S-Corp, C-Corp, LLC, or Sole Proprietor?

The choice between a sole proprietorship, LLC, S-corporation, and C-corporation is the foundational decision in any tax strategy. Each structure carries distinct implications for self-employment tax, income tax rates, compensation rules, retirement plan contributions, and eventual exit. For medical and dental practices in California — where the state piles on its own tax complexity — the stakes are even higher.

Where the Self-Employment Tax Hits

Sole proprietors and single-member LLCs (taxed as disregarded entities) pay 15.3% self-employment tax on net earnings up to the Social Security wage base ($168,600 in 2024), then 2.9% on all earnings above that. On $300,000 of practice profit, that is over $33,000 in SE tax before you even touch income tax.

The S-corporation structure interrupts this. By splitting practice income into a W-2 salary and S-corp distributions, only the salary portion incurs payroll taxes. The distribution bypasses FICA entirely. The IRS requires the salary be "reasonable" for your role — for a working physician, that typically means $100,000–$180,000, not $40,000. Underpaying yourself to minimize payroll tax is an audit flag and a liability.

California's Additional Complexity

California does not make this easy. The state imposes an $800 annual minimum franchise tax on LLCs, S-corps, and C-corps. S-corporations face an additional 1.5% California S-corp tax on net income — a penalty for the pass-through structure that does not exist at the federal level. C-corporations pay California's flat 8.84% corporate rate, one of the highest in the nation.

For a practice generating $500,000 in net income operating as an S-corp, California's 1.5% levy costs $7,500 on top of the $800 minimum, before touching personal income tax. That cost must be weighed against the FICA savings. In most cases, the S-corp still wins — but the California math narrows the margin and matters at lower income levels.

California also does not conform to federal Qualified Opportunity Zone tax benefits or QSBS exclusions under §1202, which affects how you model an eventual exit from a C-corp structure. What works beautifully at the federal level may generate a large California liability.

The Retirement Plan Multiplier

Entity structure directly controls how much you can shelter in a defined benefit or cash balance plan — often the single largest tax lever available to a practice owner. For S-corps and C-corps, defined benefit contributions are based on W-2 compensation. For sole proprietors and unelected LLCs, they are based on net self-employment income.

A physician with $400,000 in W-2 wages from their S-corp can fund a defined benefit plan with contributions of $100,000–$250,000 per year depending on age and actuarial factors — dollars that exit the practice pre-tax and compound tax-deferred. When you stack FICA savings, QBI deductions, and defined benefit contributions, the right entity structure combined with the right plan can reduce federal taxable income by $150,000 or more in a single year.

Which Structure Is Right for You?

The Decision Is Not One-Time

Most practice owners make their entity election early and never revisit it. That is a mistake. Income changes, tax law changes, and the optimal structure at $120,000 in practice revenue is different from the optimal structure at $800,000. An S-corp election that made sense in 2018 may now be leaving retirement plan contributions and exit flexibility on the table.

The right approach is an annual review: model your effective tax rate across structures given current income, compare the FICA savings against compliance costs, and stress-test the retirement plan math. For practices with multiple partners, the analysis multiplies in complexity — and so do the savings when it is done correctly.

Entity structure is not administrative. It is the foundation of every tax strategy you will run for the life of your practice. Get it right once, review it often, and stack every legal tool on top of it.