Tax Tips Blog

A podiatrist from East Texas would like to know:I’m a podiatrist in East Texas. My bussiness was file as an professional association under Texas Professional Association Act. For tax purposes, should my association be tax as a Corporation or Sole Proprietorships? Thanks

My reply:A Texas Professional Association is an organization created by an agreement between its member-owners stating how they intend to handle their business affairs.

Around the same time that you file under the Texas Professional Association act many physicians have choosen to incorporate in order to limit their liability. If you have not incorporated, then usually Texas will treat an unincorporated association as a partnership.

If there is only one member, then Texas would treat it as a sole proprietorship.

In rare circumstances, if the unincorporated association has attributes of those of a corporation (like centralized management, continuity of life, limitations of liability, etc.), then the services might be considered performed by an incorporated employing unit.

This is NOT something that an accountant should be deciding, but rather an attorney.

In hopes of being more helpful….most likely shortly after filing under the Texas Professional Association Act you applied for an Employer Identification Number with the IRS to pay your employees. When you completed this form (Form SS-4) you stated, what type of entity you organized under for tax purposes. Just because you wrote your type of entity on this form, doesn’t mean you actually filed the proper legal documents to become this entity, but if you had an accountant or lawyer prepare this form for you, they most likely read the legal documents before answering that question.

I hope I answered your question.

Good luck,

Gina

Additional Side Comment: Due to the recent change in the Texas Franchise Tax, and the Texas cap limiting non-economic damage awards (including pain and suffering) against physicians, to $250,000, many physicians are now considering organizing as a General Partnership and making sure their liability is covered via insurance.

This is one of the most common questions that new business owners ask me and when they do, I usually give this standard reply…. The correct answer usually depends on a large number of details including the type of product or service the business will be selling, the current and potential size of the business, the business’s source and type of beginning and future capital (cash), the number of employees and whether or not they are related, if the owners are married whether or not their spouses are working and have company benefits, if the business wishes to distribute the profits of the company in equal proportion to their investment in the business or not, etc. Then I tell them they will usually be happiest if they follow these steps: Step One: Put your Business Plan in writing A business plan doesn’t have to be anything fancy or long and you can do it yourself. In general a business plan includes:

• A description of your business
• the marketing strategy you intend to employ in order to make your business a success
• who the owners are, the owner’s role in the company, how they intend on sharing in the debt, profit and/or losses, what happens when one owner decides to leave or if the business wishes to take on a new owner
• how you intend to get the cash to start your venture and how you intend to get future cash, if needed.

Step Two: Have a Meeting with your lawyer, CPA and insurance agent TOGETHER. Provide each of them with a copy of your business plan in advance of the meeting along with a list of your questions or concerns. At the meeting ask them, based on the information you have provided in the plan, which entity they believe you should create. Many people fail to include all three of these professionals or don’t have a meeting with all three together. That may be a huge mistake. The two most common concerns when someone creates a business is liability protection and taxes. Many people know you have liability protection with a corporation, but there are exceptions for certain professions, type of liabilities and whether or not you personally guaranteed any loans of the business. This is why both your lawyer and insurance agent should be involved. The hot new entity of choice a LLC (Limited Liability Company), but this entity is still considered new and as I explained in my article The New Texas Franchise Tax, LLCs are subject to Texas Franchise and Margin tax, two good reasons to consult your lawyer and CPA before choosing this structure. Step Three: Listen to their adviceMake sure you understand what each adviser is telling you and why they are giving you the advice they are. Take notes. Ask questions. Then go back and review this meeting and their conclusions with everyone involved in your business. Step Four: Make Your Own DecisionThis is your businesses and no one else’s so every decision that you make, should be yours. Yes, it’s true that you can change your business structure later, but there are exceptions and rules involved that could mean a lot of additional professional fees and taxes.