and taxes are the responsibility of the owner, as in a sole proprietorship.
So, if you had an issue with the creditors, both your personal property and the LLC become vulnerable. An S-Corp, which treats the practice and owner as separate financial entities, offers better protection.
Does An LLC Make A Private Practice Appear More Credible?
While it is a matter of personal opinion, many consider the LLC to appear more credible than sole proprietorship. If you’re just starting your private practice and you’re looking to attract clientele, it might be better to register as an LLC (or PLLC).
Can I Change A Sole Proprietorship To An LLC?
Yes, you can initially start your private practice as a sole proprietorship, and later change to an LLC. Many of the benefits of the LLC will only appeal to larger businesses, and the cost of registering an LLC might be prohibitive for a new practice. Registering as a sole proprietorship is cheaper, and easier.
As your private practice grows, you can later register as an LLC, and receive the associated tax advantages, and protection against litigation.
Do I Need An LLC For A Private Practice With A Business Partner?
You don’t necessarily need an LLC to form a private practice with a business partner, but it is desirable. Without an LLC or similar, many states default to standard partnership rules. These are often less than ideal.
An LLC offers a document of ownership, as well as flexibility in distributing profits. An S-Corp is another potential option, although it requires an even distribution of profit among members.
Speak To A Lawyer Or Accountant
Before making your choice, consider speaking to a lawyer or accountant. They can assess your private practice from an outside perspective, and advise you on which option might be preferable.
There are advantages to sole proprietorship, LLCs, and S-Corps, as well as disadvantages. Impartial advice can help you determine exactly which structure will work best for your private practice.
Although you don’t need an LLC for a private practice, it may be the best option for your business. An LLC offers tax advantages for larger businesses, and provides some personal protection against litigation. Other good options include sole proprietorship, or registering as an S-Corp.
We hope this information will help you make the right choice for your private practice, but we recommend speaking to a lawyer or accountant, to fully explore your options.