Choosing a structure for your pharmacy can have wide-reaching impacts. Depending on the structure you choose, you will have different obligations around personal liability, taxes, and management, so it’s critical to choose a structure that aligns with your business goals.
Pharmacies typically choose between three different types of business structures according to the 2020 NCPA Digest: 62.8 percent are structured as S corps, 21.2 percent are structured as LLCs, and around 9 percent are structured as C corps.
Here’s how each of these three structures can affect how you do business.
What Is an S Corp?
An S corporation, sometimes known as an S subchapter, is a type of corporation that can pass on income, losses, deductions, and credits to shareholders in order to avoid double taxation on corporate income. An S corp structure can work well for small businesses like an independent pharmacy. You just have to make sure all your shareholders are willing to sign off on the structure.
To structure your pharmacy as an S corp, you have to meet certain requirements from the IRS, which include:
- Being a domestic corporation
- Having one class of stock
- Having 100 or fewer shareholders
- Shareholders must be individuals, trusts, or estates
- Shareholders cannot be partnerships, corporations, or non-residents
Certain kinds of companies — like insurance companies, financial institutions, and corporations that deal with international sales, aren’t eligible to be S corps, but those restrictions don’t apply to independent pharmacies.
Pros of S corp
One major advantage of an S corp structure is that it limits liability for you as an owner. By structuring as an S corp, your pharmacy is recognized as separate from your personal assets, so if your pharmacy finances go south, you won’t risk losing your personal assets like your house or your car.
But the main reason small businesses structure as S corps is the tax advantages they come with. As an S corp, you benefit from “flow-through” taxation. You distribute your profits to your shareholders, who will pay income taxes on those profits, but you don’t have to pay taxes on profits as corporate income.
Cons of an S corp
Even though you don’t have to worry about corporate taxes, you and your other shareholders could end up paying more personal taxes, which is one disadvantage of an S corp structure.
Some businesses structured as S corps often try to hide salaries as corporate distributions, and because of that, the IRS could scrutinize your business to make sure you’re properly paying payroll taxes.
If the IRS finds out that one of your shareholders is a partnership, corporation, or non-resident alien, they can also revoke your S corp status, charge back-taxes for three years, and make you wait five more years to regain your S corp status.
Additionally, as an S corp you’re required to hold an annual meeting with shareholders and the board of directors.
What Is an LLC?
An LLC, or a limited liability company, is a structure that falls in between a sole proprietorship and the more complicated “corporation” structure. It’s main feature is limiting individual liability for a company’s debts.
Unlike an S corp, anyone can be a member of an LLC (including corporations, foreign entities, and individuals). Most states have their own rules about how LLCs function, but generally, to form an LLC members must file articles of organization with their state.
LLCs can also choose not to pay federal taxes, and instead have members list profits and losses on their personal tax returns.
Pros of an LLC
Like an S corp, one of the biggest advantages of an LLC is the limited liability that comes along with the structure. You also get the benefits of pass-through taxation — avoiding corporate taxes by distributing profits to LLC members.
In addition to those perks, LLCs are often much easier to start and manage than corporations. Typically, LLCs pay a nominal fee to file their articles of organization and an annual fee for upkeep, but beyond that, maintaining an LLC is fairly hands-off. There are no requirements for annual meetings like with a corporation.
Cons of an LLC
The liability protection an LLC provides owners is not unlimited. If you don’t keep track of your personal and business accounts separately, a judge can “pierce the corporate veil” by making your personal assets fair game if the pharmacy finances falter.
LLCs are also usually treated like “partnerships” which means that the members of the LLC are considered self-employed by the government. That will make you liable for self-employment taxes based on your pharmacy’s net earnings, which could end up being a huge expense.
An LLC isn’t ideal if you plan on passing your business on to someone else. In most states, an LLC has to be dissolved upon the death or bankruptcy of a member, unlike a corporation, which can go on existing forever.
What Is a C Corp?
A C corporation, sometimes known simply as a “corporation,” has some similarities to an S corp. They both are owned by “shareholders” rather than “members,” which is the case for an LLC. They both offer shareholders liability protection to keep personal assets safe in the case of business debts.
However, unlike an S corp, a C corp has to file a corporate tax return instead of passing through profits to shareholders, meaning owners might have to pay taxes twice — first on their corporate income and second on a personal income.
Pros of a C corp
Unlike an S corp, there are no restrictions on who can be a shareholder of a C corp. This makes the structure especially appealing if you are looking for people to invest in your business.
As a C corp, you can also issue more than one class of stock for different types of shareholders.
The 2017 Tax Cuts and Jobs Act has also lowered the corporate tax rate to a flare rate of 21 percent, making double taxation easier to swallow.
Cons of a C corp
Double taxation is the main reason many shy away from the C corp structure. If you want to avoid paying corporate taxes, you may be better suited for an S corp or LLC.
The other main disadvantage of a C corp is the complexity. There are many formal requirements for how to operate a C corp and the records you need to keep. Like an S corp, you are required to have shareholder and director meetings, but the rules for a C corp have more red tape and formalities, like submitting meeting minutes to the state.
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