Episode 1754 - Incorporation: do's & don'ts

The #PTonICE Daily Show

Alan Fredendall // #LeadershipThursday // www.ptonice.com

In today's episode of the PT on ICE Daily Show, ICE Chief Operating Officer Alan Fredendall discusses the importance of incorporation, the difference between various corporate structures, and secondary benefits to incorporation

Take a listen to the podcast episode or check out the full show notes on our blog at www.ptonice.com/blog.

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EPISODE TRANSCRIPTION

INTRODUCTION Hey everybody, Alan here. Currently I have the pleasure of serving as their Chief Operating Officer here at ICE. Before we jump into today's episode of the PT on ICE Daily Show, let's give a shout out to our sponsor Jane, a clinic management software and EMR. Whether you're just starting to do your research or you've been contemplating switching your software for a while now, the Jane team understands that this process can feel intimidating. That's why their goal is to provide you with the onboarding resources you need to make your switch as smooth as possible. Jane offers personalized calls to set up your account, a free date import, and a variety of online resources to get you up and running quickly once you switch. And if you need a helping hand along the way, you'll have access to unlimited phone, email, and chat support included in your Jane subscription. If you're interested in learning more, you want to book a one-on-one demo, you can head on over to jane.app.switch. And if you decide to make the switch, don't forget to use the code ICEPT1MO at signup to receive a one-month free grace period on your new Jane account.

ALAN FREDENDALL Good morning, everybody. Welcome to the PT on ICE Daily Show. Happy Thursday morning. Hope your day is off to a great start. My name is Alan, happy to be your host today. Currently have the pleasure of serving as our Chief Operating Officer here at ICE and a faculty member in our Practice Management and Fitness Athlete Divisions. It's Leadership Thursday. We talk all things small business ownership, practice management, tips and tricks, that sort of thing. Leadership Thursday also means it is Gut Check Thursday. So Gut Check Thursday this week comes courtesy of street parking. If you don't know street parking, It is an at-home functional fitness crossfit style program designed for people who are primarily working out in the basement, the garage, the barn, whatever. A bunch of different options, at-home programming designed to do by yourself or maybe with your spouse or your kids or something like that. So this workout was sent to me by our very own Dustin Jones, division leader over in our older adult division. 12 rounds for time, 5 double dumbbell hang power cleans right into 7 double dumbbell front squats and then drop the dumbbells and do 9 box jump overs. Recommended weights, 50's for guys in the hands, 35's for ladies. and then a 24 inch box for guys and a 20 inch box for ladies. So go there, you're trying your best to hold on to a minute per round, maybe faster if you can really cycle those dumbbells really fast and you're light on your feet and springy on that box and definitely trying to get done under the 15 minute mark. So remember, you are rewarded for participating in Gut Check Thursday. Post your time lapse on Instagram. tag us at ice physio hashtag gut check Thursday you'll be entered into a weekly drawing to win a free ice t-shirt that will mail out to you so that is gut check Thursday today we're talking about incorporation do's and don'ts so we start our brick by brick course with this topic. This is a very important topic. I believe this is a very overlooked topic. I think this is an area of practice management where we can think it really doesn't matter. We can get really sloppy with how we incorporate and our incorporation type, if we incorporate at all, and I think it's really fundamental to understand why we incorporate, how we incorporate, and one of those benefits that you may not know that will result in you hopefully paying less tax money each year as a benefit of incorporation.

WHY INCORPORATE? Let's start with why do we incorporate? Who cares, Alan? I'm seeing patients at my CrossFit gym or I see a couple people from my run club or whatever. I see them on nights and weekends. What does it really matter? Is it worth paying the $50 to my state to form a corporation? Short answer, yes. We talk a lot in Brick by Brick that becoming a business owner, even if it's not a full-time thing, even if you never plan to grow your practice beyond yourself, the whole idea behind being a business owner is to really look at and evaluate where are those areas that have maybe even a small degree of risk but that has a really simple, easy, low cost, time and or money solution to eliminate that risk. And owning a business, running a practice is really about minimizing that risk as much as possible because why not? Why carry a bunch of risk even if it's a hundred different amounts of really small types of risk? if you don't have to. And incorporation is one of those risks. The cost of forming a corporation is something that you can do in every state on your own. You don't need to hire a lawyer. You don't need to pay $1,000 to LegalZoom. We show you in Brick by Brick that it's a form usually on your state website. It's something you can fill out yourself. It's something that might even be free, especially if you're a small business owner, you're a first-time business owner. Something that you can knock out as simple as a couple minutes. In some cases, have your incorporation documents back instantaneously. So you're thinking, in some states, five minutes and zero dollars to form a company that is going to go a long way to limit your risk. Let's talk about that risk. What is that risk? When you are running a business, if you are not incorporated in the eyes of the law, both the legal law as well as tax law, you and your company are not separate entities. You are what is considered a disregarded entity. You are somebody who has not formed a corporation. You and your company are the same person, the same entity, and that carries a lot of that risk that we were just talking about. If you were to be sued for whatever reason, your business assets can be held liable to cover whatever you might be sued for personally, and vice versa. If someone falls in your parking lot, if a robber tries to break into your clinic and falls through the window and cuts their arm on your window glass and sues you, Your personal assets can be used and seized to pay for the outcome of that lawsuit should you lose. And that is because you have not legally separated yourself, the individual American taxpayer, from your company, your business. And again, that process is very, very, very simple, often quick, often very cheap to do. And so we always, always, always encourage people Even if you are seeing one patient a week, one patient a month, you are just a side hustle, seeing patients five to 10 hours a week, even if you never plan to grow beyond yourself, you plan to just essentially be self-employed, spend the 50 bucks, spend the 100 bucks, spend the 10 minutes, spend the hour, and incorporate so that you create that legal division between yourself and your business. Your personal assets are protected when the business gets in trouble, your business assets are protected when something may happen in your personal life. The last thing you want to do is have your house seized because maybe somebody slipped on the ice in your parking lot which you have no control or responsibility over and yet here you are having your personal assets seized because you have not incorporated.

DIFFERENCES IN CORPORATE STRUCTURE So looking at a corporation, what are the two major types that we see with physical therapists? These are going to be state dependent, but you are going to form some type of limited liability corporation. The reason, again, we do this is right in the name of those companies. We are limiting our liability. So we can either form a limited liability company, LLC, or in some states, Physical therapists may be required to form a Professional Limited Liability Corporation, PLLC, or sometimes called Professional Corporation, or PC. What are the differences? They're important and it's important to know them. I'll start with this, you should always form an LLC and not a PLLC if you do not need to form a PLLC. The major difference between these two corporation types is that in an LLC you are protected from malpractice and fraud claims against anybody else in the business including yourself as a personal practicing physical therapist working in your own business. Now in a PLLC, a professional limited liability corporation, what some states have done is said, hey, professional level folks, folks who are licensed professionals, whether they're healthcare professionals, mental health therapists, attorneys, dentists, whoever, anybody that is required to have a professional license in this state must form a professional limited liability corporation or professional corporation. Why? These states are saying, hang on a second, you should not be safe from committing male practice or fraud as an individual licensed provider, even if you are acting within the scope of a corporation. And so the difference between an LLC and a PLLC, primarily, is that you do not have built-in mail practice and fraud protection with that PLLC. At the end of the day, you have to form whatever your state requires, so if you have to form a PLLC or PC, you have to do that. But if you don't, you want to form that LLC. The second difference in a PLLC is there is a big con, and it is that everybody in the company, anybody who will ever have ownership stake in that company, has to be from the exact same profession. So for a while, ICE was a PLLC. We are now a corporation, an inc, if you will, but we were a PLLC, which means that Jeff Moore was our owner. He's a physical therapist and because he formed the PLLC and he was a physical therapist, no one else could have ownership stake in the company that wasn't also a physical therapist. So that's something to keep in mind, especially if you're going into business with a partner, that partner must be a physical therapist. If you are also a physical therapist, if you were to sell the company, you would have to sell it to another physical therapist. If you were to pass it on to your children, or your spouse, or any of those things, everybody would have to be from the same company, or you would have to dissolve and reform the company. If you're dealing at all with any sort of contract insurance or whatever, you want to avoid obviously dissolving your company, losing your business, losing your business name, losing your tax ID, all that sort of thing. So we want to avoid dissolving our company if the company is changing hands under good terms. And so that is the second con of a PLLC. But again, if you have to form it by your state law, you have to form it. So LLC versus PLLC, if you're able to, always choose LLC, but recognize you might have to choose PLLC.

TAXATION BENEFITS TO INCORPORATION And now the final benefit, a benefit that's not talked about a lot, is one of the reasons, aside from protecting yourself from legal liability, is that there are a lot of taxation benefits to forming a corporation. This is really hard to understand, but if you have been alive for a while, you recognize that this is naturally true. America is built to service companies. There are a lot of legal benefits. There are a lot of tax benefits to owning a company. Even if you don't own a giant company like Amazon or Tesla or something like that. Even if you own your own small business and you're your own employee. there are a lot of taxation benefits to incorporating as an LLC or a PLLC. The primary benefit is that you can elect something called S-corp taxation. This is a form you fill out with the IRS, form 2553, and this is not a different type of corporation. What this is doing, back in 2016 under President Trump, a law was passed where we can elect to be taxed as an S-corporation. What does that mean? It means we are eligible for pass-through taxation. Instead of paying a 21% flat corporate tax on all of the revenue that our business makes, and then paying it to ourself, paying it to others, and having those folks pay income tax on that money, avoiding that double tax is the result of something called S-corp taxation. And so, your company does not pay tax, it does not report anything to the government, you pass through your revenue and expenses to your personal income tax. What does that do? That provides us with two main avenues for benefits. The first is it lets us enroll 20% of all of the business expenses over to our personal income tax as a deduction. Now that's pretty huge. As you're starting, you may not spend a lot in your business, but if your business grows to multiple people, you will find yourself spending tens of thousands and hundreds of thousands of dollars in expenses. What's nice is that 20% of that can get pulled through to your personal income tax as a tax deduction. And so you get to stack that on top of all the other stuff you write off. As a business owner, you have a lot more leeway now of other stuff you can write off. You can write off anything that you may have spent money on that's a reasonable business expense. And so by having a business, by being incorporated, you're able to write off a lot more things and overall pay a lot less income tax than when you were an unincorporated personal citizen just paying taxes. That is one of the primary benefits of spending the time and money to get yourself incorporated.

SUMMARY So incorporation, do's and don'ts. Do please incorporate. If I haven't stressed it enough, it is a relatively cheap, quick process that gives you a lot of legal protection. It also gives you a lot of taxation benefits that should see your tax bill be lower once you own a business and are incorporated than before when you were not incorporated and you were just a private citizen paying taxes normally. So if you have Deeper questions about this, our Brick by Brick course starts again July 2nd. We go really deep into the weeds on topics all like this. We talk about incorporation, we talk about whether or not you should work with insurance, we talk about how to work with Medicare either in network or taking cash. and we get into the nitty gritty about a lot of business topics so that at the end of the eight weeks, you feel really good about starting your practice or at least understanding the steps you need to take to start your practice. So if you're interested, we'd love to have you. Again, the next class starts July 2nd. I hope this was helpful. Have a wonderful Thursday. Good luck with that Gut Check Thursday workout. If you're coming to Michigan this weekend for the Fitness Athlete Live Summit, we'll see you tomorrow. Have a good weekend. Bye, everybody.

OUTRO Hey, thanks for tuning in to the PT on Ice daily show. If you enjoyed this content, head on over to iTunes and leave us a review, and be sure to check us out on Facebook and Instagram at the Institute of Clinical Excellence. If you're interested in getting plugged into more ice content on a weekly basis while earning CEUs from home, check out our virtual ice online mentorship program at ptonice.com. While you're there, sign up for our Hump Day Hustling newsletter for a free email every Wednesday morning with our top five research articles and social media posts that we think are worth reading. Head over to ptonice.com and scroll to the bottom of the page to sign up.