Announcement

Collapse
No announcement yet.

Professional corporation for group vs independent sole proprietors

Collapse
This topic is closed.
X
X
Collapse
First Prev Next Last
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Professional corporation for group vs independent sole proprietors

    I'm a rehab physician, in CA. I hopefully have a new partner coming to join my unit. It would be just me and him. Previously it was myself as an IC, as well as another doc who was directly employed by the hospital (which is an extremely unfavorable option financially). We didn't have anything in writing, but we covered each other's patients for call, vacation.

    Currently I'm a sole proprietor-it's simpler, it's cheaper. CA taxes professional corporations 1.5%, and physicians cannot form an LLC. My pass through deduction is also maximized as a sole proprietor, and since all my income is from my billings or a stipend where I fill out a time card, I really cannot justify s-corp distributions all that much. Certainly not enough to make the hassle worth it.

    The new physician joining me is asking about starting a group. I understand there's a professional/personal benefit to this-it's a bit more formal of an agreement to work together than us operating independently as sole proprietors and just covering vacation time for each other, sharing call, etc. And I guess we could get group health insurance and a group 401k. I'm not really sure those are beneficial, though I believe in CA ERISA protects group 401k but not i401k plans.

    As far as I can tell:
    1) Liability doesn't change--we're always personally liable for medical mistakes. If we're independent sole proprietors, he cannot be sued for my mistakes, similar to how his assets wouldn't be at risk if we were a professional corporation (though the corporation's assets could be). Correct?
    2) Taxes are higher-1.5% s-corp taxes in CA. If I earn $300,000, that's $4,500.
    3) I believe the 199a pass through deduction is more favorable as a sole proprietor compared to s-corp. That's what my accountant told me a year and a half ago. It had something to do with the language of the deduction--I don't recall it off the top of my head.
    4) If we're part of a group, I'd have to be an employee of the group, correct? So that would mean my deductions would be less favorable.
    5) I like things simple. I'm not a fan of the added complexity/accounting an s-corp requires.

    What would the benefits of us forming a professional corporation be? And what about any other downsides?

    Please consider:
    - We will have no employees
    - I doubt we'll add on any other partners to the group anytime soon, but a third physicians wouldn't be out of the question down the line
    - If it's relevant, I'd expect gross income to be $300-$400,000.
    - 100% of our income would be from insurance/patient collections and professional stipend for administering the rehab unit.
    - 100% inpatient/hospital-based job. (no office for people to slip on, get knocked down by an earthquake, etc. All property we work on/with is owned by the hospital, aside from my clothes and stethoscope)

  • #2
    Originally posted by Charlie88 View Post
    I guess we could get group health insurance and a group 401k. I'm not really sure those are beneficial, though I believe in CA ERISA protects group 401k but not i401k plans.
    You can not get group health insurance without at least one (1) non-owner/spouse employee.

    The differences between a small business 401k and a one-participant 401k only covering partners in a partnership or 2% shareholder-employees in an S-Corp are:
    • A mainstream one-participant 401k is available with no startup costs and administrative fees from many providers. A small business 401k will require non-trivial startup costs and annual administrative fees.
    • You don't have to file a Form 5500 until the total year-end 401k account balances are > $250K.
    • You can use Form 5500-EZ instead of Form 5500-SF or Form 5500 when filing is required.
    • With all things being equal with a partnership or S-Corp, you will have to start filing Form 5500s in half the time.
    More importantly, in these circumstances a small business 401k does not provide any ERISA anti-alienation protection. Only 401k plans covering at least one (1) non-owner/spouse employee are ERISA qualified plans.

    I see no benefit to merging your independent business revenues into a partnership or S-Corp. A sole proprietorship would likely be your best option with adequate business and personal liability insurance.

    Comment


    • #3
      Originally posted by Charlie88 View Post
      I'm a rehab physician, in CA. I hopefully have a new partner coming to join my unit. It would be just me and him. Previously it was myself as an IC, as well as another doc who was directly employed by the hospital (which is an extremely unfavorable option financially). We didn't have anything in writing, but we covered each other's patients for call, vacation.

      Currently I'm a sole proprietor-it's simpler, it's cheaper. CA taxes professional corporations 1.5%, and physicians cannot form an LLC. My pass through deduction is also maximized as a sole proprietor, and since all my income is from my billings or a stipend where I fill out a time card, I really cannot justify s-corp distributions all that much. Certainly not enough to make the hassle worth it.

      The new physician joining me is asking about starting a group. I understand there's a professional/personal benefit to this-it's a bit more formal of an agreement to work together than us operating independently as sole proprietors and just covering vacation time for each other, sharing call, etc. And I guess we could get group health insurance and a group 401k. I'm not really sure those are beneficial, though I believe in CA ERISA protects group 401k but not i401k plans.

      As far as I can tell:
      1) Liability doesn't change--we're always personally liable for medical mistakes. If we're independent sole proprietors, he cannot be sued for my mistakes, similar to how his assets wouldn't be at risk if we were a professional corporation (though the corporation's assets could be). Correct?
      2) Taxes are higher-1.5% s-corp taxes in CA. If I earn $300,000, that's $4,500.
      3) I believe the 199a pass through deduction is more favorable as a sole proprietor compared to s-corp. That's what my accountant told me a year and a half ago. It had something to do with the language of the deduction--I don't recall it off the top of my head.
      4) If we're part of a group, I'd have to be an employee of the group, correct? So that would mean my deductions would be less favorable.
      5) I like things simple. I'm not a fan of the added complexity/accounting an s-corp requires.

      What would the benefits of us forming a professional corporation be? And what about any other downsides?

      Please consider:
      - We will have no employees
      - I doubt we'll add on any other partners to the group anytime soon, but a third physicians wouldn't be out of the question down the line
      - If it's relevant, I'd expect gross income to be $300-$400,000.
      - 100% of our income would be from insurance/patient collections and professional stipend for administering the rehab unit.
      - 100% inpatient/hospital-based job. (no office for people to slip on, get knocked down by an earthquake, etc. All property we work on/with is owned by the hospital, aside from my clothes and stethoscope)
      To add to what spiritrider wrote above, if you plan to hire any staff at all, solo 401k plan is a total no-go. Even if you have a sole proprietorship/partnership, and you anticipate hiring anyone other than spouses, you should go with a full blown 401k plan (ERISA variety). This is because as soon as you add even a part-timer (that otherwise would not be eligible to participate in a 401k plan), they become 100% immediately eligible if you use any off the shelf solo 401k plan documents. We've ran into this issue before, and it is a complete disaster to deal with, as there is no way to correct it at all, you simply make all your staff immediately eligible even if you turn around and convert your solo 401k into an ERISA 401k plan.
      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

      Comment


      • #4
        Originally posted by litovskyassetmanagement View Post
        This is because as soon as you add even a part-timer (that otherwise would not be eligible to participate in a 401k plan), they become 100% immediately eligible if you use any off the shelf solo 401k plan documents. We've ran into this issue before, and it is a complete disaster to deal with, as there is no way to correct it at all, you simply make all your staff immediately eligible even if you turn around and convert your solo 401k into an ERISA 401k plan.
        As I have pointed out to you more than once on this forum, this is not true. With the exception of Vanguard, the other mainstream low-cost one-participant 401k providers (e.g. E-Trade, Fidelity, Schwab and TD Ameritrade) allow an election in their adoption agreement/plan document for eligibility restrictions of a minimum age of 21 and a minimum of one (1) year of service defined as a minimum of 1,000 hours/year.

        Although consistent with your caution, these plans and most other 401k plan documents/adoption agreements will have to be amended to incorporate the new three (3) years of 500 hours/year requirement in the SECURE Act. The financial institutions need to get a move on. The first countable year for the three years is 2021.

        Comment


        • #5
          Originally posted by spiritrider View Post
          As I have pointed out to you more than once on this forum, this is not true. With the exception of Vanguard, the other mainstream low-cost one-participant 401k providers (e.g. E-Trade, Fidelity, Schwab and TD Ameritrade) allow an election in their adoption agreement/plan document for eligibility restrictions of a minimum age of 21 and a minimum of one (1) year of service defined as a minimum of 1,000 hours/year.

          Although consistent with your caution, these plans and most other 401k plan documents/adoption agreements will have to be amended to incorporate the new three (3) years of 500 hours/year requirement in the SECURE Act. The financial institutions need to get a move on. The first countable year for the three years is 2021.
          While they do allow for those elections, they also specifically state that you can not have non-spouse employees, and there are very good reasons for this. Just because a solo 401k has a handful of provisions that can be elected, it does not have many other necessary provisions that a full 401k plan document does, and this plan can not easily be amended into an ERISA 401k (no TPA will do it that I know of). The brokerages can amend their own document to include certain things from SECURE and CARE act and other laws, but they don't have to do it now or ever for that matter (depending on the provisions), and you have no control over the timing. This is a grey area where there isn't a lot of knowledge available, so mistakes are made all the time. Thus if there is even a hint of non-spouse employees down the line, I never recommend a solo 401k plan to avoid any issues/mistakes. Also if one of the employees does become eligible, they will be eligible using the brokerage plan document which is really not designed to do anything in your favor (such as allow cross testing or preferable vesting schedule, or tons of other provisions that are in the full plan document), so for that reason, no solo 401k if you plan to hire, even in the future, a year or two of ineligible staff, and then pro-rata profit sharing for all and no vesting schedule can be quite a problem if your staff has met eligibility so you can't change these options on the fly and they are immediately eligible for profit sharing.
          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

          Comment


          • #6
            Originally posted by litovskyassetmanagement View Post
            While they do allow for those elections, they also specifically state that you can not have non-spouse employees, and there are very good reasons for this. Just because a solo 401k has a handful of provisions that can be elected, it does not have many other necessary provisions that a full 401k plan document does, and this plan can not easily be amended into an ERISA 401k (no TPA will do it that I know of).
            Even the IRS has been known to use that imprecise terminology, but is not correct. This issue is and has always been you can not have non-owner/non-spouse eligible employees. You of all people should know a one-participant 401k plan is not a different kind of 401k plan. It is still subject to the Internal Revenue Code, IRS rules and regulations with the exception of anti-discrimination provisions because their are no NHCEs and the relaxed reporting rules of Form 5500-EZ.

            Employee eligibility rules are no different in a one-participant 401k than an ERISA 401k plan with non-owner/non-spouse employees. Here is the relevant section of the Ascensus 401k plan document that E-Trade, Schwab, TD Ameritrade and Vanguard use for their Individual 401k plans.

            SECTION TWO: ELIGIBILITY REQUIREMENTS
            2.01 ELIGIBILITY TO PARTICIPATE
            Each Employee, except an Employee who belongs to a class of Employees excluded from participation as indicated in the Adoption Agreement, will be eligible to participate in this Plan upon satisfying the age and eligibility service requirements specified in the Adoption Agreement. If no age is specified in the Adoption Agreement, there will not be an age requirement. If no option for eligibility service is selected, no eligibility service will be required.


            E-Trade, Schwab and TD Ameritrade all have a complete section Section Two: Eligibility in their adoption agreement to elect age, eligibility service and application to existing employees..

            As I pointed out earlier it is only Vanguard that has no election in their Section Two: Eligibility. Instead, they have an explicit declaration that there are no employee eligibility restrictions with their plan. This is one of the reasons, I do not recommend Vanguard's Individual 401k plan.

            Fidelity uses their own Self-Employed 401k plan document and adoption agreement with the capability to take full advantage of the IRS allowed employee eligibility restrictions.

            Unless and until you provide relevant IRC, CFR, Guidance or 401k plan document evidence that what I have described is incorrect. You do the WCI community a tremendous disservice with this continued Fear Uncertainty and Doubt (FUD).

            Not to mention, if you don't know any TPAs who can amend a mainstream one-participant 401k plan to another 401k plan document, adoption agreement, trustee and/or custodian. You need to start working with competent TPAs. There are dozens of WCI forum members who have amended their mainstream one-participant 401k plans to other TPAs/plans.

            Comment


            • #7
              We don't plan any employees at this time. Maybe down the line, but if so it'd likely be a physician partner rather than employee.

              Comment


              • #8
                Originally posted by spiritrider View Post
                Even the IRS has been known to use that imprecise terminology, but is not correct. This issue is and has always been you can not have non-owner/non-spouse eligible employees. You of all people should know a one-participant 401k plan is not a different kind of 401k plan. It is still subject to the Internal Revenue Code, IRS rules and regulations with the exception of anti-discrimination provisions because their are no NHCEs and the relaxed reporting rules of Form 5500-EZ.

                Employee eligibility rules are no different in a one-participant 401k than an ERISA 401k plan with non-owner/non-spouse employees. Here is the relevant section of the Ascensus 401k plan document that E-Trade, Schwab, TD Ameritrade and Vanguard use for their Individual 401k plans.

                SECTION TWO: ELIGIBILITY REQUIREMENTS
                2.01 ELIGIBILITY TO PARTICIPATE
                Each Employee, except an Employee who belongs to a class of Employees excluded from participation as indicated in the Adoption Agreement, will be eligible to participate in this Plan upon satisfying the age and eligibility service requirements specified in the Adoption Agreement. If no age is specified in the Adoption Agreement, there will not be an age requirement. If no option for eligibility service is selected, no eligibility service will be required.


                E-Trade, Schwab and TD Ameritrade all have a complete section Section Two: Eligibility in their adoption agreement to elect age, eligibility service and application to existing employees..

                As I pointed out earlier it is only Vanguard that has no election in their Section Two: Eligibility. Instead, they have an explicit declaration that there are no employee eligibility restrictions with their plan. This is one of the reasons, I do not recommend Vanguard's Individual 401k plan.

                Fidelity uses their own Self-Employed 401k plan document and adoption agreement with the capability to take full advantage of the IRS allowed employee eligibility restrictions.

                Unless and until you provide relevant IRC, CFR, Guidance or 401k plan document evidence that what I have described is incorrect. You do the WCI community a tremendous disservice with this continued Fear Uncertainty and Doubt (FUD).

                Not to mention, if you don't know any TPAs who can amend a mainstream one-participant 401k plan to another 401k plan document, adoption agreement, trustee and/or custodian. You need to start working with competent TPAs. There are dozens of WCI forum members who have amended their mainstream one-participant 401k plans to other TPAs/plans.
                As I mentioned before, competent TPAs maintain their own plan documents. I don't know any TPA who would be amending other company's document (and this includes brokerage documents, I'm yet to hear anyone amending these). I can not speak for every TPA out there, but this is a rule, not an exception, and if some out there are amending brokerage plan documents, they are the ones who are not doing anyone any favors because these documents should not be used for custom-designed 401k plans. A custom-designed document should always be used if you want a plan other than a one-participant/solo 401k (for owner and spouse). If you use a brokerage document and you can find some TPA to amend it, proceed at your own risk because that TPA is NOT going to maintain/amend/keep track of the document since it is not on their platform, and they can't possibly be expected to maintain or restate it. Also, brokerage documents are there for a reason, and if you use a specific brokerage, you should be using their document because the brokerage is not going to honor an amended document that they didn't create. Doing these types of things can potentially create all types of issues down the line, so I wouldn't recommend this course of action.

                For those who want to do it right, hire a TPA and do a document from scratch. This will eliminate any potential issues. Trying to save a few bucks and hiring a TPA to update a brokerage plan document is a very bad idea, and I would not be encouraging anyone to do it. For full disclosure, I don't work with solo/individual plans, so I don't do much with these types of plans, other than sometimes fix a broken plan that started as an individual plan but evolved into a plan with staff. Last thing I want to do is worry about the differences of different brokerages and what they do or don't do in their plan document. It is much simpler to just create a custom document and have your TPA maintain/update it, and this will completely eliminate the possibility of making a mistake in the process. Unless doctors themselves become experts on these things (and most are not going to be), I don't recommend amending brokerage documents. Just because something can be done does not mean it should be done in this specific case.

                Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                Comment


                • #9
                  I see you conveniently neglected to even mentioning the employee eligibility issue you were incorrect about.

                  Originally posted by litovskyassetmanagement View Post
                  As I mentioned before, competent TPAs maintain their own plan documents.
                  More misinformation. With the exception of large TPAs like Ascensus, almost no TPAs maintain their own 401k plan document. They use a boilerplate 401k plan document licensed form a platform provider. The only thing they may do is make optional elections of features on that platform to generate semi-customized plan document.

                  Originally posted by litovskyassetmanagement View Post
                  I don't know any TPA who would be amending other company's document (and this includes brokerage documents, I'm yet to hear anyone amending these).
                  More misinformation, trying to put words in my mouth and then going off on a tangent down a rabbit hole. I never said anything about amending a brokerage's 401k plan documents. I said and I quote;

                  Originally posted by spiritrider View Post
                  amend a mainstream one-participant 401k plan to another 401k plan document, adoption agreement, trustee and/or custodian.
                  If you don't understand the difference, it makes me wonder if you understand that a 401k plan is its own entity with a life separate to any plan document, adoption agreement, trustee, custodian, etc...

                  Comment


                  • #10
                    Originally posted by spiritrider View Post
                    I see you conveniently neglected to even mentioning the employee eligibility issue you were incorrect about.


                    More misinformation. With the exception of large TPAs like Ascensus, almost no TPAs maintain their own 401k plan document. They use a boilerplate 401k plan document licensed form a platform provider. The only thing they may do is make optional elections of features on that platform to generate semi-customized plan document.


                    More misinformation, trying to put words in my mouth and then going off on a tangent down a rabbit hole. I never said anything about amending a brokerage's 401k plan documents. I said and I quote;


                    If you don't understand the difference, it makes me wonder if you understand that a 401k plan is its own entity with a life separate to any plan document, adoption agreement, trustee, custodian, etc...
                    You are wrong about TPAs not maintaining their own plan document. When you change TPAs, they always require you to switch to their plan document. Even if they didn't, every several years a document has to be restated and they would never restate a document that is not their own. They can let you have the old one for a year but eventually you have to switch. I'm not trying to nitpick here, or prove that you are wrong somehow, just to explain the general approach to individual/solo 401k plans vs. ERISA plans for those who are growing a practice and why I believe that the approach of amending a brokerage plan doc is risky in my opinion. There are so many mistakes made here, many of which I see first hand, that I don't recommend doctors to DIY with brokerage plan documents and discount TPAs who don't provide advice and will do anything you ask. This is in fact the most prudent approach for WCI that should be considered by docs who are specifically growing a practice and who form a group with the intent to grow. We'll just have to agree to disagree on this.

                    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                    Comment


                    • #11
                      There you go again with more misinformation, and ranting once again about amending a brokerage's one-participant 401k plan. When I said no such thing and even quoted myself to prove that. You seem to have a mental block, tunnel vision, reading or comprehension problem regarding this issue.

                      Do you not understand that a 401k plan is owned by the plan sponsor and not only can the 401k plan document be amended, but the 401k plan can be amended to a new 401k plan document. That including trustee -> trustee transfers is the only way to switch 401k plan providers.

                      Originally posted by litovskyassetmanagement View Post
                      You are wrong about TPAs not maintaining their own plan document. When you change TPAs, they always require you to switch to their plan document.
                      You continue to be incorrect. Large financial institutions/record keepers, platform providers, and large TPAs develop and maintain their own plan document. Even Vanguard does not maintain their own 401k plan document, they use one from Ascensus.. When you change TPAs or other 401k providers, of course they require you to change to the 401k plan document they provide. However, in the case of most TPAs it is not their 401k plan document, but one they license from someone else. Some TPAs may use their own or amended adoption agreement from the 401k plan document provider, but most definitely do not create and maintain their own 401k plan document.

                      I don't disagree with you that a WCI forum member expecting to hire eligible employees within the next year should go straight to an ERISA 401k plan from a TPA.

                      However, you do not have right to your own facts and do a tremendous disservice to the WCI community with your agenda driven disinformation. There is no reason a member of the WCI community should not adopt a one-participant 401k plan if they have no intention of hiring eligible employees in the near future.

                      I have always recommended that even if you think you will never hire an employee. You should not adopt a Vanguard Individual 401k plan or any other one-participant 401k plan that does not allow employee eligibility restrictions. You should adopt a one-participant 401k plan that allows such restrictions and elect the maximum allowable by the IRS and their adoption agreement.

                      Comment


                      • #12
                        ok stop you two until the OP follows up please.

                        Comment


                        • #13
                          Originally posted by Charlie88 View Post
                          We don't plan any employees at this time. Maybe down the line, but if so it'd likely be a physician partner rather than employee.
                          I would still recommend a customized plan document, not a 'solo' 401k plan variety. If you plan to grow, it is best to set up your plan the right way from the start. It might cost you more, but later on you will not have any issues to add any new partners/staff and have all of the right options in place. For example, a lot of plans start as individual self-directed brokerage accounts. This not a good plan design from the start. A better one is to have a fund menu with the option of having brokerage accounts offered from within the plan. It is more expensive this way, but avoids any problems one might have with brokerage account only plans. A long way from 'solo' 401k plans, but many docs don't think through the evolution of their practices and end up with badly designed/set up plans that they then have to convert to better designed plans to avoid having to deal with administrative issues that come with having multiple independently managed and set up accounts.
                          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                          Comment


                          • #14
                            Originally posted by Peds View Post
                            ok stop you two until the OP follows up please.
                            I'm being very aggressively accused of spreading misinformation and having an agenda (not sure which agenda this is, since I don't make any money from anything I've written regarding plan documents or plan administration). I will respond to any such accusations, as it is very unprofessional to attack someone personally on a public forum where information is exchanged for everyone's good.
                            Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                            Comment

                            Working...
                            X