The first thing many physicians do after signing a contract is form an LLC. It feels like the responsible move. The locums check arrives with no withholding, the deposit is larger and stranger than any paycheck of the last decade, and an entity seems like the grown-up response. Then the state fee arrives, the second bank account sits mostly unused, and no one can explain what actually changed.
Here is the plain version. An LLC is a liability and organizational structure. By default it is not a tax structure at all. The IRS treats a single-member LLC as an entity disregarded as separate from its owner for income tax purposes unless the owner files Form 8832 and affirmatively elects corporate treatment. Your locums income still lands on Schedule C. Your self-employment tax still runs through Schedule SE. Your federal tax liability does not move by one dollar because you filed articles of organization.
That sentence disappoints people, and it should not. The LLC does real work. It simply does not do the work most physicians believe they are buying.
Forming an LLC changes your federal tax bill by exactly zero dollars
A physician earning $80,000 of net 1099 income as a sole proprietor and the same physician earning $80,000 through a single-member LLC file identical returns. Same Schedule C. Same Schedule SE. Same qualified business income analysis. Same quarterly estimated payments. The LLC name appears on the invoice and the bank account, and nowhere on the tax math.
| Sole proprietor | Single-member LLC | LLC with S-corp election | |
|---|---|---|---|
| Federal income tax treatment | Schedule C | Schedule C, disregarded entity | Form 1120-S, K-1, W-2 to owner |
| Self-employment tax | Schedule SE on full net profit | Schedule SE on full net profit | FICA on wages only |
| Separate federal return | No | No | Yes |
| EIN strictly required | No | No, unless employees or excise tax | Yes |
| State formation and annual fees | None | Yes, varies by state | Yes, varies by state |
| Payroll administration | None | None | Required, ongoing |
The IRS is explicit that a disregarded single-member LLC with no employees and no excise tax liability does not need an EIN at all, though it may obtain one to open a bank account or because state tax law requires it. Most physicians should get one regardless, for a reason unrelated to the entity: an EIN on a Form W-9 keeps your Social Security number off the paperwork of every hospital, staffing group, and telehealth contractor that pays you.
Key insight
If the only reason you are considering an LLC is taxes, get an EIN instead. The EIN costs nothing, takes about ten minutes online, keeps your Social Security number off every Form W-9 you sign, and delivers most of the practical benefit physicians attribute to the entity. The federal tax treatment is identical either way.
The malpractice shield you think you are buying does not exist
This is the misconception worth killing, because physicians act on it and because the stakes are a career.
An LLC does not protect you from liability for your own clinical negligence. When a member of a limited liability company personally commits a tort, the entity shield is beside the point: the person who committed the act is personally liable regardless of whether the act was performed on behalf of an entity or for its benefit. The American Bar Association's business law section states the principle directly in its 2019 discussion of the limits of limited liability, and it is the standard rule taught in every business associations course. Your entity may be a co-defendant. It is never a substitute defendant.
No entity form shields a physician from a malpractice claim arising out of care that physician personally delivered. That is what professional liability insurance is for, and no structure substitutes for it. The specifics are state law and the details vary. Many states require licensed professionals to organize as a professional limited liability company or professional corporation rather than a plain LLC, several restrict membership to licensees, and a few apply additional statutory rules to professional entities. Confirm what your state permits for physicians with your state medical board and your secretary of state before you file anything.
Important
If you have been quoted a lower malpractice premium, or told you can carry lower limits, because you practice through an LLC, treat that as a reason to get a second opinion. Entity form is not a rating factor for your own clinical acts. Read your tail coverage terms instead — an unfunded tail is a far larger uninsured exposure than anything an LLC addresses. The mechanics are in malpractice coverage, decoded.
What the entity genuinely does protect, and it is not nothing
Strip out the clinical malpractice claim and a real set of exposures remains. These are the ones an LLC addresses:
- Premises and non-clinical injury. A patient falls in the waiting room of an office you lease. A courier is injured on your property.
- Contract liability. You sign an equipment lease, a billing service agreement, or an office lease, and the business cannot pay. The counterparty pursues the entity rather than your home equity, absent a personal guarantee.
- Employment claims. The moment you hire a medical assistant or a scribe, you own wage-and-hour, discrimination, and wrongful-termination exposure. This category alone is a genuine reason for an entity.
- Vicarious exposure for others. Acts of employees or subcontractors that are not your own clinical acts.
- A clean books boundary. One account in, one account out, one card. Every deduction you claim on Schedule C is defensible because the record is separate rather than reconstructed from a personal statement in April.
- An election container. The LLC is the structure into which an S-corp election is later dropped, without re-papering contracts, credentialing, and bank accounts.
For a physician who moonlights at three hospitals with no staff, no lease, and no equipment, that list is thin. For a physician who signs an office lease and hires two people, that list is the entire argument.
Commingling dissolves the protection you paid for
The most common way physicians lose entity protection is not an exotic legal theory. It is running personal expenses through the business account.
Courts disregard the entity — the phrase is piercing the corporate veil — when the owner has not respected the separation. The recurring facts are consistent across jurisdictions: personal and business funds mixed in one account, no operating agreement, undocumented transfers between owner and entity, contracts signed in the individual name rather than the entity name, and inadequate capitalization. An LLC that exists only as a filing receipt is the easiest kind to set aside.
The discipline is unglamorous and takes roughly twenty minutes a month:
- Every 1099 payment lands in the business account. No exceptions, including the small telehealth deposits.
- Business expenses are paid from the business account or a dedicated business card. Personal expenses never touch it.
- You pay yourself by a labeled transfer from business to personal, called an owner's draw. That is the only money that crosses the line.
- Every contract, Form W-9, lease, and invoice is signed in the entity name, with your title.
- You keep a written operating agreement even though you are the only member.
Skip these and you have purchased an annual fee rather than a shield.
Run the five-year cost before you file anything
State cost is not uniform, and it is the variable most physicians never check. Formation fees across the states run roughly $50 to $520, and recurring annual or biennial fees run from $0 to $800. Three illustrative examples, each of which you should re-confirm directly with the state because these figures change:
| State | Formation filing fee | Recurring annual cost |
|---|---|---|
| California | $70 | $800 franchise tax every year, regardless of income |
| Delaware | State filing fee | $300 annual franchise tax, due June 1 |
| Texas | State filing fee | Franchise tax report required; most LLCs owe $0 because revenue falls below the $2.47 million threshold |
Example calculation
Assumptions, stated explicitly: California physician, single-member LLC, $85,000 of net 1099 locums income, no employees, no lease, no equipment. Registered agent duties handled personally at no cost. Five-year horizon. Fees at current published rates, which change.
Formation filing fee, year one: $70 California annual franchise tax: $800 per year Five years of franchise tax: $800 x 5 = $4,000 Statement of Information, $20 every two years, three filings: $60
Five-year cost of the entity: $70 + $4,000 + $60 = $4,130 Federal tax saved by the entity over those five years: $0 Malpractice exposure reduced by the entity: $0
The $4,130 purchases separation from premises, contract, and employment liability. With no premises, no contracts beyond the staffing agreement, and no employees, you are paying $4,130 to insulate against exposures you do not currently have.
Change one input — the same physician signs an office lease and hires a front-desk employee — and $4,130 over five years becomes inexpensive. That is the actual analysis, and it turns on what you own and who you employ rather than on how much you earn.
A sole proprietorship with real insurance is frequently the correct answer
Physicians hear "sole proprietor" and think amateur. It is not. It is the default federal treatment for a person doing business, and for a locums or physician with no staff and no premises it is often the right structure.
The sole proprietor version done well looks like this: an EIN used on every Form W-9, a dedicated checking account and card used only for business, professional liability coverage sized to your actual practice with the tail question answered in writing, an umbrella policy over your personal assets, quarterly estimated payments on a calendar, and a one-participant established in your own name. Every one of those is available without forming an entity, and the retirement piece in particular is entity-neutral: a sole proprietor establishes a solo 401(k) exactly as an LLC owner does, with identical contribution math. The full sequence for a first 1099 year is laid out in the 1099 starter kit.
Quick takeaway
The order of operations that actually protects a 1099 physician: professional liability coverage with the tail funded, then an umbrella policy over personal assets, then an EIN and separate banking, then a retirement plan, and only then an entity — at the point where premises, contracts, or employees give the entity something real to do.
The S-corp election is the real question hiding behind the LLC question
When a physician says "I want an LLC for the tax savings," the thing they have heard about is the S-corp election, which an LLC can make and which does change the tax math. The election splits business income into W-2 wages, subject to FICA, and distributions, which are not subject to self-employment tax.
The trade is real and so are the costs. You must run actual payroll with withholding and quarterly filings, you must pay yourself reasonable compensation for the clinical work you personally perform, you file a separate Form 1120-S, and your accounting fee increases. The savings scale with profit above reasonable compensation, and for a physician that headroom is constrained by the fact that published specialty compensation benchmarks make "reasonable" straightforward for an examiner to establish. It is a decision that turns on your net profit, your state, and your tolerance for administration, and it deserves a CPA working from your actual numbers rather than a rule of thumb from a forum.
The relevant point today: you do not need to decide it now. Form the LLC when it has non-tax work to do, then evaluate the election later against twelve months of real profit. If you are still weighing whether the 1099 arrangement is right at all, that comparison comes first — see W-2 versus 1099: the real comparison.
Common questions
Does an LLC lower my malpractice premium?
No, and any quote suggesting otherwise deserves scrutiny. Premiums are set by specialty, procedure mix, claims history, geography, and policy limits. Entity form is not a rating factor for your own clinical acts, because those acts remain your personal liability regardless of structure.
Do I need an LLC to open a solo 401(k)?
No. A sole proprietor with net earnings from self-employment may establish a one-participant 401(k). The plan attaches to the business activity, not to an entity form, and the contribution calculation is identical whether or not an LLC exists.
My state requires a PLLC for physicians. Is that different?
For the question you are asking, functionally no. A professional limited liability company still does not shield you from liability for care you personally delivered. It is the form many states require licensed professionals to use, and in several states it carries ownership restrictions limiting membership to licensees. Confirm the requirement with your state medical board before filing.
I already formed an LLC I do not need. What should I do?
Nothing rushed. Decide whether the annual cost is worth keeping the container for a future S-corp election or a future practice. If it is not, dissolve it properly through the state rather than abandoning it, because an abandoned entity continues to accrue fees and penalties in states such as California.
What to do next
- Read your state medical board's guidance on entity forms available to physicians, and your secretary of state's fee schedule. Both are free, take about fifteen minutes, and determine whether the rest of this analysis even applies to you.
- Apply for an EIN online at no cost, whether or not you form an entity, and use it on every Form W-9 going forward in place of your Social Security number.
- Open a dedicated business checking account and one business card, and route every 1099 payment through it starting with the next deposit.
- Pull your malpractice policy and answer three questions in writing: claims-made or occurrence, who pays the tail, and what the per-claim and aggregate limits are.
- List the exposures you actually have today — premises, lease, employees, equipment, subcontractors. Form the entity only if that list is not empty.
- Revisit the S-corp election with a CPA once you have twelve months of actual net profit rather than a projection.
Physicians who get this right treat the LLC as a tool with a specific job rather than as a status marker. If your practice has no premises, no staff, and no contracts beyond the staffing agreement, insurance and clean books do nearly all the protective work, and you can add the entity in the month it starts earning its fee. The sequence above works with or without us. This is education, not individualized financial advice.