November 22, 2022
Dr. Carlene MacMillan, M.D.
There’s a ton of detail that goes into starting your practice that you didn’t learn in school. In part 1 of the “starting your practice series” we covered knowing your “why” and getting clear on what type of practice is right for you. In part 2 we dove into budget planning.
Before you can officially register your business, you’ll need a name! States have strict regulations about the official legal name for medical practices, often requiring exact information such as the doctor's name, type of medical specialty, and/or location. For example, our practice name is NYC Psychiatrist Services, P.C.
There are also forbidden words you will not be able to use in your legal name. Look up state-specific guidance to understand the rules for your specific practice. For example, here is New York’s list of restricted words and phrases.
After you officially file your legal practice name, you can file to run your business under a “catchier name,” using a fictitious business name, or a “doing business as” name (DBA). For example, our practice name is NYC Psychiatrist Services, P.C., but we filed a DBA to go by “Fermata.”
There are four main types of businesses you’ll hear thrown around:
Which is right for you? First, know that the options differ by state, and you may want to consult a healthcare attorney and/or an accountant familiar with medical practices for further guidance.to understand the nuances of your circumstances. We’ll walk through some of the main pros and cons of each structure.
A sole proprietorship is the simplest structure. It requires minimal paperwork and doesn’t require you to file your business and personal taxes separately. It also offers pass-through tax benefits, meaning you do not have to pay taxes twice on corporate profits and personal income. However, sole proprietorship comes with some significant risks. Should you need to declare bankruptcy or face a lawsuit, your personal and business assets are one in the eyes of the government.
For all other business structures that are not sole proprietorships, owners typically become W-2 employees of their own company and pay themselves a fair market value salary plus owner’s disbursements.
A professional corporation provides much more protection than a sole proprietorship by limiting your liability for business debts and claims. Note that no business structure—including a professional corporation—will fully protect you in some cases of negligence or malpractice.
Professional corporations are usually filed as C-corps, which come with more bureaucracy than sole proprietorships and no pass-through tax benefits. In other words, a C-corp’s profits are taxed at the 21% corporate tax rate; in addition, you pay a tax on your individual tax returns—which is why you may hear some people say “double taxation.” To avoid this, you can file your professional corporation as an S-Corp to reap the pass-through benefits. C-corps and S-corps are covered more in the sections below.
Note that professional corporations are only available in certain states, and when they are available, this is a common choice for psychiatrists. Some states don’t allow two types of professionals, or a regulated professional and a non-regulated professional to co-own a PLLC. That means that you might not be able to co-own your business with a non-physician spouse, investor, or psychologist.
A professional limited liability company (PLLC) offers both limited liability protection and tax benefits. A PLLC is designed to protect licensed professionals from malpractice and other legal claims, by legally separating your personal assets from your business assets. Think of a PLLC as a hybrid between a sole proprietorship and a true corporation. Unlike a corporation, however, your business's profits, losses, and taxes are still your responsibility. And you’ll be taxed as someone self-employed.
States take very different approaches to PLLCs. In some states, PLLCs are actually required for physicians. California on the other hand doesn’t have a PLLC entity type and doesn’t allow physicians to limit their liability to the same degree as other states. Other states don’t allow two types of professionals, or a regulated professional and a non-regulated professional to co-own a PLLC. That means that you might not be able to co-own your business with a non-physician spouse, investor, or psychologist.
If your business is registered as a PC or a PLLC, you can elect to have it taxed as an S Corp. You then must run a payroll and pay yourself a salary (even if you're a solo practice). As the owner of the S-Corp, you only pay self-employment taxes on your reasonable salary. The distributions you take are exempt from self-employment tax!
You may want to meet with a CPA to determine a reasonable salary to pay yourself based on the nuances of your business and location, to help you maximize tax savings. While electing to be treated as an S-Corp can come with more upfront costs and added complexity, the tax payroll tax benefits are typically worth it.
You can also choose to have your PC or PLLC business treated as a C-Corp. This could make sense if you are planning on taking on external capital and shareholders sooner rather than later. This is not likely to be the case for most solo or small psychiatry practices.
You can choose to either hire a lawyer to incorporate, or many providers are able to complete the paperwork themselves using online services. The time to hear back varies, but you should expect to wait at least a few weeks.
An Employee Identification Number (EIN) is a type of Taxpayer Identification Number (TIN) that links your company to the IRS. Many describe it as a “business social security number” for your practice that you’ll need to pay taxes, open a business bank account, and open a business credit card, among other purposes.
If you're going the PLLC route, you’ll likely want to wait until your PLLC is approved before applying for an EIN. That way, if your PLLC filling is not approved, you won't have an EIN affiliated with a non-existent PLLC. Plus, applying for an EIN is free and immediate if you apply online. At the end of your successful online application, you'll immediately be able to download a PDF of your EIN Confirmation Letter.
You'll need to register an address, so if you don't have an office space secured or are planning to work virtually full-time, you can use your home address, a PO Box, or a virtual mailbox. You'll be able to change this later when/if you get a physical office space.
Lastly, if you choose a business structure other than a sole proprietorship, you will want an organizational Type 2 NPI in addition to your personal Type 1 NPI. For more information on which NPI number to file and how to apply for your NPI number, read pages 6 and 7 of this guide.
Once you have an EIN, you can use it to open a business bank account. Banks usually ask for your EIN confirmation letter, business registration approval, business operating agreement, and all business owners’ driver’s licenses and/or passports, but call ahead to determine exactly what paperwork you’ll need.
You might need to shop around for the right business account to avoid fees. A “basic” business checking account with no monthly fee is sufficient for most solo practitioners starting out. There are some trade-offs between online-only banks that may offer higher interest rates and integrations with common software vendors, and brick and mortar banks that better support cash deposits.
Hopefully, you’ve made a budget to account for your up-front costs and the first few monthly costs. Since it may take a while for your practice to reach capacity, think carefully about if you need to take out a loan to get your business off the ground. If you choose to go this route, having a financial business plan is crucial. Lenders and investors may also want to see personal tax returns, your CV, and financial statements. We recommend shopping around for multiple options to compare interest rates and terms.
You’ll want to start tracking your business expenses separately from your personal expenses as soon as possible. Trust us, it gets a lot more difficult to remember that $50 expense after a week passes.
There are many accounting software systems out there that help you track your income and expenses, create general reports, show your cash flow, and generate profit and loss statements.
Two popular choices are QuickBooks and FreshBooks. You can also hire a part-time bookkeeping service for a low monthly fee. Keeping your books up-to-date will be critical for tax season, and for understanding the overall financial health of your business.
While you don't need a separate DEA if you work in more than one location within a state, you do need one DEA per state.
Once you know where you'll be practicing, you’ll want to change your contact information (address, phone number) on your DEA, state licensure board certification, and malpractice insurance to match your private practice address.
Keep in mind that your DEA number cannot be tied to a PO Box or a virtual mailbox. It must be a physical address that can be inspected. If you don't have a physical space yet, or if you plan to work from home exclusively, it can be your home address.
Congratulations! Now you have the legal and financial foundations for private practice success. In parts 4 and 5 of our “start your psychiatry private practice” series, we’ll cover finding a physical office space, setting up decor and furniture, and implementing liability policies.
Disclaimer: The information provided here is not intended to provide legal advice, nor is it intended to replace your own research of regulations implemented by governing bodies. It is strongly recommended to go to the appropriate regulatory body to make your own interpretation of the requirements, based on your own practice situation.
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