The BLT of Private Practice: Business, Legal, and Tax Considerations

When you’re starting a private practice, you’ve got all sorts of things to think about. One of the most important is the business structure that you will use. It has significant legal and tax implications.

When creating a business, you can create an entity that is distinct from you as an individual person. This is often a good idea. There are several options, each with different legal implications, namely surrounding liability for the business. Each business structure also has different tax implications in terms of how you file your taxes and what you might have to pay.

In the end, you’re going to want and need the help of a professional accountant and/or an attorney. That said, you want a basic understanding of your options first.

This post will cover:

• Basic Business Structures
• How to Pick One
• A Quick Side Note on Non-Profits
• A bit on tax status
• What I Did & Why

What are the basic business structures?

The most common forms of business are:

• Sole proprietorship
• Partnership
• Limited Liability Company (LLC)
• Corporation
• Non-profit corporation (a.k.a. 501c3)

It is a big list… and there’s actually more options beyond this, but this will get you started.

The Small Business Administration is filled with amazing resources for entrepreneurs and small business owners. Their information is easy to understand and trustworthy. They have an article that is well worth your time (SBA: Choose A Business Structure) that explains each of these options in detail. Definitely read it and then come back.

If you don’t have time to read it and you’re looking for the short and sweet: You’re probably going to want to go with an LLC unless it is extremely cost prohibitive in your state.

How to Pick a Business Structure for Legal/Liability purposes:

Here’s three questions to help you decide on the business structure for you.

1. Are you flying solo or do you have partners?

Flying Solo: Consider sole proprietorship, an LLC, or a type of corporation. Rule out things like partnership and non-profit. Taking partnership off the table is obvious, but what about non-profit? Non-profits are pretty tightly regulated and you’re going to have to answer to a board of directors.

Partner(s): A partnership is a great, flexible option. This article from the Service Core of Retired Executives (another great resource) helps explain the four basic types of partnership. You can still have an LLC or a Corporation with partners as well. Whichever route you take, you’ll need clear written agreements with your partner(s).

2. Do you need to protect/separate your personal assets from the business?

Yes please! Certain business structures let you say: “My stuff belongs to me and the business stuff belongs to the business.” There are rules to make sure you’re not cheating the system, and if you follow them you can protect yourself and your personal assets. The LLC is usually the best bet for this reason. As long as you maintain separate finances for the business, you will create legal distance between yourself and the business. That means if the business ever gets sued, your home, car, and personal bank accounts won’t be at risk. If you want this protection and separation, you’ll need to look at an LLC, Corporation, or even a non-profit.

If you don’t have many assets or aren’t worried about the risk, a sole proprietorship or partnership might be good, easy options for you. Keep in mind, you might not have many assets now (maybe you’re fresh out of grad school with an old car and paying rent), but if things go well you might have things to protect later.

3. How much money do you have to spend on start-up costs?

$0.00: If you have absolutely no money to spend on start-up costs, then your probably stuck with sole proprietorship or a partnership. Technically, a partnership is going to need a written agreement, but you can draft it yourself pretty easily.

A little money, but not much: With just a little bit of cash to start your business, you can probably afford to create an LLC. The costs vary by state, but I spent about $100 to have an accountant set up my LLC for me (read more below). That included the state filing fees and her fees. Reach out to business attorneys or accountants in your area, many will offer a free, initial consultation and can help you understand the exact costs and processes for your state.

A few thousand dollars or more: With enough cash on hand, any option is open to you. A corporation or non-profit will require some professional help from accountants and lawyers both to set up and maintain every year.

Side Note on Non-Profits

A non-profit can be a great thing, but is not quite the same thing as a “private practice.” Technically, a non-profit doesn’t have an owner. Sure, you can start one, run it, and earn a salary from it. But you won’t ever own it. You can’t sell it. And you could be removed from it by the board of directors.

For these reasons, I’m going to kind of ignore it in this post and assume you’re going the for-profit route.

A Bit on Tax Status

Once you’ve got a business structure, you’ve got to decide how the business is going to pay income taxes. One of the things I remember most from my accounting and finance classes in college is that businesses can fail or thrive based on how they handle their income taxes

Sole Proprietors will report business income as part of their personal taxes, probably using a “Schedule C” form. The business itself won’t file any tax paperwork.

Partnerships are a bit more complicated. The business has to prepare several forms like a 1065 and K1 for each partner. Then each partner uses their K1 form as part of their personal taxes. Some states may require the partnership to pay more taxes.

LLCs are a legal structure / entity, but they can chose to pay taxes in 4 different ways. 1) As a sole proprietor (only if the LLC has one member). 2) As a partnership (if the LLC has multiple members). 3) As an “S Corp” or 4) As a “C Corp”. S and C corporations give you some flexibility with saving on taxes, but there are specific and strict rules your business must follow if you choose S or C corp. For example, if the business is an “S Corp,” and the owner works in the LLC, they must be paid a “reasonable wage” subject to payroll taxes.

Corporations are able to elect S Corp or C Corp status. There’s also a “B corporation” status and probably a few others… but S and C are the most common options

What I Did and Why:

Disclaimer: This is what I did. I don’t know if it is a good idea for you. That is something between you and the professionals you hire.

I started thinking about opening my practice when I was still in graduate school. I obviously didn’t have the licensure then, but I also didn’t have any extra cash to spend on hiring a professional. So I started a few low-risk side businesses as a sole proprietorship without an LLC to save up. I started blogging, selling materials on TeachersPayTeachers, and I published a book. I reported my business income on my personal taxes, but I made the decision to set aside the post-tax earnings in a separate savings account.

When I finished grad school and was ready to start dabbling in private practice, I took a part-time job contracting in another clinic. I had a little over a thousand dollars set aside for business start up costs. I started looking for a professional to advise me.

I spoke with SLPs who I knew did contracting work, and asked for recommendations. I spoke with several accountants on the phone for a free initial consult. With each of them, I explained my business, my goals, and asked a lot of questions about everything. We discussed record keeping, income taxes, sales tax, their qualifications and background, common problems, and options for my business. Finally, I decided who I wanted to work with.

For my circumstances (including my states’ laws), my accountants recommended an LLC, and I opted to go solo rather than work with a partner. In my state, that meant I got the tax simplicity and control of a sole proprietorship but many of the legal protections of a corporation (assuming I follow the rules, which we’ll discuss in another post). They also explained to me that in the future it might make sense to keep my LLC but change its tax status to S-corp.

Once I said, “Yes. Let’s do it!” My accountant did the following for me in 30 minutes:

• Formed the LLC with my states’ Secretary of State office
• Created a Employer Identification Number through the IRS
• Registered my business with the state taxation and revenue department
• Registered my business with my city
• Sent me an excel sheet and instructions for basic bookkeeping
• Sent me a guide on basic expense tracking for tax deductions

Altogether, it only cost me $40.45 for their time on those tasks and $50 in filing fees.

For the less than one hundred dollars, I was set!

Your turn

Once you think through what you want from your business, start reaching out to professionals in your area.

Let me know in the comments below what you decide and how it goes!