Practice Ownership and Income Structure for Physicians

Owning a practice, or buying into a group, changes how income is taxed and what planning options are available. The entity choice, how the owner is paid and how buy-ins are structured each have tax effects that compound over the years.

Entity choice

Physician practices are commonly organized as professional LLCs, S corporations or partnerships, with C corporations used less often. Each has state-law requirements and federal tax treatment that may differ from state treatment. Some states restrict who may own a medical practice, which can narrow the options.

• Sole proprietorship or single-member LLC: simplest, but all net profit is generally subject to self-employment tax.
• S corporation: owner-physicians pay themselves a reasonable salary subject to payroll tax, with remaining profit as distributions. Salary must reflect the work actually performed.
• Partnership or multi-member LLC: pass-through taxation with flexibility in allocations, but partners' self-employment treatment depends on their role.

Owner salary and distributions

In an S corporation, the salary-to-distribution split is the key planning lever. Too low a salary invites scrutiny, and too high a salary gives up the payroll tax advantage. The right number depends on local market compensation for similar work, the practice's profit and the retirement contributions you intend to make, since many plans base contributions on salary.

Partnership buy-ins and sales

Buying into a practice often means paying for goodwill, accounts receivable or equipment. How the purchase is structured affects amortization, depreciation and future gains on sale. Some payments may be deductible over time; others may be treated as capital. Reviewing the buy-in agreement before signing is worth the cost.

Practical steps

1. Model the after-tax result of at least two entity options at your expected profit level, including payroll costs and state tax.
2. Decide on a salary policy and document the basis for it.
3. Confirm which benefits (health coverage, retirement plan, disability and malpractice coverage) the entity will pay for, and how each is taxed.
4. Review any buy-in, buy-out or non-compete terms with your tax advisor and attorney before signing.
5. Revisit the structure when your income, partners or state rules change.

Entity and buy-in decisions are among the most consequential tax choices a physician makes. PremCPA.com offers CPA services that can model these options against your actual numbers, and SmallTax.com has general tax help for small businesses.

General educational information only, not tax, legal or investment advice. Entity and buy-in rules depend on state law and individual facts. Consult a qualified CPA and attorney before forming, joining or selling a practice.