Which business structure is best for your veterinary practice?

Jul 8, 2020 | Technology & Tools

Veterinary practice owners commonly use four general business structures:

  • Sole proprietorships
  • Partnerships
  • Limited liability companies (LLCs)
  • Subchapter S corporations (S-Corps)

How to choose the best businss structure for your practice

When determining business structure, an owner must consider many factors, including the four most important:

1: Tax impact

The IRS classifies the four most common business structures as “pass through” entities, meaning that rather than the business filing its own income tax statement, the business earnings are reported as income on the owner’s taxes. Traditional corporations (C-Corps) file a tax statement separately from each shareholder and can be taxed twice, because the C-Corp pays taxes on all its earnings, and then, if shareholders receive a distribution of net earnings, those earnings are taxed as the shareholders’ income. For many business owners, this single issue is the primary—if not the sole—factor in choosing a business structure.

Because sole proprietorships and partnerships provide similar tax benefits as LLCs and S-Corps compared with C-Corps, and are easier and cheaper to start and maintain than LLCs, many business owners choose sole proprietorship and partnership structures. Unfortunately, this approach, which fails to consider the other, potentially more impactful, aspects of LLCs and S-Corps, is short-sighted.

2: Ease of obtaining financing

Most veterinary practices require commercial lending at some point, whether at start-up, to purchase capital improvements (e.g., new equipment or property), or both. Therefore, when choosing a business structure, always factor in the preferences or requirements of commercial lenders, who can be reluctant to offer loans to sole proprietorships or partnerships, because they prefer the improved structure and stability of LLCs and S-Corps. Commercial loans that are approved for sole proprietorships and partnerships often carry increased costs, such as higher interest rates, and less favorable terms, such as greater borrower equity (e.g., requiring more cash from the borrower toward the purchase). So, veterinary practices are best organized as an LLC or S-Corp to take advantage of commercial lenders’ preference for these business structures.

3: Potential future business relationships

A relatively new factor—at least in the veterinary profession—that should be considered when determining business structure, is the preference of private equity groups and “corporate” practice groups, many of whom are actually LLCs, to partner with LLCs and S-Corps. As many more corporate practice groups enter the veterinary market, fewer ideal practices—in their eyes—are available for purchase at a profitable price. Because of this, more corporate groups are interested in joint ventures with privately owned practices where, typically, the corporate group buys a majority share in the practice (i.e., 60% to 80%), and the owner becomes a minority shareholder in a new LLC. These business structures are more complex, and often involve outside investors, so the corporate groups and their backers want to operate within a specifically defined system. But, court rulings regarding sole proprietorships and partnerships have been inconsistent, posing more risk than corporations are willing to take, and many  will partner only with a practice structured as an LLC or S-Corp.

4: Personal liability protection

Arguably the most important consideration, from a risk management standpoint, when choosing a business structure, is the availability of personal liability protection. Both LLCs and S-Corps limit the individual owner’s business debt liability to the owner’s business investment. Sole proprietorships and most general partnerships do not provide the business owners with any liability protections, although some partnerships provide limited liability for some owners. In fact, sole proprietors and partners are individually responsible for all business debts, which  means that a sole proprietorship or partnership practice that cannot cover its debts (i.e., more money is owed than is made in profits), the individual owner can be held liable for those debts, and all their personal assets can be seized, and/or sold, to satisfy the debts. However, when the practice is an LLC or S-Corp, and the owner’s personal and business finances are maintained separately, only the business assets are available to the creditor, and any personal assets are protected.

These four factors tend to favor LLCs and S-Corps as the business structure of choice for most veterinary practices. They provide favorable tax status — especially S-Corps — personal liability protection, and are favored by commercial lenders, private equity groups, and other potential business partners.

According to one law professor, an LLC or S-Corp has so many benefits compared with a sole proprietorship or partnership, that “Any small business owner that does not choose to set up their business as an LLC or an S-Corp is either ignorant or crazy.”

The takeway

For the majority of veterinary practice owners, an LLC or S-Corp is the best business structure.

Have questions? Looking for additional legal advice? Contact me at [email protected].

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