By Robert J. Fisher, Attorney, ByrdAdatto
As a med spa owner, there are a lot of things that need to be done when you start your business. You have staff to hire, space to rent or buy, clients to find. The first step to creating a successful business is coming up with a novel, innovative idea or service for which there is a need. But, then what? Chances are, you probably need to form a business entity if you do not already have one. This might seem obvious for many, but the question that often follows is “what kind of entity?” One of the most popular choices over the past few decades has been a limited liability company, or “LLC”. An LLC is attractive to many business owners because it offers liability protection as well as ease in maintenance and broad flexibility in terms of taxation and structure.
The main advantage to an LLC is that it provides its owners (or members) with liability protection. In general, members of an LLC are not personally liable for the acts of the LLC. Meaning, if a lawsuit were filed against the LLC or any creditor issues arose, the members’ personal assets would be protected in most scenarios. However, this liability protection is not unlimited. A member can be held personally liable in certain situations or if the “corporate veil” were otherwise pierced. (See Bradford Adatto’s article here for more on this topic.)
Another advantage is an LLC’s taxation status – much flexibility exists in how this can be setup. The default tax status for most LLCs is that of “pass through” taxation (i.e., disregarded entity or partnership taxation), where the profits and losses “pass through” to those of the members and are reported on each member’s individual tax returns (as opposed to a corporation, which must pay its own taxes). However, this is only the default tax option. An LLC can actively opt for another tax status, such as C-Corporation or an S-Corporation. An S-Corporation also has pass-through taxation, but is attractive for a number of reasons, the main one being if members want to pay themselves wages as income reported on a W-2 (versus payments as profit distributions). There are some restrictions in selecting an S-Corporation, but overall it is important to note that an LLC can take on a variety of taxation statuses, all of which should be reviewed with a CPA or tax advisor and legal counsel.
Once these options are reviewed and selected, the next step is forming the LLC. There are two main formation documents for an LLC: the Certificate of Formation if in Texas (the Articles or Certificate of Organization in other states) and the Company Agreement if in Texas (the Operating Agreement in other states). The Certificate of Formation is filed with the state to officially form the entity while the Company Agreement is an internal document setting forth the agreement among the members regarding the management, control, operation, and other terms related to the LLC. As compared to a corporation, a Company Agreement combines the concepts of a corporation’s Bylaws and Shareholders’ Agreement into one document.
In sum, an LLC can protect your assets, business ideas, and offer tax flexibility, so it is a great option for many new and established business owners. If you have any entity-related questions or need help forming an LLC, consider reaching out to ByrdAdatto for a consultation.
For more information on your state’s laws and regulations, attend an AmSpa Medical Spa & Aesthetic Boot Camp and be the next med spa success story.
Robert J. Fisher’s passion for healthcare traces back to his high school days of shadowing doctors. His passion evolved in college to study as a pre-med major. The last major evolution of Robert’s interest in health care was the transition to an interest in health care law. With this education, a business attorney for a father, and a renowned orthopedic surgeon for a father-in-law, Robert has the pedigree for success as a business and health care attorney at ByrdAdatto.