Choosing the Right Entity Structure and Compensation Strategy for Your Practice

Most medical practices settle on a legal structure once, in the earliest days of the business, and rarely revisit the decision afterward. The paperwork gets filed, the practice grows, partners come and go, and the original structure simply carries forward by default rather than by design. For a solo practitioner, that inertia may not cost much. For a middle market group practice with multiple owners and real income at stake, it can.

As we discussed in our previous article, the wider QBI deduction thresholds introduced in 2026 give many physician-owners a reason to revisit how their practice is structured and how compensation is set. This article walks through the questions worth asking, whether your practice has been operating under the same structure for two years or twenty.

The Common Structures, and Where They Fit

Most physician-owned practices in Kentucky operate under one of a handful of structures. The S corporation remains the most common choice for smaller and mid-sized practices because it allows income to pass through to owners while avoiding the double taxation associated with a traditional C corporation, and it offers some flexibility in how owner income is characterized for payroll tax purposes.

Multi-member LLCs and partnerships offer similar pass-through treatment with somewhat more flexibility in how profits and losses are allocated among owners, which can matter for practices with uneven ownership stakes or complex partner agreements. Larger groups sometimes layer a management services organization, or MSO, on top of the clinical entity to separate administrative and support functions from the practice of medicine itself. This approach is more common among practices considering a private equity relationship or planning for significant growth, and it introduces its own set of tax and governance considerations.

None of these structures is universally correct. The right choice depends on the number of owners, the practice's income level, its growth plans, and how the partners want to handle compensation and eventual ownership transitions. What matters is that the choice be an active one, made with current facts, rather than an assumption inherited from the practice's founding.

How the QBI Phaseout Should Inform Structure

The QBI deduction phaseout described in our last article does not operate in isolation. It interacts directly with entity structure, because the way a practice is organized affects how income is characterized, how it flows to individual owners, and how much flexibility exists to manage taxable income near the phaseout thresholds.

Practices whose owner income sits near the boundary of the QBI phaseout range have real decisions to make about timing and structure. These decisions might involve how retirement plan contributions are structured, how bonus compensation is timed, or whether a change in entity structure would better position the practice going forward. None of this should be decided casually, since it touches payroll tax treatment, retirement planning, and long-term compliance. It is, however, worth raising proactively with your accountant rather than discovering after a tax return has already been filed.

Salary Versus Distribution: Getting Compensation Right

For practices organized as S corporations, one of the most consequential ongoing decisions is how to divide physician-owner compensation between salary and distributions. The IRS requires that owner-employees of an S corporation receive reasonable compensation for the services they provide before any remaining profit is distributed, and the definition of reasonable compensation is not left entirely to the owner’s discretion.

This distinction matters because salary is subject to payroll taxes, while distributions generally are not. Practices that set salaries too low relative to industry norms, in an effort to minimize payroll tax exposure, take on meaningful audit risk. Practices that fail to revisit compensation levels as the practice grows, on the other hand, may be leaving legitimate tax efficiency on the table.

Benchmarking physician compensation against recognized industry surveys, and documenting the basis for that compensation, protects the practice on both fronts. It supports the reasonableness of the salary in the event of an IRS inquiry, and it helps ensure the practice is not paying more in payroll tax than the circumstances require. This is an area where a periodic review, rather than a one-time decision, serves practices well.

Multi-Owner Dynamics: Buy-Ins, Buy-Outs, and Compensation Formulas

Middle market practices rarely stay static. Partners retire, new physicians buy in, and production levels shift over time, and each of these events puts pressure on whatever compensation formula the practice originally adopted. Some practices divide income evenly among owners regardless of individual production. Others use RVU-based formulas tied directly to clinical output, and still others use a hybrid approach that blends production with a base allocation tied to seniority or administrative responsibility.

The formula a practice chooses affects far more than take-home pay. It shapes the valuation used in partner buy-ins and buy-outs, it influences how the practice is perceived by outside parties such as lenders or potential acquirers, and it can either ease or complicate a generational transition as senior partners step back and younger physicians take on a larger role. A formula that made sense with three owners does not always scale cleanly to seven or eight, and practices that have grown significantly since their formula was adopted should take a hard look at whether it still reflects how the practice actually operates.

Signs It Is Time to Revisit Your Structure

A handful of events should reliably trigger a structure and compensation review. Adding a new partner or preparing to buy out a retiring one is one of the clearest signals, since both events touch valuation, tax treatment, and the compensation formula all at once. A practice considering a sale, merger, or private equity relationship should also review its structure well in advance, since prospective buyers examine the clarity and defensibility of a practice's financial and legal organization closely during due diligence.

Significant income growth is another trigger, particularly when that growth moves owners closer to or across the QBI phaseout thresholds discussed earlier. Opening a new location, adding a service line, and absorbing a major change in the tax law, such as the provisions that took effect this year, are further reasons to schedule a review rather than assume the existing structure still fits.

Where to Go From Here

A practice's legal structure and compensation formula are not decisions to make once and forget. They are living parts of the business that deserve the same periodic attention as clinical protocols or equipment upgrades, particularly as the practice grows and the tax law around it continues to shift.

Baldwin CPAs assists medical practices across Kentucky evaluate whether their current structure and compensation approach still serve them well, and works alongside practice leadership to make adjustments before those decisions get made by default. If it has been more than a few years since your practice took a fresh look at this question, this is a good time to start that conversation.