I know it’s not number two in the book, but I would say the second biggest mistake we see is if we go on would be choosing the wrong entity we operate in.
Choosing the correct business entity, whether you are a sole proprietor, partnership or a single member LLC corporation, or S Corporation. That is something that we see very often where basically they were starting a practice. They spoke with their attorney and they recommended a certain type of structure and maybe a sole proprietorship or it maybe a single member LLC because as professionals we have those professional LLC’s that really don’t give us a whole lot of protection and sometimes those are not the right way to be operating.
Sometimes corporation’s makes sense. Sometimes we have people that are operating as an S corporation and when you look at everything together, you can make a decision what entity is really best. There’s no one size that fits all. It is just really looking at all the facts and figuring out what is really the best way for whomever is operating an entity to be in that type of entity.
The entity … I see a lot of dentists having PC and like a personal corporation. I myself am an S corp. What would be kind of the definition, like why would someone pick a PC or I guess PCS is a Professional corporation, correct?
Right, I know some states are a little bit different, but in New York it’s if you’re a professional, if you’re licensed by the state, you were supposed to be a PC for professional cooperation because you don’t have the typical liability, and I’m not an attorney, but you don’t have the typical liability protection that a non professional would have.
You see PC’s that are taxed as S corporations, you see LLC that are PLLC’S, professional LLC. There’s a single member LLC is maybe or their taxes if there’s more than one owner it is taxed as a partnership and each one has its own set of a pluses and minuses.
Depending on what your circumstances are makes a difference.
Are both an S-corp, and LLC are they both pass through entities?
Yes, They’re both passed through.
I guess you can explain it, but basically you go ahead and explain what a pass-through is.
What a pass-through means for the whole, for the most part, excluding some states. Typically it’s a state fee that the state wants to collect on your pass-through entity, the entity itself doesn’t really pay any tax. All the income flows through to your personal return, and then you pay the tax on your personal return based on what you get from pass-through entity, which could be k-1 from a partnership, a K-1 from an S Corporation or it could be a single member LLC that’s recorded on your schedule C of your tax return or it could be just the regular sole proprietorship.
You can have an LLC with an S-Corp election?
Yes you can. You can make an election to be taxed as an S Corp. There are instances where you can even make a late election to be taxed as an S Corp.
Who’s generally best suited, let’s say hypothetically you reached out to a dentist. Who would be best suited to be an S Corp versus who’d be best suited to be an LLC? Well, What would you see in your experience being would be the best way to set something up from an entity standpoint, and I know you said it varies from situation to situation-
It does vary, because it depends on if they have partners or not. Are they looking to bring in partners?
Lets say they are not looking to have partners?
You are either a single member LLC or you are an S Corporation and if you’re an LLC you’re probably taxed as a single member LLC. If you have nothing else going on, no other investments or no other businesses you’re involved in, maybe then an S-Corp might be the right way to go.
I have a lot of younger dentists that listening to this podcast and I think there couldn’t be anything more important. This would be an instance where obviously it’s pretty complex subject.
This would be an instance where I would highly recommend someone to reach out to you and determine, kind of with a long range goal, short term goal, where they are now determining what, how they should set up their entity?
Correct, we do that kind of planning.
That’s great because honestly I have made the mistake in my career as setting up the wrong entity and it’s kind of a mess when you have to back up and do it correctly and it’s kind of a cluster.
I’m a big believer in having your CPA, your tax professional, your attorney and you having at least the conversation at the very least over that before you decide the entity choice you’re going to use.
The consequences, obviously going back to number one, which is leaving well, going back to number one where we kind of alluded to the fact that it’s not so much how much you keep and how much you make and choosing the wrong entity can have adverse consequences in terms of your tax liability.
Most definitely, it could make a big difference as far as your liability. It can also make a difference in where you’re going to operate in the future. It’s not something that you just call up the attorney and say I’m a dentist, they need you to form a PC for me, or I need you to file an LLC for me.
Don’t go on legal zoom.
I’m not an attorney, but I would not recommend any of those for somebody that can be sued.
At least if the attorney safety, attorney screws up. At least you could sue him. Pretty sure legal zoom pretty much tells you that you are on your own.
If it’s DIY legal work, then you’re on your own.
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