Summary of presentation from Alex Meyer with PCC for PMI's Certified Pediatric Office Executive (CPOE) program
When launching or re-evaluating a pediatric practice, one of the most impactful decisions the owner-physicians face is choosing the right corporate structure. Whether considering a Limited Liability Company (LLC), C Corporation (C Corp), S Corporation (S Corp), partnership, or another entity type, this foundational choice will dictate how your practice is managed, how profits are distributed, and—critically—how owners are paid and taxed. In this article, we summarize key points from Alex Meyer’s Certified Pediatric Office Executive course on corporate structures, highlighting pros, cons, and practical tax differences for pediatric practice owners. We’ll also offer actionable takeaways to help guide your firm's next steps.
First and foremost, it’s important for every pediatric practice to build a trusted advisory team. An independent, neutral Certified Public Accountant (CPA) should review your finances and ensure tax compliance, while each owner should also have a personal accountant to advise on individual tax implications. The same principle applies to legal representation: the practice itself needs a relationship with a law firm versed in healthcare, employment, and corporate work, but each owner should also have a personal attorney. This dual-advisor approach ensures that you make informed decisions aligned with both group and individual interests while maintaining professional integrity and compliance.
When it comes to structuring your practice, there are two broad categories: corporations—including S Corps, C Corps, and Professional Corporations—and unincorporated entities, such as partnerships and LLCs. Partnerships offer the greatest flexibility in management and profit-sharing, but partners are personally liable for all assets and debts—meaning personal properties could be at risk in lawsuits. LLCs, while sharing much of the operational flexibility of partnerships, provide a liability shield for the partners’ personal assets. Both partnerships and LLCs offer various tax election options, but these designations also affect how owners are taxed on their income.
Corporations, on the other hand, provide greater access to benefits, fringe programs, and investment opportunities, but enforce stricter regulations on ownership structure and profit distribution. A C Corp is taxed at the corporate level, and then again when dividends are distributed to owners (double taxation), making it less attractive for many small practices. S Corps avoid double taxation by passing profits directly to owners for personal tax reporting; they allow owners to divide income into salary (wages) and distributions (non-wage), impacting how employment taxes are applied. Deciding which structure suits your practice isn’t just about taxes—issues such as growth plans, responsibilities, and long-term goals all come into play.
A crucial but often overlooked issue is distinguishing between “work” and “ownership” compensation. In most pediatric practices, partners act as clinicians, managers, and owners. Payment for services as a doctor or manager should be handled just like any other employee—via salary or wages, taxed through standard payroll processes. In contrast, the financial return for taking on the risk of ownership (e.g., practice profits after expenses) is best separated as an owner’s draw, distribution, or dividend, depending on your structure. This distinction matters because wage and non-wage payments are taxed differently.
Examining practical examples illustrates these differences. In a sample three-partner, five-doctor practice, each partner might earn a salary for work performed and also receive a share of profits as owners. For C Corps, partners receive salary (W-2 income, subject to income and employment taxes) and dividends (taxed as personal income and after corporate tax at the practice level). For S Corps, profit is passed directly to owners, and only the wage portion is subject to employment (Social Security and Medicare) taxes—significantly reducing the overall tax bill. Partnerships and LLCs generally treat all compensation as subject to employment taxes unless the entity elects S Corp status.
One of the main tax advantages of S Corp status is the ability to split compensation into ‘reasonable’ salary and owner distributions. The IRS requires practice owners who work for the S Corp to take a reasonable salary, but any additional profits can be paid out as distributions, not subject to employment taxes—potentially saving thousands each year. However, careful documentation and a well-advised strategy (with help from your CPA) are critical to comply with IRS guidelines.
Partnerships and LLCs taxed as partnerships offer the greatest flexibility, but all profits—regardless of their source—are subject to both income and self-employment taxes. LLCs can elect to be treated as S Corps or C Corps for tax purposes, potentially combining flexibility with tax efficiency. Ultimately, every structure involves tradeoffs between flexibility, tax efficiency, compliance requirements, and personal liability.
Because these decisions have lasting repercussions, pediatric practice owners must weigh current needs and long-term intentions. Practices with rapid growth plans or ambitions to bring on investors or non-physician owners may need a corporate structure. Those solely comprised of owner-physicians focused on clinical practice may prefer the simplicity and flexibility of an LLC or partnership, especially when combined with S Corp tax status.
Five Practical Takeaways for Pediatric Practice Owners:
1. Distinguish Roles and Income: Separate compensation for clinical and management work from your return on investment as an owner. Keep wage and ownership income distinct to optimize tax reporting and compliance.
2. Secure Professional Advisors: Engage a neutral CPA and attorney for the practice, along with personal advisors for each partner. Avoid potential conflicts of interest by not relying on relatives or close friends in these capacities.
3. Tailor Your Structure to Your Goals: Match your entity type (LLC, corporation, partnership) and tax status (e.g., S Corp election) to the practice’s size, growth plans, and partner preferences.
4. Optimize for Tax Efficiency: Consider S Corp status to reduce payroll tax liabilities on owner distributions, but ensure compliance with reasonable compensation rules to avoid IRS scrutiny.
5. Review Regularly with Your Team: Revisit your structure as your practice evolves. Laws change, partners’ life circumstances develop, and business objectives shift—ensure your entity and compensation approach continue to serve the best interests of all parties.
Selecting the optimal corporate and tax structure for your pediatric practice is a complex but vital decision. With sound planning, expert guidance, and a clear separation between work and ownership income, you can maximize both individual and group success as you focus on delivering exceptional care.