The Cash Based Practice Podcast with Dr. Jarod Carter Part II

What are the most common things that you find yourself advising your clients on with this new tax law?

Well it all falls back to number one, planning. You know, people fail to plan, they spend more time looking for the new car than the do figuring out ways to plan for their taxes. And that falls back into choosing the right entity and under the new law, under the same old law, you know, having the correct entity can make a big difference when it comes to taxes so you want to make sure that your CPA is involved in the discussion with your attorney when you’re forming that entity and if you’re already operating, maybe you want to have that conversation with your CPA and your attorney now.

See if there’s anything you can do about it.

That’s a question I see come up a lot, not just with direct emails from my audience to me but also just in various forms of, “Hey, I’m going to get started, what’s the best entity?” And what I’ve kind of seen from my own research and also from other people jumping into those conversations is that the answer for what’s most ideal is affected by a lot of different factors, of course. But one of the factors can actually be the state that you’re in. I know here in Texas if you want to be a single member LLC and you try to do that as a physical therapist or a physician or a chiropractor, they’re going to say, “No, no, no, you have to be a PLLC,” which is, you know, that additional designation of a professional LLC. Not to say that that changes anything tax wise but what do you look at or what should someone look at when they’re trying to answer that question other than just speaking with their attorney or accountant. But what are the factors that they should consider when they’re trying to make that decision of what kind of entity is going to be beset for my individual situation if they’re starting out let’s say, just as a single professional physical therapist or related healthcare practitioner in their own private practice?

Yeah, well that’s a conversation they should have with their CPA and their attorney. There’s no difference from a tax perspective of a PLLC versus a regular LLC, it’s just more of a legal issue and like in New York, you know, if you’re a professional, you have to be a PLLC. If you’re not a professional, you’re an LLC, it doesn’t make a difference from a tax perspective, there’s some legal issues there. Some states, there’s a couple of states where they don’t, I believe have single member LLCs or depending on … there’s something to do, like I know California’s got a funky rule.

So you just have to see what works but if you have that conversation with your attorney and then you have your accountant involved, then you can pick out what’s going to work best for you. And like you said, you know, me and you can be in the same profession but a single member LLC might work best for you and an S-Corporation may work best for me depending on what we have going on.

And what kind of things would that … you know, in terms of what we have going on, what would make the differentiation?

Other employment. Are you working some place else, do you have other sourced income, you know, how much self-employment tax are you paying from another job, is this the only line of work you’re in? So it’s kind of like you have to look at the whole picture, not just okay, he’s a physical therapist. No, okay he’s a therapist and he works three other jobs.

Right. And even if those are other … like a very common scenario is somebody that wants to start their practice, they continue to work for someone else say two or three days a week in home health or whatever the case may be. So they are employed elsewhere, maybe whether it’s … well even if it’s full time or part-time but they’re starting their own practice. In those situations, it might move them to look at something other than a single member LLC.

And sometimes it might be better off that they are actually a single member LLC. If they’re working someplace else and they’re getting paid as a W2 employee.

You know, so sometimes then it’s more beneficial to be a single member LLC and the wonderful thing about an LLC is you can make an election to be treated as in a corporation and an S-Corporation so if you have maybe the not-optimized entity, you can still go and make some selections and get it straightened out.

Okay.

Without creating a whole new entity.

Okay and then for those who perhaps have gotten past that point and are scaling up a bit and they have say, multiple employees, is there a time in that process where you start to suggest that people look at making a change in their entity? That it would move them to be a corporation versus an LLC.

Yeah and it varies by what they have going on.

You know, is that LLC, does it make sense to have that LLC taxed as an S-Corporation? Is that an election that we can make? Can we actually make that election retroactively? Can we do that?

How to do that? So you have to kind of look at the big picture and see what’s going on. I don’t like to be real vague but it really depends on everything that’s going on and typically, you know, at the point that you have a couple of employees, you’ve pretty much built up a practice usually where you’re making enough money to survive so now you’re trying to scale it and so there’s opportunities there.

Okay and then just a selfish question, for someone like me who has two different businesses in unrelated fields. I’ve got my online business here and I have my clinic. They’re both … well one’s a PLLC and one’s a single member LLC, my online business. Would you look at that and say, “That’s totally fine, have multiple LLC’s if you want to have multiple businesses,” or does it start to make sense to have say, a parent holding company at one point that kind of owns all of them?

You can do all of the above and you have to kind of look at what’s the money coming in, how much tax are you paying, what’s going to help you eliminate the tax? You know, sometimes people want to have that extra level in there where it’s … you know, they have single member LLCs owned by another LLC. As a professional in most states, you don’t have that legal liability protection so that’s a reason why sometimes it doesn’t make sense but you have to kind of look at things and say, “Okay, what can we do differently? Maybe does it make sense to have one of these taxed as corporation and leave the other one as an LLC? You know, so that’s why it’s really important that you communicate with your CPA and you go over these things in advance. Not wait until March.

Yes.

Do it during the tax year, earlier the better.

Yes.

Because the more you communicate, the more they can help you.

 

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