June 8, 2015

Growing a Veterinary Practice



JUNE 2015

Recent reports show pet ownership is at an all-time high among U.S. households.  More pets mean a greater demand for veterinarians.  This is supported by the low (3.19%) unemployment rate for licensed veterinarians.  Yet even with these encouraging statistics, veterinarians still need to be smart about establishing and growing a new veterinary practice.


There are a host of issues to address when starting a practice.  The first is choice of business entity.  When starting a new veterinary practice, there are two primary concerns: (1) limitation of personal liability, and (2) maximum tax efficiency.


In Oregon, licensed professionals such as doctors, lawyers, and veterinarians, when practicing through a corporate entity (versus operating as a sole proprietorship or partnership), are required to operate as a professional corporation.  Professional corporations differ from regular corporations in a number of ways.  This includes the requirement that the professionally licensed shareholders of the professional corporation remain jointly and severally liable for any negligent acts or omissions committed when rendering professional services, up to an annual limit of $450,000 for a single shareholder and $3,100,000 for all shareholders.  Accordingly, a professional corporation does not offer the licensed shareholders the full, limited personal liability that is generally available to shareholders of a regular corporation.  However, the professional corporation does offer marginally better limited personal liability than running the practice as a sole proprietor or a partnership.


Other states allow licensed professionals to form professional limited liability companies; however, that form of entity has not been approved in Oregon.


For maximum tax efficiency, a “pass through” entity generally works best.  This is most often either an S corporation or an LLC.  However, since PLLCs are not available in Oregon, the choice for maximum tax efficiency in Oregon is limited to an S corporation. 


A newly formed professional corporation is by default a C corporation.  This means the corporation’s profits are taxed at the corporate-entity level, at higher “personal service income“ tax rates, and again when the profits are distributed to the shareholders.  By electing to be taxed as an S corporation, the professional corporation becomes a “pass through” entity, meaning there is no tax at the entity level, all of the practice’s tax attributes (profits, losses, etc.) are passed through to the shareholders, and tax attributes are reported and taxed on the personal return of the shareholders.


Growing the practice should be included in your initial planning.  Growth takes cash, and there are often limited sources to obtain the cash necessary for a growing practice.  If the cash cannot be internally generated by operations, then it will need to come from external sources, generally as debt or equity.  Another unique aspect of a professional corporation is that the law requires that each of the shareholders of the corporation be similarly licensed professionals.  This effectively eliminates the likelihood of obtaining an investment in the practice from a “silent partner,” unless that silent partner happens to also be a licensed veterinarian.


Bringing on a new shareholder to join the practice can be made to work, as long as the new shareholder has the capital to invest in the practice.  Otherwise, the source of external financing for growing the practice may be limited to borrowing.   

Establishing and growing a new veterinary practice can be an exciting and lucrative adventure.  However, proper structuring, asking the right questions at the outset, and following through are crucial.  Your choice of entity now can have lasting impacts for years to come.

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