Are you considering locum work, because it offers the flexibility to choose where and when to work? Sounds like a dream job, right?
While the independence that accompanies locum tenens is a plus for many, it’s a good idea to carefully review all factors. One of the most important considerations deciding if you’d like to form a small business, or if you’d rather stay a 1099/Independent Contractor. If you’d like to form an entity, you’d have to decide which is the best entity structure for your business to help protect you, your venture, and your personal assets.
Editor’s Note: The content of this blog should not be used as a substitute for consultation with professional accounting, tax, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional.
Congratulations on your decision to create your own business! You have chosen a business name and are ready to get started. But what comes next?
One of the first steps should be choosing the right entity structure. You want to make sure that the entity is set up for both tax and asset protection, as well as everyday operations of your business. Be sure to speak with both your accountant and lawyer to help you decide which option is best for you.
Some of the most common types of entity structure options for an individual business owner are Sole Proprietorship, Limited Liability Company (LLC), Professional Limited Liability Company (PLLC), S-Corporation, and C-Corporation.
Let’s review some of the different entity structures:
With Sole Proprietorship, you complete business activities as an individual and are not registered as any kind of business. Sole Proprietorship is relatively easy to form and can give you complete control of your business. However, because you do not create a separate business entity, there is no legal separation between your business assets and liabilities and your personal assets and liabilities. Consequently, you can be held personally liable for debts and obligations associated with your business. Also, you are not protected against your personal assets and liabilities. This choice would be good for a low-risk business or to test the venture before creating a formal business entity.
Limited Liability Company (LLC)
An LLC is a corporate structure. Often considered a hybrid entity because it provides both the legal structure of a limited liability corporation and tax efficiencies, an LLC can protect you from personal liability in the event that your business faces bankruptcy or lawsuits. Profits and losses can be passed through to your personal income without facing corporate taxes. You are the member of the LLC and are considered self-employed, so you would be responsible for paying the self-employment tax contributions towards Medicare and Social Security. This may be a good entity choice if you are a medium-to-high risk business or have significant personal assets to protect.
Professional Limited Liability Company (PLLC)
PLLCs are only available to licensed professionals such as physicians, CRNAs, other medical professionals, lawyers, accountants, engineers, and many others. This type of entity structure is commonly used by licensed professionals who offer a specific service in relation to their profession. There is very little difference between the LLC and PLLC structure; however, although they both offer liability protection for the member of that entity (you), the PLLC is different in that it does not protect individual members from malpractice claims against them. Therefore, malpractice insurance is essential. Some states do not even offer a PLLC, so check your state’s requirements on licensed professionals.
Of note, Barton Associates provides all of their locum tenens providers with malpractice insurance, so we’ve got you covered!
This entity is sometimes referred to as a small business corporation. Corporate income, losses, deductions, and credits can be passed through to shareholders for federal tax purposes. You are a shareholder of this type of entity structure, which allows you to report flow-through or pass-through of income and losses on your personal tax return. Taxes are then assessed at that individual’s tax rate. This allows the S-Corporation to avoid double taxation on the corporate income. You still have legal protection within your business and so do your personal assets. Taxes must be filed once a year, and you must be a U.S. resident for this type of entity structure.
This entity is a legal structure in which the owners of the business are taxed separately from the entity. C-Corporations are most prevalent with large businesses. They are subject to corporate income taxation. The taxing of profits from the business is taxed both at the corporate level and personal level, referred to as double taxation. This type of entity structure can offer the most protection when compared to the others, but it can be complicated and imposes more documentation requirements.
There are many considerations when trying to decide which entity structure is best suited for your business. One must compare the liability risks as well as asset protection. And don’t forget taxes and their equally important overall impact on your business.
Good luck in pursuing your interest in independent contracting! Be sure to consult with your accountant and attorney, as the general information in this article should not take the place of legal advice and guidelines.