Business Organizations

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Business Organizations
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There are four types of business organizations
that can be used for the practice of optometry

• general partnership
• limited liability company (LLC)
• professional association or corporation (PA or
  PC)
• subchapter S corporation

The most common choices today are limited
liability companies and subchapter S corporations.
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Partnership
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A partnership can be created through 4
different types of business organizations

• General partnerships
• Limited liability companies
• Professional associations or corporations
• Subchapter S corporations
• A general partnership is the traditional method.

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General Partnership

• A partnership can be defined as an association
  of 2 or more persons to carry on as co-owners a
  business for profit.
• Partnerships are quasi-legal entities they can
  hold title and exercise certain property rights
  but partnerships cannot sue in their own name and
  do not pay taxes.
• Partnerships are regulated in all states (except
  Louisiana) by the Uniform Partnership Act, which
  controls many aspects of the partnership but
  allows the partners to modify some provisions.

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General Partnership

• The financial issues (and other aspects of
  operation of the partnership) are controlled by
  the partnership agreement (or articles of
  partnership), which describes the manner in
  which the partnership is run and the
  responsibilities of the partners.
• The partnership agreement must provide for the
  formation, maintenance, and dissolution of the
  partnership (because all partnerships end).

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General Partnership

• The liability of partners is "joint and several"
  each partner is considered to be the agent of the
  other, and thus all partners are liable for the
  acts of a single partner.
• A partnership pays no taxes it is a conduit for
  tax purposes. The partnership does file a federal
  tax return, on Form 1065 this form reports the
  partnership's income, its expenses, and the
  partners' profit (or loss).
• There are distinct advantages and disadvantages
  to going into a partnership arrangement.

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Going into Partnership

• Advantages
• Generally higher earnings than solo
  optometrists  
• Shared overhead, less capital outlay per partner
  compared to solo optometrists  
• Office coverage during vacations, illness,
  personal holidays  
• Consultation with partners for business and
  patient management decisions   
• Expanded hours, convenience for patients  
• Investment in career protected and equity
  established for retirement, disability, or death

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Going into Partnership

• Disadvantages
• Loss of independence  
• Personality conflicts with partners or the
  spouses of partners  
• Differences in professional ideas and
  philosophies  
• Unequal distribution of patient load  
• Unequal distribution of income based on
  productivity of the partners

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Professional Associations or Corporations
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Corporations are artificial creations of law,
endowed with certain characteristics

• right of perpetual succession
• separation of ownership and management
• transfer of ownership through sale of shares of
  stock
• right to hold title, sue, claim tax benefits
• obligation to pay income tax
• liability for acts or omissions of employees

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Corporations enjoy certain advantages and
disadvantages when compared to other types of
business organizations

• Advantages
• Tax benefits (deductible insurance, retirement
  plans)
• Medical expenses reimbursement plans
• Employee insurance plans
• Sick pay
• Better administrative organization
• Transferability of ownership
• Continuity of existence
• Limitations on legal liability

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Disadvantages

• Cost of formation and operation are comparatively
  greater
• Increased taxes (35 for PAs and PCs)
• Accumulated earnings tax (39.6 over 150,000)
• Increased retirement plan costs
• Greater business complexity
• Loss of independence
• Disclosure requirements comparatively greater
• Licensees with different degrees (OD and MD)
  cannot be shareholders in some states

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Articles of incorporation are filed in the
state by the incorporators (only one is needed)
to describe the purpose of the corporation, its
stockholders, and its management.In a
professional association (PA) or corporation (PC)
the PA or PC may be formed by one or more
licensed professionals, who constitute both
ownership and management. Only licensed
professionals can own stock and serve on the
Board of Directors however, non-professionals
can be Officers.
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Structure of Corporations Shareholders
(owners)electBoard of Directors(long term
management)who electOfficers(day-to-day
management)
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Structure of Professional Associations/Corporation
sShareholders(owners may be one person must
be professional licensee)electBoard of
Directors(long-term management may be one
person must be professional licensee)who
electOfficers(day-to-day management may be one
person does not have to be professional licensee)
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The PA or PC is responsible for its contracts,
debts, and the negligence of its employees. The
shareholders (owner) are not responsible for
debts or liability claims, although in a one
licensee PA or PC if the licensee is negligent he
or she will be individually responsible and the
PA or PC will also be responsible as employer.
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PAs or PCs pay a federal income tax a "double
tax" is possible, if the PA or PC has a profit
(35 bracket) and the shareholder-employee is
paid a salary (10 to 35 bracket). PAs or PCs
must file an annual tax return, on Form
1120.Most states also charge an income tax for
corporations. In Alabama, for example, the tax
rate is 5 of taxable income. A business
privilege tax is also levied in Alabama against
corporations and LLCs, at the rate of 1 per
1,000 of taxable income, or a minimum of 100.
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Subchapter S Corporations
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Subchapter S Corporations

• Small corporations may elect to be taxed under
  Subchapter S of the tax code.
• S Corporations pay no income tax, rather being
  taxed in the same manner as a partnership or LLC.
• Shareholders of an S Corporation do not have to
  be like-kind professional licensees thus an
  optometrist may share ownership with another
  professional (such as an optician) or
  nonprofessional (such as a spouse).
• An S Corporation is limited by law to 100
  shareholders.

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Subchapter S Corporations

• To create an S Corporation, first a business
  corporation must be formed, then it must elect
  Subchapter S status.
• The election must be unanimous among the
  shareholders.
• The election must be made during the first month
  of the tax year (or in the month preceding).

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Subchapter S Corporations

• Because an S Corporation pays no taxes, it avoids
  the "double tax" imposed on earnings of a PA or
  PC. Employees of an S Corporation are paid
  salaries, on which individual income tax is
  imposed.
• Employees of S Corporations may participate in
  tax-deferred retirement plans, such as Keogh
  defined benefit and defined contribution plans,
  and 401(k) plans, thus providing tax benefits
  similar to those offered by PAs and PCs.

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Subchapter S Corporations

• Potential tax savings can be realized in an S
  Corporation by the payment of dividends (a return
  of profit earned by the business) to the owners.
• If an annual dividend is paid, although the
  amount is subject to income tax, it is not
  subject to Social Security/Medicare tax. Example
  after all expenses and salaries are paid, there
  is a profit of 20,000, which is taxable income
  for the 2 owners but not subject to Social
  Security/Medicare withholding.
• This represents a savings of 15.3, which is
  the Social Security/Medicare tax percentage for
  self-employed individuals.

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Subchapter S Corporations

• Tax writeoffs are not the same for S Corporations
  as for PAs and PCs for example, life and
  disability insurance premiums may be deducted by
  a professional association or corporation, but
  not by an S Corporation.
• Liability is similar to that of a professional
  association or corporation an optometrist-shareho
  lder is not personally liable for the negligence
  of another optometrist-shareholder rather, the S
  Corporation is responsible.

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Subchapter S Corporations

• Subchapter S Corporations are occasionally chosen
  as the business organization for optical
  dispensaries that are separate from private
  practices.
• Because laypersons (opticians, spouses) can be
  stockholders in S Corporations, these individuals
  can be co-owners of the dispensaryeven though
  the optometrist practices as a PA or PC and they
  are prohibited from being stockholders
  (co-owners) of the PA or PC.

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Limited Liability Companies
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Limited Liability Companies

• Limited Liability Companies are a relatively new
  type of business organization (first authorized
  in Alabama in 1993).
• An LLC may be formed by 1 or more individuals,
  partnerships or corporations, and may have
  perpetual duration.
• Articles of Organization and an LLC operating
  agreement are used to establish the purpose,
  conduct and management of the company.

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Limited Liability Companies

• An LLC can be used to render professional
  services thus, optometrists can form an LLC.
• Special provisions apply to the personal
  liability of members and to the transferability
  of members' ownership to successors (these rules
  are similar to the rules for professional
  associations or corporations).
• Members of the LLC control management unless the
  Articles of Organization provide otherwise.

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Limited Liability Companies

• The LLC is treated like a partnership for tax
  purposes the LLC pays no income taxes and profit
  (or loss) is allocated to the members of the LLC
  just as in a partnership.
• Members of the LLC are not liable as individuals
  for the debts or negligence of the LLC or for the
  debts or negligence of other members. In this,
  the LLC is like a professional association or
  corporation.

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Limited Liability Companies

• The formation of LLCs is controlled by state law
  (the state's Limited Liability Company Act),
  found in all states.
• For tax reporting purposes, the LLC may elect to
  be classified as a corporation or a partnership
  (for 1 person LLCs, as a corporation or a sole
  proprietorship) this election is made by filing
  Form 8832.

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Which is easiest, LLC or Subchapter S?

• Formation of an LLC requires less formality
• LLCs do not have to hold formal meetings and
  record minutes
• Only Sub S corporations must issue stock
• Tax reporting for one person LLCs is Schedule C
  for LLC partnerships is Form 1065 for Sub S
  corporations tax reporting is on Form 1120S
• Sub S shareholders share profits as dividends an
  LLC splits profits in accordance with the
  operating agreement

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Keogh Plans

• Retirement plans for partnerships include Keogh
  Plans.
• These plans have achieved parity with the
  retirement plans allowed the employees of
  professional associations or corporations.
• Contributions to a Keogh Plan are tax deductible.
  The earnings are tax sheltered until withdrawn.
• Withdrawals must be made between ages 59 ½ and 70
  ½ years or a penalty will be imposed.
• Withdrawals can also be made without penalty if
  due to disability or death.
• Keogh accounts can be used for loans under
  certain circumstances.

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Keogh Plans

• There are 2 basic types of plans
• defined contribution an established amount is
  contributed each yearin a profit sharing plan,
  up to 25 of income, to a maximum of 46,000 (for
  the 2008 tax year) the amount is based on
  profits and may be changed from year-to-year.
• defined benefit the actuary-determined amount
  necessary to fund a retirement income equal to
  100 of earnings, up to 185,000 a year (as of
  2008) yes, that means you can put everything you
  earn into the Keogh to fund your retirement!

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Keogh Plans

• Defined contribution profit-sharing plans must
  include eligible employees up to 25 of income
  may be contributed, and the employer determines
  the percentage of profit-sharing to contribute to
  the plan. Again, the limit is 46,000.
• If a Keogh Plan is established, all full time
  employees are eligible to participate ("full
  time" is defined as an employee who has been
  employed for 2 years and works more than 1000
  hours a year).

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Keogh Plans

• Vesting is the length of time needed for eligible
  employees to be entitled to 100 of investment
  income (the amount in excess of what the employee
  has contributed). Cliff vesting requires 3
  years to reach 100, while graded vesting takes
  6 years (0 first year, then 20 a year after).
• Plans may vary with respect to vesting. If an
  employee quits before being 100 vested, the
  employee forfeits the non-vested portion of the
  fund.
• Example An employee has contributed 5,000 to a
  Keogh plan over 4 years, after which time the
  accumulated value of the employee's share is
  7,000. The employee is 60 vested in the plan.
  If the employee withdraws from the plan, the
  employee may take the 5,000 contributed to the
  plan, plus 60 of the 2,000 accumulated value,
  for a total of 6,200.

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Keogh Plans

• As the example illustrates, the contributions
  made by employees are irrevocably theirs, even if
  the employees quit or are fired.
• The percentage contribution for defined
  contribution plans must be the same for all.
  Example if 25 of income is contributed, an
  employer earning 100,000 contributes 25,000,
  while an employee earning 20,000 contributes
  5,000.

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Keogh Plans

• Because of the large annual contributions
  permissible under Keogh Plans (particularly
  defined benefit plans), they tend to be used by
  individuals who start a retirement plan rather
  late in their careers.
• Orparadoxicallythey can be used by high-earning
  individuals who want to retire early (withdrawals
  can start at 59 ½ years without penalty).
• The requirement that full-time employees be
  permitted to participate in the plan increases
  the cost and complexity of plan administration.

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Self-Employed Business-Related Tax Deductions
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