Choosing the Right Entity Type for Your Private Practice and How to Get a Free EIN

Starting a private practice is an exciting journey, but choosing the right business entity and understanding the basics of obtaining an Employer Identification Number (EIN) can be overwhelming. This guide will help you navigate these crucial steps and set up your practice for success.

If you already saw my post on choosing the right entity type, this might be a little repetitive but there is new and other helpful info, I promise ;)

Choosing the Right Entity Type

When starting a private practice, selecting the appropriate business entity is essential for legal, tax, and operational purposes. Here are the main entity types to consider:

Sole Proprietorship

A sole proprietorship is the simplest and most common structure for new private practices. Here are the pros and cons:

Pros:

• Easy and inexpensive to set up

• Complete control over the business

• Simple tax filing (income is reported on your personal tax return)

Cons:

• Unlimited personal liability for business debts and obligations

• More admin work to change entity types later on

• Usually have to file your D/B/A name with you jurisdiction and get it notarized (for a fee)

LLC/PLLC

A Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC) offers more protection and flexibility. The difference between LLC and PLLC typically depends on state regulations and the type of professional services provided. Check with your state for specific requirements.

Pros:

• Limited liability protection for personal assets

• Flexible tax options (can be taxed as a sole proprietorship, partnership, or corporation)

• More credibility with clients and partners

Cons:

• More paperwork and costs than a sole proprietorship

• Annual state fees and regulations to comply with

LLC Taxed as an S-Corp

An LLC can elect to be taxed as an S-Corporation, which can offer potential tax benefits.

Pros:

• Potential for tax savings on self-employment taxes

• Limited liability protection

• Ability to pay yourself a salary and take additional profits as distributions (which are not subject to self-employment tax)

Cons:

• More complex tax filing requirements

• Need to ensure reasonable salary to avoid IRS scrutiny

How to Start Your Business

1. Name Your Business (and check trademarks): Use your state's name availability checker and check trademarks to ensure your business name is unique.

2. Choose Your Entity Type: Decide on the best entity type for your practice.

3. Register Your Business: File the necessary paperwork with your state (e.g., Articles of Organization for an LLC).

4. Get an EIN: Obtain your Employer Identification Number (EIN) from the IRS.

5. Open a Business Bank Account: Keep your personal and business finances separate.

6. Get Necessary Licenses and Permits: Check your state and local regulations.

Changing Entity Types

If you start as a sole proprietorship and later decide to change to another entity type, here are the basic steps:

1. Dissolve Sole Proprietorship EIN: You may need to dissolve your current EIN and obtain a new one.

2. Form the New Entity: Register the new business entity with your state.

3. Transfer Assets and Liabilities: Move your business assets and liabilities to the new entity.

4. Update Licenses and Permits: Ensure all business licenses and permits reflect the new entity.

Tax implications usually remain the same for single-member entities, but always consult with a CPA for specific guidance.

How to Get a Free EIN from the IRS

An EIN is essential for tax reporting and opening a business bank account. Here’s how to obtain one for free:

1. Visit the IRS Website: Go to the IRS EIN application page here.

2. Complete the Online Form: It takes 5-10 minutes to complete the online form. You can also apply by paper if preferred.

3. Receive Your EIN: You will receive your EIN immediately upon completion. Unless you mail it in, then it can take several weeks.

Important Note: Do not fall for companies that charge for EIN services. The process is FREE and straightforward.

Do I need an EIN if I am a Sole Proprietor?

It is best practice, in addition to protecting your social security number, here are some other benefits:

• Separates personal and business finances

• Required for hiring employees

• Needed for business bank accounts and credit

Need Help Starting Your Private Practice?

If you need assistance starting your private practice, I offer 1:1 coaching and will soon launch a comprehensive course.

Disclosure: This information varies by state, so always check with your Secretary of State for specific requirements.

By following these steps and choosing the right entity type, you can lay a solid foundation for your private practice and focus on providing excellent care to your clients. You can also avoid costly mistakes, lawsuits, and more.