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Choosing a Legal Entity for Your DPC Practice

Quick Summary: For most solo DPC physicians, form a PLLC (or LLC where PLLC not required), operate as a default LLC initially, then evaluate S-Corp election once profitable. This provides liability protection from day one with flexibility to optimize taxes as income grows.

Table of Contents

Overview

Selecting the right legal structure for your Direct Primary Care practice is one of the most important early decisions you will make. Your choice affects personal liability protection, tax obligations, administrative complexity, and future growth options.

This guide compares the most common entity types and helps you determine which structure best fits your situation.

[!CAUTION] Consult Local Professionals: Laws governing business entities, professional corporations, and tax treatment vary significantly by state and change regularly. This guide provides general education only—not legal or tax advice. Before forming any entity, consult with a healthcare attorney licensed in your state and a CPA or tax advisor familiar with medical practices in your jurisdiction.

Prerequisites

Before selecting an entity type, you should:

  • Have a general understanding of your state's business registration requirements
  • Know whether you plan to practice solo or with partners
  • Have consulted with (or plan to consult with) a healthcare attorney and accountant

Entity Types Compared

Sole Proprietorship

What it is: The simplest business structure where you and the business are legally the same entity.

Advantages: - No formal registration required (beyond business license) - Simplest tax filing (Schedule C on personal return) - Complete control over decisions - Lowest startup and maintenance costs

Disadvantages: - No personal liability protection - Personal assets at risk in lawsuits - May appear less professional to some patients - Difficult to bring in partners later

Best for: Physicians testing the DPC model briefly before committing, or those in very low-risk situations.

[!WARNING] Sole proprietorship is generally not recommended for medical practices due to liability exposure.

Limited Liability Company (LLC)

What it is: A flexible business structure that provides personal liability protection while allowing pass-through taxation.

Advantages: - Personal asset protection from business liabilities - Pass-through taxation (no double taxation) - Flexible management structure - Relatively simple to form and maintain - Can elect S-Corp taxation for potential tax savings

Disadvantages: - Annual state fees and filings required - Operating agreement recommended (attorney costs) - Self-employment taxes on all profits (unless S-Corp election) - Some states have franchise taxes

Best for: Solo DPC physicians who want liability protection with simplicity.

Professional Limited Liability Company (PLLC)

What it is: A specialized LLC for licensed professionals (physicians, attorneys, accountants). Required in some states for medical practices.

Advantages: - All LLC benefits - Specifically designed for licensed professionals - Required structure in many states for medical practices - Members must hold relevant professional licenses

Disadvantages: - Does not protect against malpractice claims (only business liabilities) - Same self-employment tax considerations as LLC - Not available in all states (California, for example)

Best for: Solo DPC physicians in states that require PLLCs for medical practices.

[!IMPORTANT] In most states, a PLLC protects you from business debts and other members' malpractice, but not from your own professional negligence. Malpractice insurance remains essential.

S Corporation (S-Corp)

What it is: A corporation that elects pass-through taxation, avoiding double taxation while providing corporate liability protection.

Advantages: - Personal liability protection - Potential self-employment tax savings (pay yourself a "reasonable salary") - Pass-through taxation - Established legal precedents - Can be attractive if bringing in partners or employees

Disadvantages: - More complex formation and maintenance - Required formalities (board meetings, minutes, bylaws) - Stricter ownership rules (100 shareholders max, one class of stock) - Payroll requirements for owner-employees - Higher accounting and legal costs

Best for: DPC physicians with higher income who want to reduce self-employment taxes, or those planning to grow with multiple physicians.

Tax Note: Many physicians form an LLC and then elect S-Corp taxation, getting both the simplicity of an LLC and the tax advantages of an S-Corp.

Professional Corporation (PC) / Professional Association (PA)

What it is: A corporation specifically for licensed professionals, similar to PLLC but in corporate form.

Advantages: - Required in some states for medical practices - Can elect S-Corp taxation - Established structure for professional practices

Disadvantages: - Corporate formalities required - Does not protect against personal malpractice - Higher formation and maintenance costs - More complex than LLC/PLLC

Best for: Physicians in states requiring corporate structure for medical practices, or those planning larger multi-physician practices.

State-Specific Considerations

States Requiring PLLC or PC for Medical Practices

The following states generally require professionals to use a PLLC or PC structure (verify current requirements with a local attorney):

  • New York (requires PC or PLLC)
  • California (does not allow PLLC; requires PC)
  • Texas (allows PLLC)
  • Florida (allows PLLC or PA)
  • Many others have specific requirements

Corporate Practice of Medicine Doctrine

Some states prohibit corporations from practicing medicine or employing physicians. This affects entity choice and ownership structure. States with strong corporate practice of medicine restrictions include:

  • California
  • Texas
  • New York
  • Illinois
  • Ohio

In these states, the entity must typically be owned entirely by licensed physicians.

Franchise Taxes and Annual Fees

Consider ongoing costs by state. Examples (verify current amounts with your Secretary of State):

State Annual LLC Fee Notes
California $800 minimum Franchise tax regardless of income
Texas No fee But has franchise tax on revenue over threshold
Delaware $300 Popular for incorporation but may not benefit small practices
Wyoming $50 Low-cost option
Florida ~$140 Annual report fee

[!IMPORTANT] State fees, franchise taxes, and filing requirements change regularly. Always verify current amounts directly with your state's Secretary of State office or a local attorney before making decisions based on costs.

Tax Implications Summary

Entity Type Federal Tax Treatment Self-Employment Tax Payroll Required
Sole Proprietorship Schedule C Yes, on all profits No
LLC (default) Schedule C Yes, on all profits No
LLC (S-Corp election) Form 1120-S Only on salary Yes
S-Corp Form 1120-S Only on salary Yes
PLLC Same as LLC Same as LLC Depends on election
PC Depends on election Depends on election Usually yes

The S-Corp Tax Advantage

If your practice generates significant profit, an S-Corp election can reduce self-employment taxes (FICA taxes: Social Security + Medicare).

Example: - Practice profit: $200,000 - Reasonable salary: $120,000 - Remaining profit (distribution): $80,000

As LLC (default): Pay self-employment tax (15.3%) on entire $200,000 = ~$30,600

As S-Corp: Pay FICA taxes only on $120,000 salary = ~$18,360 - FICA savings: ~$12,240/year

[!NOTE] Important clarifications: - The $80,000 distribution is still subject to ordinary income tax—you're saving on FICA taxes specifically, not income taxes - The 15.3% self-employment tax rate includes 12.4% Social Security (capped at the annual wage base, ~$168,600 in 2024) and 2.9% Medicare (uncapped) - Income above the Social Security wage base only incurs the 2.9% Medicare tax, reducing S-Corp savings for very high earners - An additional 0.9% Medicare surtax applies to income over $200,000 ($250,000 married filing jointly) - "Reasonable salary" requirements are strict—the IRS scrutinizes unreasonably low salaries

Actual savings depend on your income level, state taxes, and individual circumstances. Work with a CPA to model your specific situation.

Decision Framework

Answer these questions to guide your decision:

1. Does your state require a specific structure?

If yes, that narrows your options immediately. Check with your state medical board.

2. Are you practicing solo or with partners?

  • Solo: LLC/PLLC is usually simplest
  • Partners: Consider operating agreement complexity; may want PC or S-Corp

3. What is your expected annual profit?

  • Under $60,000: LLC simplicity likely outweighs S-Corp tax savings
  • $60,000-$100,000: Evaluate S-Corp election with accountant
  • Over $100,000: S-Corp election often beneficial

4. How much administrative complexity can you handle?

  • Minimal: LLC/PLLC
  • Moderate: LLC with S-Corp election
  • Comfortable with formalities: S-Corp or PC

5. Do you plan to bring in partners or sell the practice eventually?

  • Yes: Corporate structures may facilitate this
  • No: LLC/PLLC simplicity is fine

For the typical solo DPC physician, we recommend:

  1. Form a PLLC (or LLC if your state doesn't require PLLC for medical practices)
  2. Operate as default LLC for the first year while establishing the practice
  3. Evaluate S-Corp election with your accountant once profitable
  4. Elect S-Corp taxation if annual profit exceeds $60,000-$80,000

This approach provides: - Liability protection from day one - Simple startup with lower initial costs - Flexibility to optimize taxes as income grows - Ability to add partners later if desired

Working with Professionals

Healthcare Attorney

Engage a healthcare attorney to: - Confirm state requirements for medical practices - Draft operating agreement - Review corporate practice of medicine compliance - Create any required bylaws or corporate documents

Expected cost: $1,500-$5,000 for entity formation

Accountant/CPA

Work with an accountant experienced in medical practices to: - Advise on entity selection tax implications - Implement S-Corp election if appropriate - Set up proper accounting systems - Determine reasonable salary for S-Corp

Expected cost: $200-$500 for initial consultation; ongoing fees for tax preparation

  • Research your state's requirements for medical practice entities
  • Determine if corporate practice of medicine doctrine applies
  • Estimate first-year and ongoing profit potential
  • Consult with healthcare attorney on entity options
  • Consult with accountant on tax implications
  • Decide on entity type
  • Determine if S-Corp election is appropriate (now or future)
  • Proceed to business registration process

Resources

Next Steps

Once you have selected an entity type, proceed to: - Business Registration Checklist - Startup Costs Overview