For many physicians, a buy-in is the largest financial decision since training, and it often arrives with a short deadline and a thick agreement. The price is only part of it. What you are buying, how you pay for it and how you will be paid afterward decide what the first year of ownership actually feels like.
How the practice is taxed
In a practice organized as a partnership, a partner is generally not an employee of the partnership. In California, medical practices generally cannot be organized as LLCs, so the legal form there is a question for counsel. The W-2 gives way to a Schedule K-1 reporting the partner’s share of income, there is no withholding on that income, and self-employment tax and quarterly estimated payments become the partner’s own responsibility. A professional corporation is a legal form, and for tax it is either an S corporation or a C corporation. S corporation owners who work in the practice are usually paid a salary with withholding and are taxed on their share of the company’s income whether or not it is distributed. A C corporation pays its own tax, and its owners are taxed on their salaries and on any dividends. The same price can therefore lead to very different cash patterns.
Retirement savings often change as well. A partner’s retirement plan contributions are generally based on net earnings from self-employment instead of a salary, which can change both the amount that can be contributed and when it is figured.
The first year, side by side
Consider a physician moving from a salaried position to partnership. Last year’s paychecks had tax withheld automatically. This year, the salary may stop at closing and cash arrives as partnership draws, with no withholding, while tax is owed on the partner’s full share of income whether or not it is drawn. Loan payments for the buy-in start right away. Unless estimated payments are set up in time, the first April can bring a large balance and an underpayment penalty just as the new partner’s income is still ramping up. In a corporate practice the paycheck continues, but distributions and loan payments rarely line up neatly either.
Price, financing and what you receive
The purchase price itself is generally not a deduction; it becomes your basis in what you acquire. How the price is divided among the ownership interest, equipment, receivables and goodwill matters to the seller and sometimes to you. These are questions to settle before the signature instead of after the first return.
- What is acquiredStock, a partnership interest, an ancillary entity or a contractual right.Counsel interprets the documents
- How it is paid forDown payment, note terms, debt service and whether distributions fund it.The lender sets the terms
- Pay after closingSalary, profit allocations and distributions on different schedules.The practice runs payroll
- The household yearWithholding, estimates, state filings and cash needs across the change.The tax projection
Where we help
We model the first ownership year: the tax under each version of the terms, the timing of cash, and the estimated payments to plan before the first payment due date after closing. Your attorney reviews the agreement and your lender sets the loan terms; we help make the tax side of the decision clear before you sign.
Sources
Start before you sign.
Tell us about the offer and when it needs an answer. We can talk through what the structure means for your taxes and cash in the first year.
Contact our team