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| Columns - Practice Management | ||||||||
| Sunday, 30 September 2001 | ||||||||
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In the last issue, we explored some personal and clinical areas that need addressing when making a move into an independent practice setting. However you will also need to make decisions pertaining to your business identity and practice make-up. There are many things that will change as you practice privately, but paying taxes isn't one of them. For the Internal Revenue Service you will need to be recognizable as a specific taxable entity, describing your business to them clearly. It's also best, of course, to give yourself as many tax advantages as you can, and how you officially set up your business may make a big difference when April 15th rolls around. Generally when we work for ourselves it appears that "we" are the business. This doesn't necessarily hold true if you decide to incorporate, but "you" being the business is the most popular option when you're working alone. From a clinical perspective that is generally known as a solo practice, but to the IRS it's a sole proprietorship. Most solo practices, and many, many other small businesses function in this category, but it's also important to know that there are other options available to you, such as partnerships and corporations.In a sole proprietorship there is generally one person who owns and operates the business, and also is responsible for all the debts. This type of business is very simple to start up and simple to dissolve. You may need to obtain a local or state license, complete a registration or file papers, and open a checking account. In some states one merely hangs out a sign to be in business. Be sure to check the local requirements in your state. A sole proprietorship allows you to have ultimate freedom regarding what you do, when you do it, and with whom you share information about your business (Griffin et al., 1996). Counseling revenue is considered part of your personal finances and taxed as individual income. A distinct disadvantage of a sole proprietorship is that if someone sues you over a business matter you may lose everything you own. This reality is termed unlimited liability, which is a "legal condition under which any damages or debts attributable to the business can also be attached to the owner because the two have no separate legal existence" (Ferrill et al., 1996). The more wealth a person has, the greater the disadvantage of unlimited liability (Ferrill et al., 1996). If your counseling business fails to generate enough cash the bills must be paid out of your pocket and, although this varies by state, creditors may claim many personal possessions, including home, furniture, and automobiles if bills remain unpaid. In our scenario the expenses for starting a private practice can be minimal if you're careful, and your total exposure generally won't be big enough for you to lose everything that you have. The influence of managed care organizations (MCOs) may dictate your choice of organizational make-up for your business. The trend for MCOs is to contract for services with groups and less with solo practitioners. Those choosing to receive cash for their services won't be affected by this, but if you're intending to become a member of local provider panels, a first step would be to check with the MCOs and see who they are admitting. If you find that solo providers are generally excluded from local panels, there are still ways to provide services while essentially remaining independent. You may work together with other independents in group or associate practices. Some choose to mutually employ support staff and offices. Other independent practitioners may join together more formally and split their fees with a management organization. They do all the billing, scheduling, provide offices, waiting rooms, etc., typically in exchange for a 60/40 percent split of your income. (This is usually the industry standard with the management getting the 40 percent.) This arrangement may also offer you an opportunity to purchase personal health insurance at group rates. Many smaller nonprofit corporations operate this way. They, as a group, apply for provider panel slots and submit all the individual applications together, opening access for your independent practice in a group context. However, because you don't actually work for them, you remain a sole proprietor. Partnerships are another way to do business, and are a legal association between two or more people as co-owners of a business for profit (Mescon et al., 1999). In a general partnership, taxation, and unlimited liability are the same as sole proprietorships. In a limited partnership, partners are liable for only their amount of the investment. Owners share in the profit (or loss) equally unless there is an arrangement stipulating otherwise. Partners are also generally liable for another partner's mistakes, and if they are sued all partners may also be sued. If a partner chooses to leave, they will need to sell their share to benefit from any equity they may have in the partnership. Setting up a partnership can be as easy as a sole proprietorship, although retaining an attorney to record the partners' rights generally is advisable. In 1819 the U.S. Supreme Court defined a corporation as "an artificial being, invisible, intangible, and existing only in contemplation of the law" (Griffin et al., 1996). A corporation is considered to be a legal person, and a separate entity from its owners. This makes the corporation liable for its debts, plus the owners' liability extends only to the limits of their investment. Corporations are more difficult to form, requiring Articles of Incorporation, bylaws, and complicated income and loss reporting for tax purposes. Generally solo practitioners will not benefit from this arrangement, although nonprofit corporations are generally the norm for publicly funded healthcare providers. If you're looking to receive financial support granted directly from local, state, or federal governments you will have to be a not-for-profit corporation, or a 501(c)3 in IRS language. Nonprofits require basically the same design as for-profits. Both are governed by a board of directors. You should be aware that this option eventually leads you back to what you were doing before you opened a private practice, i.e., answering to other parties. Depending on how you formulate your business you may need to obtain a Taxpayer Identification Number (TIN) from the IRS. Information regarding your needs in this area can be found at www.irs.gov, or for more information contact your local tax accountant. My advice is to keep it simple, especially at the beginning. The "easy-in, easy-out" approach allows you to concentrate on what you originally wanted to do: provide clinical services independently. If your needs change you can always modify your business set-up at a later date. Lindsay Freese, MEd, MAC, LADC, is associate professor of Human Service at the New Hampshire Community Tech-nical College in Concord, NH. Over the past 20 years he has worked in private practice and both clinically and administratively in residential programs. He is a past president of the New Hampshire Alcoholism and Drug Abuse Counselor Association. References Ferrill, O., Hirt, G., Business: A Changing World, 2nd. Ed., Irwin. McGraw-Hill, 1996. Griffin, R., Ebert, R., Business, 4th ed., Prentice Hall, Inc., 1996. Mescon, M., Bovee, C., Thill, J., Business Today, 9th. Ed., Prentice Hall, Inc., 1999.             
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