October 14, 2008 Features

A Legal Primer on Business Entities

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More speech-language pathologists may want to consider private practice after the recent enactment of the Medicare Improvements for Patients and Providers Act. The new law, which takes effect in July 2009, allows SLPs to bill Medicare directly using their own National Provider Identifier (NPI) numbers.

Choosing a business structure is the key decision in starting a private practice.* The basic business entities are sole proprietorship, partnership, and corporation. Each structure calls for different ways of handling salary, benefits, income tax, liability, and other business matters.

First Steps

Before hanging your shingle, confer with an attorney who specializes in small businesses and estate planning and a certified public accountant who can provide financial planning advice and set up business accounts. Consider taking practical business courses at a community college, from a women's center, or online. The U.S. Small Business Administration provides information about starting a business and offers loans. It is much easier and less costly to set up a business correctly than to fix problems later.

Your state may require SLPs, audiologists, and other professionals to form "professional corporations," also called "professional service corporations." They are optional in some states, where you can also consider a sole proprietorship, partnership, or corporation.

Sole Proprietorships

Sole proprietorships often are appropriate for someone beginning on a small scale because they allow control and are easy to start and simple to manage. Because a sole proprietorship is not a legal entity separate from the individual, the sole proprietor is liable for business debts and lawsuits against the business. This condition is a major drawback; a lawsuit plaintiff can target the sole proprietor's personal assets, including money, investments, real estate, and personal property. Similarly, loans to a sole proprietor are essentially personal, guaranteed by the individual's personal assets.

Advantages of this structure include relatively simple accounting, minimal legal requirements, and reduced tax liability. Tax liability is reduced because business and personal incomes essentially flow together when calculating taxable income, and the total is taxed as personal income, rather than at often-higher corporate rates. For example, a school-employed SLP sees private patients part-time as a sole proprietor; her overall taxable income is a combination of her school salary and her income from private patients. She may deduct business-related expenses, such as travel, advertising, and office rental, from her business income before counting the total gain or loss along with personal taxable income.

A sole proprietor uses either a Social Security number or an Internal Revenue Service-assigned Employer Identification Number (EIN) as the business identifier for tax and other purposes. Partnerships and corporations also use EINs. However, when billing private health plans or government programs, the clinician's NPI is used as the claim identifier.

Partnerships

Two or more people in business together may form a partnership to share ownership as well as financial and liability risk. Partnerships can be general, limited, or joint ventures (clinical practices are not commonly joint ventures, which are set up for a limited time or limited purpose). Limited liability partnerships that shield partners from negligent acts of other partners and employees are permitted in some states. Financial contributions, gain, operational input, and risk can be shared equally or unequally. Partners are legally liable for the actions or inactions of their partners to the extent dictated by the partnership agreement and law.

A partnership is a separate legal entity from the owners, so only business assets—not personal assets—are at risk for defaulted loans, business debts, or lawsuits.

Corporations

State corporation commissions set up corporations, each with a unique name. Stocks are issued, so owners become shareholders even if they are also employees. Officers are chosen to run the company. Incorporation forms and information are on each state's corporation commission Web site.

As with a partnership, a corporation is a separate legal entity from the owners. Corporations are set up first with "subchapter C" status, under 26 U.S.C. Section 1361. You may then apply for "subchapter S" status and tax treatment for your corporation; income and deductions will then flow to your personal income, as with a sole proprietorship. A subchapter S election is good to consider because its hybrid characteristics protect the owner from individual liability and financial risk, yet allow income and tax offsets to pass through to the individual.

Each business structure has its own special characteristics, so the key is to discover which best suits your needs and purposes now and in the future. 

* Any ASHA member considering entry into private practice should conduct due diligence on all aspects of business practice. 

Angela Foehl, Esq., director of private health plans advocacy, can be reached at afoehl@asha.org.

cite as: Foehl, A. (2008, October 14). A Legal Primer on Business Entities. The ASHA Leader.

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