Business Planning

Choosing Your Practice Model

Before anything else, decide your revenue model -it determines every downstream decision. A cash-pay only practice is the simplest: no credentialing, no claims, but a smaller patient pool. Out-of-network lets you set your own rates while patients file for reimbursement, but you may still want an NPI and CAQH profile for credibility. In-network practices require full credentialing and payer enrollment (which takes 90-180 days), but access the largest patient base. Most new practices go hybrid -accepting a few major commercial payers plus Medicare while offering cash-pay options for uninsured patients. Write this out plainly: who you treat (population), what you treat (conditions), what you do (services/procedures), where you do it (in-person, telehealth, or hybrid), and why you are different. This description becomes your website copy, directory bio, referral outreach script, and payer specialty selection -so get it right early.

Your Launch Command Center

Credentialing failures are almost always data mismatch failures. Before filing a single form, create a master data sheet with these exact fields, copied identically everywhere -IRS W-9, NPPES, CAQH, payer applications, EHR, and clearinghouse: your legal name (exact punctuation, middle initial yes/no), credential suffixes (MD/DO/NP), practice legal entity name, EIN, NPI Type 1 (individual) and Type 2 (organization if applicable), taxonomy codes, service and mailing addresses, phone/fax, website URL, and primary contact email. Add a formatting notes column: "Use Suite as Ste 200 everywhere," "No periods in middle initial," "Phone formatted as (XXX) XXX-XXXX everywhere." Then build a secure digital folder structure: 01-Legal and Tax (EIN letter, entity docs, W-9), 02-Provider IDs (NPI, CAQH ID), 03-Licenses (state license, board cert, CPR), 04-Malpractice (declarations, claims history), 05-Credentialing Apps, 06-Contracts, 07-Policies and Compliance, 08-Branding. This folder becomes your single source of truth for the entire launch.

Market Analysis & Service Area Planning

A rigorous market analysis prevents the most expensive mistake in practice launches: opening in the wrong location or with the wrong specialty mix. Start with demographics -pull Census data, county health department reports, and commercial demographic tools to understand your target area population by age, income, insurance coverage rates, and prevalent health conditions. Map existing providers within a 10-15 mile radius (urban) or 30+ miles (rural) using the NPPES NPI Registry and insurance directory searches. Identify referral sources: proximity to hospitals, urgent care centers, large primary care groups, and specialist offices that could send or receive referrals. Evaluate payer mix -what percentage of the local population is commercially insured vs. Medicare vs. Medicaid vs. uninsured? This directly affects your revenue projections. Check state certificate-of-need requirements if you plan procedures or facility-based services. Finally, understand the competitive landscape not just by headcount but by wait times, patient satisfaction scores (publicly available via CMS), and which payers local competitors accept.

Financial Projections & Startup Budgeting

Realistic financial projections require modeling three scenarios: conservative, moderate, and optimistic. Start with your expected payer mix and reimbursement rates -use CMS Physician Fee Schedule Lookup for Medicare rates as a baseline, then estimate commercial rates at 120-200% of Medicare depending on your market. Calculate expected patient volume by month, accounting for a slow ramp-up: most new practices see 5-10 patients per day in month one, growing to 15-25 by month six. Multiply by average revenue per visit (typically $150-350 for primary care, higher for specialists). On the expense side, budget for: lease/buildout ($2,000-8,000/month depending on market), equipment ($50,000-150,000+ depending on specialty), EHR/PM software ($300-800/month), malpractice insurance ($6,000-50,000+/year depending on specialty and state), staffing (your largest ongoing cost), billing services (if outsourced, typically 5-9% of collections), and at least 6 months of operating reserves. Most solo primary care practices need $100,000-250,000 in startup capital; procedural specialties can require $500,000+.

Choosing Your Business Entity

Your entity structure affects liability protection, taxation, ownership rules, credentialing, and compliance with your state's Corporate Practice of Medicine (CPOM) doctrine. Most states require physicians to form a professional entity (PC, PA, or PLLC) rather than a standard LLC. Here is how the major entity types compare for a small medical practice:

Entity Type	Pros	Cons	Comments
Sole Proprietorship	Simplest to set up. No state filings. Minimal paperwork.	Zero liability protection — your personal assets (home, savings, investments) are fully exposed to malpractice and business debts. Full 15.3% self-employment tax on all net income.	Not recommended for medical practices. The liability exposure alone disqualifies this for any clinical business.
General Partnership	Easy to form. Pass-through taxation.	Worst liability exposure — each partner is personally liable for the acts and debts of ALL other partners. Full 15.3% SE tax.	Never use for a medical practice. If your partner commits malpractice, your house is on the line.
LLC / PLLC (default tax treatment)	Good liability protection (personal assets shielded from business debts and other members' malpractice). Simple formation and low compliance burden. Flexible profit-sharing. Easy to add members later.	Full 15.3% SE tax on all net earnings (12.4% Social Security up to $184,500 wage base in 2026, plus 2.9% Medicare with no cap, plus 0.9% Additional Medicare Tax above $250K MFJ). Many states require PLLC specifically for physicians.	Great starting point. Form a PLLC in states that offer it. All owners must hold professional licenses. Note: does NOT protect you from your own malpractice — only from other members' malpractice. You still need malpractice insurance.
LLC/PLLC with S-Corp Election (IRS Form 2553)	Same liability protection as LLC/PLLC, but major SE tax savings: you pay yourself a “reasonable salary” (subject to FICA), then take remaining income as distributions NOT subject to the 15.3% SE tax. For a physician netting $400K with $200K salary, that’s roughly $5,800–$7,600/year saved in Medicare taxes alone.	Must run payroll (W-2s, payroll tax filings). Separate corporate tax return (Form 1120-S). Must set a “reasonable salary” — the IRS scrutinizes physicians closely; too low triggers reclassification plus penalties. QBI deduction (Section 199A) only applies to K-1 distributions, not your W-2 salary, reducing the potential deduction.	⭐ Most popular structure for small physician practices. The typical path: form a PLLC, operate as default pass-through during startup, then file Form 2553 to elect S-Corp taxation once net income consistently exceeds $80K–$100K. Below that threshold, the payroll and filing costs usually outweigh the SE tax savings.
Professional Corporation (PC/PA) (with S-Corp election)	Strongest case-law history for liability protection. Required in California (no PLLC option) and some other states. Can elect S-Corp taxation for same SE tax benefits as above.	Higher compliance burden: board of directors, corporate minutes, annual meetings, bylaws. More expensive to set up and maintain. Defaults to C-Corp (double) taxation if you forget to file the S-Corp election.	Use this if your state requires it (California, some others). Otherwise, the PLLC + S-Corp election achieves the same result with less paperwork. Always pair with the S-Corp election to avoid double taxation.
C-Corporation	Flat 21% federal corporate tax rate. Unique ability to provide tax-free fringe benefits (health insurance, group life, education assistance) that S-Corp >2% shareholders cannot deduct the same way. Useful in dual-entity structures for high earners.	Double taxation — profits taxed at 21% at the corporate level, then again as personal income when distributed as dividends. Effective combined rate can exceed 40%. No pass-through of losses.	Rarely used as the primary entity for small practices. Some high-earning practices use a C-Corp management company alongside an S-Corp clinical entity to capture specific fringe benefit deductions — consult a healthcare CPA before attempting this.

Pass-Through Taxation & Your Household Income — What You Need to Know

With any pass-through entity (LLC, PLLC, S-Corp, partnership), your practice income flows onto your personal tax return. If you’re married filing jointly, this income stacks on top of your spouse’s W-2 income, pushing your household into higher marginal tax brackets. For example, if your spouse earns $150K and your practice nets $250K, your combined taxable income (~$368K after the standard deduction) pushes you through the 22% and 24% brackets and into the 32% bracket. Every dollar of practice income is taxed at whatever marginal rate your household is already in.

Key tax considerations for physician practice owners:

Self-Employment Tax Savings (the #1 reason to elect S-Corp): Without S-Corp election, you pay 15.3% SE tax on ALL net earnings. With S-Corp election, only your “reasonable salary” is subject to FICA — distributions above that are not. For physicians, the savings come mainly from Medicare tax (2.9%) on distributions, since reasonable physician salaries ($200K+) already exceed the Social Security wage base ($184,500 in 2026). Over a career, this can save hundreds of thousands of dollars.

QBI Deduction (Section 199A): The 20% Qualified Business Income deduction was made permanent by the One Big Beautiful Bill Act (2025). However, healthcare is classified as a “Specified Service Trade or Business” (SSTB), meaning the deduction phases out at higher incomes: for 2026, the full deduction is available below $403,550 (MFJ) and fully gone above $553,550 (MFJ). Most physician households with a working spouse will exceed these thresholds, losing the deduction entirely. Also note: W-2 wages you pay yourself from an S-Corp do NOT count as QBI — only the K-1 pass-through portion qualifies.

Additional Medicare Tax (0.9%): Applies to earned income (W-2 wages + SE income) above $250K for MFJ filers. With S-Corp election, this applies only to your W-2 salary — distributions are exempt. Without S-Corp, it applies to all SE income above the threshold.

Net Investment Income Tax (NIIT, 3.8%): If you materially participate in your practice (virtually all practicing physician-owners do), your practice income is exempt from NIIT. However, your high MAGI can cause your other investment income (dividends, capital gains, rental income) to be subject to this 3.8% surtax.

SALT Cap & PTE Tax Elections: The SALT deduction cap was raised to $40,000 for 2025–2029 (phasing down for MAGI over $500K). Over 36 states now offer Pass-Through Entity Tax (PTET) elections, allowing your practice to pay state tax at the entity level — fully deductible for federal purposes, bypassing the SALT cap entirely. Ask your CPA if your state offers this.

The Bottom Line: Form a PLLC (or PC where required). Operate as a simple pass-through during your startup phase. Once net income consistently exceeds $80K–$100K, file IRS Form 2553 to elect S-Corp taxation and start paying yourself a reasonable salary via payroll. This is the path most healthcare CPAs and attorneys recommend, and it’s what the majority of small physician practices use. Key outputs from this step: entity formed with correct professional designation, legal business name confirmed (matching your master data sheet exactly), EIN obtained, and ownership details documented — credentialing applications will ask for all of this.