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What are the Business Structure Options for Nursing Group Practices in California?
Choosing the right business structure is a crucial decision for nursing group practices in California. The choice of business entity determines how the nursing group practice is taxed, the extent of personal liability protection and personal asset protection available to the registered nurse or nurse practitioner professionals, and the administrative requirements the registered nurses and nurse practitioners will need to manage in operating the nursing group practice.
A recent article titled “What are the Business Structure Options for Solo Registered Nurses and Nurse Practitioners in California?” discussed the business structure options available to solo registered nurses and nurse practitioners starting a solo nursing practice, however, for two or more registered nurses and nurse practitioners starting a group nursing practice together in California, there are different options available.
This article provides an overview of the various business structure options available to registered nurses and nurse practitioners starting a group nursing practice in California, helping registered nurses and nurse practitioners to make an informed choice that aligns with their professional goals and liability concerns in the most tax efficient format possible.
Executive Summary: Putting the Conclusion First for Busy Registered Nurses and Nurse Practitioners
Summary of Practicing Nursing as a General Partnership
The primary benefit of a California General Partnership for registered nurses and nurse practitioners is its simplicity. There are few legal formalities to establish a California General Partnership and tax reporting is equally straightforward. However, a California General Partnership is not a separate legal entity, which means that registered nurse or nurse practitioner partners are jointly and severally liable for all business debts, liabilities, obligations, and legal judgments (including malpractice liability) and the lack of a separate legal entity also means there is no distinction between personal and professional business assets for registered nurse or nurse practitioner partners, meaning the debts, liabilities, and legal judgments for which registered nurse or nurse practitioner partners are liable are satisfied from the personal assets of those registered nurse or nurse practitioner partners.
Summary of Practicing with a California Professional Corporation
While slightly more complex than California General Partnerships, the complexity of a California Professional Nursing Corporation may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. As a separate legal entity, California Professional Nursing Corporations significantly reduce liability risks and are more tax efficient for most registered nurses and nurse practitioners. For registered nurses and nurse practitioners in high-liability practices, this reduction in risk can be substantial. The separate legal entity status of California Professional Nursing Corporations also means there is a distinction between personal and professional business assets for the registered nurse or nurse practitioner, meaning the business debts, liabilities, and legal judgments against the nursing practice are not generally satisfied from the personal assets of the registered nurse or nurse practitioner owners, and owners are not personally liable for acts of malpractice by their co-owners, but they do remain personally liable for their own acts of malpractice.
Choosing Between a California General Partnership and a California Professional Nursing Corporation
For most registered nurses and nurse practitioners, the California Professional Nursing Corporation is the right choice because the tax benefits coupled with limited liability protection and ability to separate personal assets from professional business assets far outweighs the increased administrative complexity compared to practicing nursing as a California General Partnership.
Contact San Diego Corporate Law for Assistance Selecting and Forming the Best Business Structure for Your Nursing Practice
Take the next step toward securing the ideal business structure for your nursing practice, whether that is a California Professional Nursing Corporation or another business structure. Contact the experienced corporate attorneys at San Diego Corporate Law today to schedule a consultation and receive personalized, expert guidance tailored to your needs. Our team is here to help you make informed decisions with confidence.
Practicing Nursing as a California General Partnership
Practicing nursing as a California General Partnership is the simplest and most straightforward business structure for two or more registered nurses and nurse practitioners practicing together in California. A California General Partnership requires minimal paperwork to set up compared to other business entity options and offers flexibility in managing the nursing practice. However, along with these advantages come distinct disadvantages that registered nurses and nurse practitioners must consider carefully before considering a California General Partnership as the business structure for their nursing practice.
Administrative Requirements of Practicing Nursing as a California General Partnership
One of the primary benefits of a California General Partnership for practicing nursing is the simplicity of establishing a California General Partnership and the continued simplicity of operating as a California General Partnership.
California General Partnerships require minimal effort to establish, but there are legal formalities involved. Typically, the initial steps of setting up a California General Partnership include optionally filing a Certificate of Partnership with the California Secretary of State, entering into a Partnership Agreement between all partners, obtaining a local business license to operate legally in the municipal jurisdiction in which the practice will operate and, if applicable, registering a fictitious business name (often referred to as a d/b/a).
Taxation of California General Partnerships for the Practice of Nursing
Tax considerations are a critical aspect to be examined when planning to practice nursing as a California General Partnership. California General Partnerships file informational tax returns and partners are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to nursing practices is essential for registered nurses and nurse practitioners when choosing a business structure in which to operate their nursing practice.
Business Income Taxation When Practicing Nursing as a California General Partnership
California General Partnerships report their business income and expenses on informational tax returns, namely IRS Form 1065 and California Franchise Tax Board Form 565, however a California General Partnership does not pay California or federal income tax on its own net profit. Instead, each partner receives a Schedule K-1 from the IRS Form 1065 tax return reporting their distributive share of profits and losses of the California General Partnership, and each partner in turn reports this on their personal income tax return using Internal Revenue Service Form 1040 and California Franchise Tax Board Form 540 to pay taxes on the net income of the California General Partnership on their personal income tax return at their household personal income tax rate.
Self-Employment Tax When Practicing Nursing as a California General Partnership
Taxation of the partners of a California General Partnership is not tax efficient. One significant consideration for registered nurse or nurse practitioner partners of a California General Partnership is self-employment tax. Since partners of a California General Partnership do not receive a salary from their nursing practice, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate at the time of this writing totaling 15.3% of net profit in addition to federal and state income taxes. However, a partner of a California General Partnership can deduct half of the self-employment tax paid as an adjustment on their personal tax return, which provides some financial relief.
Additional Medicare Tax When Practicing Nursing as a California General Partnership
High earning registered nurse or nurse practitioner partners of California General Partnerships may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For registered nurse or nurse practitioner partners of a California General Partnership filing as single, the threshold is $200,000, while it is $250,000 for registered nurse or nurse practitioner partners filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Partners of California General Partnerships must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high earning registered nurses and nurse practitioners to account for this additional tax in their financial planning to avoid unexpected liabilities.
Conclusions About Taxation of Registered Nurse and Nurse Practitioner Partners of California General Partnerships
Understanding the tax implications of a California General Partnership is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.
Personal Liability Protection and Personal Asset Protection When Practicing Nursing as a California General Partnership
Practicing nursing as a California General Partnership also comes with challenges regarding unlimited personal liability protection and asset protection for partners because a California General Partnership is not a separate legal entity, and thus does not offer a legal distinction between the registered nurses and nurse practitioners and the nursing practice.
Personal Liability for Registered Nurses and Nurse Practitioners When Practicing Nursing as California General Partnerships
One of the primary risks faced by registered nurse or nurse practitioner partners of a California General Partnership is unlimited personal liability. The lack of distinction between the registered nurse or nurse practitioner partners and the nursing California General Partnership professional practice means that each of the registered nurse or nurse practitioner partners are jointly and severally personally liable for all business debts, liabilities, obligations, and legal judgments incurred by the nursing practice personally, including claims for professional negligence, better known as malpractice, for errors and omissions.
Personal Asset Protection for Registered Nurses and Nurse Practitioners When Practicing Nursing as California General Partnerships
The lack of distinction between the registered nurse or nurse practitioner and the nursing practice that makes unlimited personal liability a primary risk to registered nurse or nurse practitioner partners of a California General Partnership also means that all assets of the registered nurse or nurse practitioner partners, be they strictly personal assets or assets used in the nursing practice, are subject to claims by creditors and legal claimants against the personal assets of the registered nurses and nurse practitioners (such as homes, bank accounts, investments, and other property).
Conclusions About Personal Liability and Asset Protection for Registered Nurse and Nurse Practitioner Partners of California General Partnerships
The exposure to unlimited personal liability for business debts, liabilities, obligations, and legal judgments (including those for professional negligence) coupled with the inability to separate personal assets from professional business assets underscores the importance for registered nurses and nurse practitioners choosing a business structure for their nursing practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.
Conclusions About Practicing Nursing as a California General Partnership
When deciding whether to establish a group nursing practice as a California General Partnership, it is essential to weigh the benefits and drawbacks of this business structure. While California General Partnerships offer some simplicity to registered nurse or nurse practitioner partners, California General Partnerships come with significant risks and limitations. The advantages and disadvantages of operating a California General Partnership are compared below together with a recommendation for when a California General Partnership is the best legal structure for practicing nursing.
Advantages of California General Partnerships for Registered Nurses and Nurse Practitioners
The primary benefit of a California General Partnership is its simplicity. There are relatively few legal formalities to establish a California General Partnership for a group nursing practice.
Disadvantages of California General Partnerships for Registered Nurses and Nurse Practitioners
While California General Partnerships are simple to establish, they carry significant risks and are not tax efficient for most registered nurses and nurse practitioners.
A California General Partnership is not a separate legal entity, which means that registered nurse or nurse practitioner partners are personally liable for all business debts, liabilities, obligations, and legal judgments (including malpractice liability). For registered nurses and nurse practitioners in high liability nursing practices, this risk can be substantial.
The lack of a separate legal entity also means there is no distinction between personal and professional business assets for registered nurse or nurse practitioner partners, meaning the business debts, liabilities, and legal judgments for which an individual registered nurse or nurse practitioner partner of a California General Partnership is liable are satisfied from the personal assets of that registered nurse or nurse practitioner partner.
When is a California General Partnership the Right Business Structure for Practicing Nursing?
A California General Partnership can be an ideal option for two or more registered nurses and nurse practitioners joining together to organize a small-scale nursing practice with the expectation of low net profit and low liability risks. However, before choosing to practice nursing as a California General Partnership, it is essential for the registered nurse or nurse practitioner partners to weigh the benefits of simplicity against the risks of unlimited personal liability and the future growth of the nursing practice. Registered Nurse and Nurse Practitioner partners in high-risk practice areas or those who anticipate rapid growth may want to avoid practicing nursing as a California General Partnership in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.
For a more detailed understanding of the differences between California General Partnerships and California Professional Nursing Corporations and when a California General Partnership is the best choice of business structure for a professional practice, see “When Not to Use a California Professional Nursing Corporation” and “What are the Disadvantages of General Partnerships in California?” for more information.
Practicing Nursing with a California Professional Nursing Corporation
Practicing nursing with a California Professional Nursing Corporation is not as simple or straightforward as practicing nursing as a California General Partnership, however, a California Professional Nursing Corporation provides the tax efficiency, limited liability protection, and separation of personal assets of the registered nurse or nurse practitioner from the professional business assets of the nursing practice that California General Partnerships lack.
Administrative Requirements of Practicing Nursing with a California Professional Nursing Corporation
In order to enjoy the tax efficiency, limited liability protection, and separation of personal assets a California Professional Nursing Corporation provides, registered nurses and nurse practitioners are faced with the complexity of establishing a California Professional Nursing Corporation. While this formation process is complex, registered nurses and nurse practitioners may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for the California Professional Nursing Corporation, leaving registered nurses and nurse practitioners with essentially the same tasks they would undertake to establish a California General Partnership. It is also worth noting that legal fees and costs of forming a California Professional Nursing Corporation are usually qualified business expenses that are tax deductible.
In addition to the initial formation of a California Professional Nursing Corporation, and every year after the initial formation of a California Professional Nursing Corporation, a Statement of Information must be filed with the California Secretary of State and a shareholder and board of directors meeting must be held. Just as with the formation of a California Professional Nursing Corporation, the experienced attorneys at San Diego Corporate Law can assist in the annual requirements of practicing nursing with a California Professional Nursing Corporation.
Despite the additional administrative requirements of practicing nursing with a California Professional Nursing Corporation compared to practicing nursing as a California General Partnership, the right corporate attorney can make the difference in requirements comparable.
For a more detailed understanding of the administrative requirements for forming and maintaining a California Corporation, see “The 7 Steps for Forming a California Professional Nursing Corporation” for more information.
Taxation of California Professional Nursing Corporations
As with registered nurse or nurse practitioner California General Partnerships, tax considerations are a critical aspect to be examined when planning to practice nursing with a California Professional Nursing Corporation. While registered nurses and nurse practitioners practicing nursing with a California Professional Nursing Corporation are subject to business income taxation, payroll taxes for wages, and franchise taxes paid to the California Franchise Tax Board, registered nurses and nurse practitioners practicing nursing with a California Professional Nursing Corporation are not subject to self-employment taxation or additional Medicare taxes. Understanding how these taxes apply to nursing practices is essential for registered nurses and nurse practitioners choosing a business structure in which to operate their nursing practices.
Business Income Taxation When Practicing Nursing with a California Professional Nursing Corporation
A California Professional Nursing Corporation is by default taxed as a personal service corporation (sometimes referred to as a professional service corporation), which is essentially a C Corporation (commonly referred to as a C-Corp) wherein corporate taxes applied to corporate profits are taxed directly at the federal and state levels at the corporate income tax rate, and any distributed dividends are subject to taxation again at the shareholder level (referred to as “double taxation”). However, a California Professional Nursing Corporation may (and almost always should) elect to be treated as an S Corporation (commonly referred to as an S-Corp), which fundamentally changes how income is taxed, so this article will focus on S Corporation taxation of California Professional Nursing Corporations.
Electing S Corporation status alters the tax treatment by enabling pass-through taxation. This means the profits and losses of the California Professional Nursing Corporation after payment of a reasonable salary to the registered nurse or nurse practitioner are passed directly to the registered nurse or nurse practitioner shareholders who report those profits on their personal income tax returns to pay federal income tax and state income tax on the net profit of the California Professional Nursing Corporation to pay personal income tax of the net profits of the nursing practice.
For more information about the election of S Corporation status for a California Professional Nursing Corporation, see “Can a California Professional Nursing Corporation Be an S-Corp?” for more information.
Self-Employment Tax When Practicing Nursing with a California Professional Nursing Corporation
Unlike registered nurse or nurse practitioner California General Partnerships, which require the registered nurse or nurse practitioner partners to pay self-employment tax on their distributive share of the net profit of the professional practice, the registered nurse or nurse practitioner-shareholders of a California Professional Nursing Corporation are not subject to self-employment taxes.
Instead of self-employment taxes on the entire net profit of the nursing practice, with a California Professional Nursing Corporation employee and employer contributions to payroll tax are only paid on the reasonable salary of the registered nurses and nurse practitioners. While the sum of the employee and employer contributions total 15.3% (the same percentage as self-employment tax), the calculation of the tax is based upon the reasonable salaries of the registered nurses and nurse practitioners only and not the net profit of the California Professional Nursing Corporation, which may result in significant annual tax savings.
Additional Medicare Tax When Practicing Nursing with a California Professional Nursing Corporation
As discussed above for registered nurse or nurse practitioner California General Partnerships, the Additional Medicare Tax is an extra 0.9% tax applied to earned income exceeding certain thresholds. However, because the Additional Medicare Tax is only applied to earned income and the net profit of a California Professional Nursing Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to registered nurses and nurse practitioners practicing nursing with a California Professional Nursing Corporation if the reasonable salary of the registered nurses and nurse practitioners exceed those thresholds, meaning for all intents and purposes, practicing nursing with a California Professional Nursing Corporation does not subject registered nurses and nurse practitioners to the Additional Medicare Tax.
Annual Franchise Tax for California Professional Nursing Corporations
California Professional Nursing Corporations must pay an annual franchise tax California General Partnerships do not pay an annual franchise tax. The franchise tax paid by a California Professional Nursing Corporation taxed as an S Corporation is 1.5% of net profit with a minimum of $800 annually. While this is a tax not paid by registered nurse or nurse practitioner partners of a California General Partnership, but pales in comparison to the self-employment taxes and the Additional Medicare Taxes paid by registered nurse or nurse practitioner partners in California General Partnerships.
Conclusions About Taxation of California Professional Nursing Corporations
Understanding the tax benefits of a California Professional Nursing Corporation is integral when deciding which of the available business entities for two or more professional to practice together will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.
For a more detailed understanding of the taxation of California Professional Nursing Corporations, see “What Tax Benefits Does a California Professional Nursing Corporation Provide?” for more information.
Personal Liability Protection and Personal Asset Protection When Practicing Nursing with a California Professional Nursing Corporation
Practicing nursing with a California Professional Nursing Corporation, while more complex than practicing nursing as a California General Partnership, overcomes many of the personal liability protection and asset protection shortcomings of registered nurse or nurse practitioner California General Partnerships. A California Professional Nursing Corporation is a separate legal entity distinct from the registered nurses and nurse practitioners, thus offering a legal distinction between the registered nurses and nurse practitioners and the nursing practice as well as personal and business assets of the registered nurses and nurse practitioners.
Personal Liability Protection for Registered Nurses and Nurse Practitioners When Practicing Nursing with a California Professional Nursing Corporation
Practicing nursing with a California Professional Nursing Corporation resolves most of the risks faced by registered nurse or nurse practitioner partners of California General Partnerships for personal liability. California Professional Nursing Corporations provide a separate legal entity distinct from the registered nurse or nurse practitioner owners, meaning the registered nurses and nurse practitioners are generally not personally liable for the business debts, liabilities, obligations, and legal judgments incurred by the nursing practice.
Under California law, claims for professional negligence, better known as malpractice, for errors and omissions of registered nurses and nurse practitioners are personal to those registered nurses and nurse practitioners committing acts of malpractice and liability is not shielded by the existence of the California Professional Nursing Corporation. California Professional Corporations do shield registered nurses and nurse practitioners from the malpractice liabilities created by the other registered nurses and nurse practitioners in their nursing practice; registered nurses and nurse practitioners are only personally liable for their own acts of malpractice. Malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the registered nurse or nurse practitioner from this risk of their own acts of malpractice.
Personal Asset Protection for Registered Nurses and Nurse Practitioners When Practicing Nursing with a California Professional Nursing Corporation
The separate legal entity and distinction between registered nurses and nurse practitioners and the nursing practice provided by a California Professional Nursing Corporation means that, unlike California General Partnerships, a California Professional Nursing Corporation separates the personal assets of the registered nurses and nurse practitioners from professional business assets of the nursing practice. Therefore, claims by creditors and legal claimants against the California Professional Nursing Corporation are generally limited to the professional business assets of the California Professional Nursing Corporation and are not satisfied against the personal assets (such as homes, bank accounts, investments, and other property) of the registered nurses and nurse practitioners.
Conclusions About Personal Liability and Asset Protection When Practicing Nursing with a California Professional Nursing Corporation
The limitation of personal liability for business debts, liabilities, obligations, and legal judgments against a California Professional Nursing Corporation coupled with the ability to separate personal assets from professional business assets makes the use of a California Professional Nursing Corporation the choice for registered nurses and nurse practitioners who wish to limit their personal liability and protect their personal wealth and future earnings from most claims arising out of their nursing practice.
For a more detailed understanding of the liability protection and asset protection of California Professional Nursing Corporations, see “What Liability Protection Does a California Professional Nursing Corporation Provide?” for more information.
Conclusions About Practicing Nursing with a California Professional Nursing Corporation
When deciding if practicing nursing as a California Professional Nursing Corporation is worth the additional cost and administrative requirements, it is essential to weigh the benefits and drawbacks of this business structure. While California Professional Nursing Corporations are more complex, California Professional Nursing Corporations resolve many of the significant risks and limitations inherent to practicing nursing as a California General Partnership. The advantages and disadvantages of operating with a California Professional Nursing Corporation are compared below together with a recommendation for when a California Professional Nursing Corporation is the best legal structure for practicing nursing in a group nursing practice.
Advantages of California Professional Nursing Corporations
While practicing nursing as a California General Partnerships is simple to establish, doing so carries significant risks and is not tax efficient for most registered nurses and nurse practitioners. California Professional Nursing Corporations significantly reduce liability risks and are more tax efficient for most registered nurses and nurse practitioners.
A California Professional Nursing Corporation is a separate legal entity, which means the registered nurses and nurse practitioners are generally shielded from personally liable for business debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability for the errors and omission of each of the registered nurses and nurse practitioners for their own, individual acts of malpractice). For registered nurses and nurse practitioners in high liability nursing practices, this reduction in risk can be substantial.
The separate legal entity status also means there is a distinction between personal and professional business assets for registered nurses and nurse practitioners, meaning the business debts, liabilities, and legal judgments against their nursing practice are not generally satisfied from the personal assets of the registered nurses and nurse practitioners (other than for their own acts of malpractice).
Disadvantages of California Professional Nursing Corporations
The primary disadvantage of a California Professional Nursing Corporation is the relative complexity of formation and operation. However, registered nurses and nurse practitioners may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for establishing and maintaining the California Professional Nursing Corporation, leaving these registered nurses and nurse practitioners with essentially the same tasks they would undertake to establish and maintain a California General Partnership.
When is a California Professional Nursing Corporation the Right Business Structure for Practicing Nursing?
A California Professional Nursing Corporation can be an ideal option for registered nurses and nurse practitioners starting group nursing practices based upon factors such as tax efficiency, limited liability protection, and separation of personal assets from professional business assets that California Professional Nursing Corporations provide. Small-scale nursing practices with the expectation of revenue growth can benefit from starting as a California Professional Nursing Corporation to avoid the future need to reestablish the nursing practice as revenue grows. Similarly, small-scale nursing practices in high-risk practice areas may benefit from the limited liability protection, separation of personal assets from professional business assets of a California Professional Nursing Corporation, and for registered nurses and nurse practitioners to avoid malpractice liability for the errors and omissions of the other registered nurses and nurse practitioners in their group nursing practice regardless of revenue or profitability.
For a more detailed understanding of the differences between registered nurse or nurse practitioner California General Partnerships and Professional Nursing Corporations in California, and when a California Professional Nursing Corporation is the best choice of business structure for a professional practice, see “When to Use a California Professional Nursing Corporation” for more information.
Registered Nurses and Nurse Practitioners in California May Not Practice Nursing as a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)
A The experienced corporate attorneys at San Diego Corporate Law are frequently asked about limited liability companies and professional limited liability companies, so this will be briefly discussed here.
California law explicitly prohibits registered nurses and nurse practitioners from providing nursing services or operate a nursing business as Limited Liability Companies (LLCs) or Professional Limited Liability Companies (PLLCs). This prohibition may be found in California Corporations Code Section 17701.04(e), which reads:
“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”
This restriction applies to all licensed professionals for which a Professional Corporation in California may be formed. Instead, California requires registered nurses and nurse practitioners who wish to operate their California business in corporate form to utilize other types of business entities, such as California Professional Nursing Corporations.
For a more detailed understanding of the prohibition on the use of LLCs for nursing practices in California, see ” Can a Registered Nurse Practice Nursing Using a California LLC?” and “Can a Nurse Practitioner Practice Nursing Using a California LLC?” and “Can I Use a PLLC to Practice Nursing in California?” and for more information.
If an LLC or PLLC is currently being used for a group nursing practice in California, see ” 10 Steps to Convert LLC to Professional Nursing Corporation in California” and “Four Reasons Not to Convert LLC to Professional Nursing Corporation in California” or “12 Steps to Convert a PLLC to a California Professional Nursing Corporation” and “Four Reasons Not to Convert Foreign LLC or PLLC to a California Professional Nursing Corporation” for more information about bringing the professional practice into compliance with California law.