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Forms of Ownership

If you own, or want to open, an optometry practice, one of the first questions you must ask yourself is, how should I own the practice? In other word, what legal structure should the business take. There are basically four different ways in which to own a professional practice (three in some states). These are, sole proprietorship (sole owner only), partnership (two or more owners), professional corporation, or, in some states, limited liabilty company (LLC). Once you understand the differences, deciding which is best for you is generally not too difficult. However, because the different forms of ownership have different tax consequences, you should always consult with your tax advisor or CPA before making a final decision.

1. Sole Proprietorship. If you own your practice alone and are not anticipating taking on any partners any time soon, a sole proprietorship is the simplest and least expensive form of ownership. If you do nothing else, your practice will be owned as a sole proprietorship by default. As a sole propreitor, your business is you, and you are your business. You report your business earnings on a Schedule C which is filed along with your 1040 tax return. All bills and liabilities are yours, and all earnings are yours.

Pros: Easy. Inexpensive to operate and easy to understand.
Cons: You are liable personally for all debts and bills, so creditors can go after your personal assets; Few opportunities to save on taxes.

2. Professional Corporation. A professional corporation (PC) is an entity separate from you. The PC issues stock, and its owners own that stock. But the assets of the business, from the phoropters to the goodwill, and the business itself, are owned by the PC, not by the shareholders. The difference between a PC and a regular (non-professional) corporation is that, in a PC, only certain licensed professionals can be shareholders. Lay individuals cannot own any of the stock. (What types of professionals other than optometrists that can own the stock varies from state to state.)

Often confused is the "S Corp" versus "C Corp" (aka "regular corporation) question. Understand first that a professional corporation can be either an S or a C corp. The difference between an S Corp and a C Corp is how corporate profits are taxed. In an S Corp profits pass thru to the shareholders and the shareholders pay taxes on those profits as if they were ordinary earnings. In a C Corp the corporation pays taxes on those profits (the profits are what is left in the corporation after everyone, including the owners, are paid their salary and bonuses), and then they are taxed a second time when the shareholders distribute those profits, either as a dividend or as pay. Since this "double taxation" is never wanted, most doctors will choose to be an S Corp.If a C Corp form is chosen, the shareholders try to be careful and ensure that they draw all profits out of the corporation as pay or a bonus before the end of the tax year to avoid double taxation of profits.

There are many advantages to a professional corporation. First, it avoids comingling of your personal finances and your business. They are completely separate. Also, if there are two or more owners, it is highly preferred over a partnership. The owners develop a "shareholder's agreement" which serves the same function as a partnerhship agreement. But the cons of a partnerhsip (see below) are avoided. Because the corporation owns the business, many liabilities are liimted to the corporation. For instance, an employee lawsuit for wrongful termination will be against the corporation, not you. Unlike in a partnership you cannot be liable for malpractice committed by someone else. And, unless you personally guarantee them, the bills of the business are owed only by the corporation, not you. So, a late payment, for instance, does not affect your credit rating.There are also a variety of tools available for reducing what you pay in taxes. Finally, it is easy to bring on a partner or new partners, or to buy out partnership interests.

The principle disadvantages of a PC are that there may be a minimum state tax, and there will be some extra tax returns to be prepared, so you'll pay a little more in accounting fees. Other than that, there are no real "cons."

Pros: Liability protection, tax saving potential, easy of transfer of interests, separatation from your family/personal finances.
Cons: Minimum state tax, additional accounting fees for addtional tax returns.