Why You Need a CPA When Starting a Medical Practice

Starting a medical practice represents one of the most significant transitions in a physician’s career: the evolution from healthcare provider to business owner. While medical school teaches doctors to treat patients, many healthcare professionals find themselves underprepared for the financial and operational complexities of running a successful practice.

That makes it crucial you find the right financial and accounting partner early in your journey as a new business owner. The decisions made during the formation of a new practice create ripple effects that impact profitability, tax liability and personal financial security for years.

A medical or dental practice with flawed financial foundations may appear successful while silently hemorrhaging profits through inefficient operations, inappropriate tax structures, substandard reimbursement processes or inadequate cash flow planning.

Much like medicine itself, the field of accounting and finance has become increasingly specialized. While more generalized CPAs can provide some support, a healthcare-focused CPA brings much more specialized expertise that can make all the difference in helping you build a healthy, growing practice.

Choosing the Right Entity Structure: Tax and Strategic Considerations for Medical Practices

Selecting the appropriate business structure carries significant implications for taxation, liability protection and operational flexibility. While entity structures can be changed, doing so is a headache. So, it’s important to make the most appropriate choice the first time around.

C Corporations

Many physicians establish professional limited liability companies (PLLCs) or professional corporations (PCs) since these can provide liability protection. However, if the practice has multiple owners, the PLLC  structure is taxed as a partnership by default.

Income may be subject to both federal income tax (up to 37%) and self-employment tax (15.3%), potentially creating a combined tax burden that exceeds 50% of the practice’s earnings. 

The PC structure is treated as a C corporation by default, generating double taxation of corporate taxable income.

S Corporations

To reduce this burden, many practices elect to be taxed as an S corporation. When properly structured — whether through a PLLC or PC — S corp status allows owners to pay themselves a reasonable salary (subject to payroll taxes), with additional profits distributed as distributions, which are not subject to self-employment tax.

An S corp election must be formally filed with the IRS and accepted by the IRS; simply forming a PLLC or PC does not automatically trigger S corporation tax treatment.

Timing Considerations for Entity Structures

Timing is another key consideration. In the early stages of a practice (when losses are anticipated), an LLC treated as a disregarded entity or as a partnership may offer strategic benefits. If properly structured with qualifying debt financing, losses during the initial setup phase can be deducted beyond a physician’s direct capital contribution.

As the practice matures and becomes profitable, PLLCs and PCs offer the flexibility to evolve. This allows a shift from partnership taxation to S corporation status to optimize tax efficiency.

Ultimately, your entity structure should align with your practice’s stage of growth, ownership goals and long-term vision. A well-considered structure can support everything from loss deductibility and tax optimization to liability protection and succession planning — making it one of the most important decisions you make when starting a medical practice.

Dive Deeper: What Business Structure Should You Use for Your Physicians Practice?

Financial Planning and Cash Flow Management for Medical Practices

Medical practices face unique cash flow challenges. Their extended reimbursement cycles create significant gaps between service delivery and payment receipt.

Planning for the realities of this business model is key to ensuring that your new practice remains financially viable. A healthcare CPA creates realistic financial models that account for industry-specific reimbursement patterns, using their experience to create financial plans that consider the realities you’ll face.

Without this expertise, practice owners may underestimate cash requirements, leading to operational disruptions or personal financial strain.

Banks often offer healthcare professionals favorable financing terms to fund the acquisition or growth of a medical practice. Accounting for the costs of servicing this debt on an ongoing basis is critical. Your CPA will create projections that assess your new business’s capacity to do so based on existing revenues and your growth plans.

These projections are comprehensive, incorporating credentialing timelines, payer-specific reimbursement cycles, and seasonal fluctuations that a less experienced accountant might miss. Your healthcare CPA won’t just build these projections; they’ll help you track your performance against them, monitoring metrics that signal potential problems before they become a crisis.

Medical Practice Valuations and Acquisitions

Many providers choose to acquire an existing practice (and its patient list) rather than start their own practice from scratch. The acquisition of an existing medical practice requires in-depth financial and business analysis. A healthcare CPA provides critical guidance throughout this process, preventing costly missteps.

Business valuation and calculation engagements focus on sustainability rather than just historical performance. They examine revenue sources, payer mix stability and operational efficiencies.

That said, a comprehensive business valuation isn’t always necessary. Instead, a healthcare CPA can provide guidance on the process of determining a reasonable value for the business.

Once you’ve identified a practice to acquire, a healthcare CPA structures acquisition terms to maximize tax advantages. Improper allocation of purchase price between tangible assets, goodwill and non-compete agreements can result in tens of thousands in unnecessary tax liabilities.

Your CPA should also play a role in the due diligence process, which assesses the financial performance, compliance and risk profile of the business being acquired.

Learn More: How Much Is Your Medical Practice Worth? A Comprehensive Guide to Valuation Methods

Evaluating Strategic Partnerships and Growth Decisions in Medical Practices

Entering into business ownership with other physicians is a decision that carries significant long-term financial implications. A healthcare CPA provides an objective perspective on these relationships, helping physicians distinguish between truly beneficial partnerships and potentially damaging affiliations.

When evaluating potential business partnerships, your accountant will examine the fundamental value each party brings to the relationship — assessing strategic contributions like contract acquisition, administrative infrastructure, and growth potential.

Understanding the distinction between owner and employee-level contributions becomes essential when structuring medical partnerships. A healthcare accountant helps establish clear criteria for ownership eligibility based on strategic value rather than just production metrics.

If your practice is growing and opening new locations, your CPA will work with you to develop scalable financial frameworks that accommodate your expansion while maintaining operational control. This includes creating subsidiary structures for new locations, implementing standardized financial reporting and establishing centralized service entities.

Build a Foundation for Practice Success with the Healthcare CPAs at James Moore

The complexities of starting a medical practice ownership extend far beyond clinical expertise. Physicians who partner with healthcare-specialized CPAs gain a strategic advantage through guidance tailored to the unique challenges of medical businesses, ensuring they avoid potential pitfalls and build a fiscally sound business.

Starting with proper financial foundations allows medical practices to focus on their core mission: providing outstanding patient care. By establishing appropriate business structures, implementing effective financial systems and making informed strategic decisions, practices position themselves for sustainable success.

For physicians contemplating practice ownership or acquisition, engaging a healthcare accounting firm early in the process provides protection against common issues while creating a roadmap for financial success.

At James Moore, our healthcare accounting team has significant experience advising physicians considering acquiring or starting their own practice. We offer a range of solutions, from advisory services to outsourced accounting solutions that see our team manage the day-to-day financial needs of your practice.

Contact James Moore’s Healthcare team for a preliminary consultation to discuss your specific practice needs and goals.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.