In a sole proprietorship, the business is owned and operated by a person who has not formed any entity for that business but instead makes a trade name filing (sometimes referred to as a DBA, assumed name or fictitious name filing) to do business under the name chosen for that business. As an example, Taylor Smith, DVM operating Happy Town Animal Clinic as a sole proprietorship would often be referred to as “Taylor Smith, DVM dba Happy Town Animal Clinic,” with the dba standing for “doing business as.”
For tax purposes, the sole proprietor practice owner simply reports the income and expenses of the practice on Schedule C of his or her personal federal income tax return. No separate tax return is required for federal tax purposes.
However, most veterinary practice owners are not comfortable operating as a sole proprietor because all of the sole proprietor’s personal assets are at risk in connection with any liability that may arise in connection with the practice. By contrast, entities such as corporations and LLCs, when properly formed and absent unusual circumstances (such as fraud), shield the owners of such entities from personal responsibility for liabilities arising from the business operations of the practice.
In a corporation, for example, the shareholders invest in the corporation when they buy its stock. That investment remains at risk related to the corporation’s business activities, but the shareholders are not personally liable for the liabilities of their corporation beyond that investment unless they either have contractually agreed to be liable (such as in a loan guaranty or lease guaranty) or have engaged in such inappropriate behavior that a court would be authorized to “pierce the corporate veil,” ignoring the corporate entity to hold the owners personally responsible for the company’s actions or debts. So, this liability shield is the primary reason that most practice owners form entities to own a veterinary practice.
But there are some tradeoffs involved in forming an entity to own a veterinary practice, particularly the additional expense involved in forming and properly maintaining the business entity. Business entities like corporations also have to file separate tax returns and often have to make recurring state and local filings.
Since the entity formation question involves both legal and tax considerations, we strongly recommend that anyone trying to decide which ownership structure works best for them consult with both an attorney and an accountant who are well-versed in the applicable state’s rules and tax considerations.