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Professional Micro-Corporations: Should I Start A PC or a PLLC?

Jun 14, 2024

Things Can Change

I was speaking to a young orthopedic surgeon recently and he was a little frustrated at the state of his career. He went to work in a large metropolitan area and after completing his orthopedic residency joined a private orthopedic practice group. Just prior to his career launch, the group sold out to the local hospital system and the end result was that he became a W-2 hospital employee.

Very quickly he became aware of the inefficiencies of staffing and practice management in an employment situation—with the roll down being that his employer falsely labeled him as a low performing surgeon. This was extremely frustrating since the issue was not his professional productivity, or work efficiency—rather it was a system problem related to the highly dysfunctional practice management of the hospital. Like most doctors, he felt helpless and frustrated to fix the issues that were out of his control, but were all under the control of management—who were passive about the issues.

Then he filed his taxes for the first time under an attending physician salary. This brought on the additional realization that W-2 earnings for high earning physicians is extremely tax inefficient. You are basically a sitting duck for the IRS and you have very few tax optimization moves, thus turn over and average of $85,000-$100,000 of your income to government every year.

Looking For Alternatives

Both experiences led him a journey that led to my book “Doctor Incorporated: Stop The Insanity of Traditional Employment and Preserve Your Professional Autonomy”. Here he was inspired to move away from traditional employment and instead pursue the best alternative option which is an employment lite contract through a professional micro-corporation.

Fortunately the hospital across town was much more willing to look at creative contractual options in the recruitment battle, including professional services agreements. This doctor had a urology friend who just made the same transition to an employment lite PSA with that hospital and encouraged him to do the same.

So he reached out to me about working with SimpliMD on the set-up of a micro-corporation and employment lite contract for him. In the process, we had an interesting discussion about whether it would be better to set up a Professional Corporation(PC), which is called a Professional Association in Texas, or a Professional LLC (PLLC).

By the way, I encourage you to check out my blog post here explaining the different terminology for professional corporations in each state: Micro-Corporation Names: Your Professional DNA

So I thought it would be good for our community to explore this common question about PC’s/PA’s vs PLLC’s.

PC/PA vs PLLC in Texas

Tax considerations for physicians in Texas when comparing a Professional Association (PA) taxed as an S corporation (S corp) versus a Professional Limited Liability Company (PLLC) taxed as a disregarded entity or an S corp:

Professional Association (PA) Taxed as an S Corporation:

  • Structure:

    • A PA is a business structure created under the Texas Civil Statutes.

    • It resembles a corporation and is governed by provisions similar to those for for-profit corporations in the Texas Business Organizations Code (TBOC).

    • Owners are called “members.”

    • Directors are elected to govern and operate the entity.

    • Officers (e.g., president, secretary) manage day-to-day operations.

  • Taxation:

    • A PA can elect to be taxed as an S corporation.

    • S corp taxation allows for pass-through taxation, meaning the business itself does not pay federal income tax.

    • Instead, profits and losses flow through to the owners’ personal tax returns.

    • Owners report their share of the business income on their individual tax returns using Schedule K-1.

    • The PA files an annual informational tax return (Form 1120S) but does not pay corporate income tax.

    • Each owner receives a Schedule K-1 from the business, which details their share of income or loss.

Professional Limited Liability Company (PLLC) Taxed as a Disregarded Entity or S Corporation:

  • Structure:

    • A PLLC is governed by the Texas Business Organizations Code’s limited liability company provisions.

    • It offers more flexibility than a PA.

    • Members (owners) can be licensed individuals or other professional entities.

    • Operational flexibility: run by members or appointed managers.

  • Taxation:

    • Default treatment for a PLLC is as a disregarded entity (if single-member) or a partnership (if multi-member).

    • Disregarded entity taxation means the business itself does not pay federal income tax.

    • Instead, profits and losses flow through to the owners’ personal tax returns.

    • PLLC members report their share of business income on their individual tax returns.

    • Alternatively, a PLLC can elect to be taxed as an S corporation.

    • S corp taxation follows the same pass-through principles as a disregarded entity.

    • The PLLC files an annual informational tax return (Form 1120S) but does not pay corporate income tax.

In summary, both PA and PLLC structures provide liability protection, but the PLLC offers more operational flexibility and tax options. Choosing between them depends on your preferences, business needs, and desired level of control.

You can read more about professional associations and PLLC’s in Texas here. In the end which is better can vary from state to state in regards to small business, tax, and fringe benefit advantages.

Because I am not an attorney or tax professional, I always recommend you consult legal and tax professionals to make informed decisions! I can help you with those type of connections through a SimpliMD business consultation here.