The best form of entity for a veterinary practice will vary depending on the location and circumstances. Key factors in this “choice of entity” decision include: (i) the laws of the state where the practice entity will provide veterinary services, (ii) the nature of the anticipated owners of the practice (i.e., veterinarians licensed in that state vs. non-veterinarian owners), and (iii) anticipated tax issues.
In many cases, practice owners decide to form an LLC or PLLC and elect to have that LLC/PLLC taxed as a Subchapter S corporation, also known as an S corporation or an “S corp” for short. An S corporation is a tax status, not a separate legal business structure. In other cases, owners of an LLC or PLLC elect to have it taxed as a disregarded entity (if a single owner) or partnership (if more than one owner). Any of those options allow for pass-through tax treatment (i.e., no double taxation, as would apply to the profits of an entity taxed as a C corporation at the corporate level, then taxed again at the shareholder level when distributed out to the C corporation’s shareholders personally).
Importantly, S corporation taxation can limit the amount of payroll taxes paid by owners who work at the practice as compared to partnership taxation. But partnership tax treatment can be beneficial for start-up practices and for practices with multiple owners, especially if many of those owners either do not work at the practice or hold their equity interests in the practice through their own S corporation entities.
As noted in our earlier blog post regarding professional entities, both the laws of the applicable state and the types of owners contemplated are very relevant when deciding between using a professional entity as opposed to a general purpose business entity. State laws also vary with respect to what kinds of entities are available for veterinary practices. Some states contemplate professional associations, for example, and in some states (surprisingly!), it may not be possible to use an LLC or PLLC at all to own a veterinary practice in that particular state.
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.