What Is an S Corporation?

An S Corporation (S Corp) is a tax classification, not a business entity. It allows small businesses, including many healthcare practices, to enhance tax efficiency while maintaining liability protection.

S Corps combine the liability protection of C Corporations with the tax advantages of sole proprietorships.

Nurse practitioners (NPs) can choose S Corp status for their practice, whether their practice is a PC, PLLC, or LLC. However, entity requirements vary by state (link here for state requirements).

Why Were S Corps Created?

S Corps were introduced in 1958 as part of a broader tax reform aimed at helping small businesses. In fact, 'S Corp' is shorthand for 'Small Business Corporation'.

Before 1958, an entrepreneur had just 2 choices to start a business:

1. C Corporation, where you have liability protection but are taxed twice (pay corporate and individual taxes)
2. Partnership or sole proprietorship, where you are taxed once (pay individual taxes), but don't have liability protection for your personal assets (e.g. personal bank accounts, house, car, etc.)

The S Corp or Small Business Corporation addressed this by combining the benefits of both structures for small business owners and entrepreneurs - you pay taxes once (individual taxes) and have liability protection.

To put it in perspective, when S Corporations were introduced, corporate tax rates were as high as 52%, and the top income taxes for individuals reached 91%. This means that even a small business owner with median family income faced an effective federal tax rate of more than 60% if they owned a C Corp.

Why Should a Nurse Practitioner Consider S Corp Tax Status?

As a Nurse Practitioner starting or growing an independent practice, choosing S Corp status is often advisable:

1. Single Taxation
   • S Corps pass business income directly to the owner(s), who report this income on their personal tax returns.
   • In contrast, C Corporations (C Corps), face corporate income tax and individual income tax (double taxation)
   • This ensures that all profits, losses, deductions, and credits flow through to the practice owner's individual tax return.
2. Maintain corporate benefits:
   • S Corps offer liability protection and legal credibility similar to C Corps
   • For example, C Corps typically offer personal asset protection so that your personal bank accounts, personal property, and other assets are not liable
   • S Corp status allows for more efficient tax treatment, while maintaining these liability protections, although exact protections vary by entity choice (link here for state requirements)

How Nurse Practitioners Can Set Up S Corp Status

Step 1: Choose the Right Entity Structure

Nurse Practitioners have three primary options when setting up their business:

State-Specific Rules Apply: Some states require Nurse Practitioners to form a PC or PLLC, while others allow standard LLCs. Be sure to check your state regulations - link here.

Note: where possible, Prax recommends selecting the additional liability protection for licensed professionals that a PLLC or PC offers.

Step 2: Apply for an EIN and Select 'S Corp'

Once you've chosen the right entity:

• File the formation documents (Articles of Incorporation for a PC, Articles of Organization for a PLLC/LLC) with your state.
• Apply for an Employer Identification Number (EIN) from the IRS.

Pro Tip: When applying for an EIN, select "S Corporation" as the tax classification even though you must still file a separate 2553 form.

Step 3: File IRS Form 2553 to Elect S Corp Status

To officially elect S Corporation tax status, you must:

• File IRS Form 2553, Election by a Small Business Corporation
• Ensure all shareholders (owners) sign the form
• Submit the form within 2 months and 15 days of the start of the tax year in which you want the election to take effect

IRS Requirements for S Corporation Status

S Corporations are designed to support small business owners and entrepreneurs such as independent healthcare practices. Therefore, the rules are intended to make sure that any entity established as an S Corp is a small business.

To qualify as an S Corporation, your business must meet the following criteria:

• Entity Type: Must be a domestic entity (PC, PLLC, or LLC)
• Stock Structure: Can only have one class of stock
• Business Activities: Cannot be a financial institution, insurance company, or international sales corporation
• Filing Requirements: Must submit IRS Form 2553 to elect S Corp taxation
• Shareholder Limits:
  • Limited to 100 shareholders or fewer
  • Shareholders must be U.S. citizens, permanent residents, or eligible trusts/estates
  • Corporations, partnerships, and non-resident aliens can NOT be shareholders

Final Takeaways for Nurse Practitioners

• S Corps provide tax advantages by avoiding double taxation and reducing self-employment taxes.
• Nurse Practitioners can form a PC, PLLC, or LLC (based on state requirements) and elect S Corp taxation.
• Form 2553 is required to complete the S Corp election, even if you select "S Corporation" on your EIN application.

By setting up your practice correctly, you'll enjoy tax savings and liability protection. We look forward to supporting your thriving practice!