S-Corp for Longevity Clinic Owners: When It Saves Taxes (and When It Doesn’t)

As a practice grows and becomes profitable, tax strategy becomes just as critical as the overall business strategy. 

During the initial planning phases, many tax experts recommend the S-Corporation as a preferred structure because it can significantly reduce taxes, at least under the right conditions. 

But S-Corps don’t always work in your favor. For some clinics, it can add unnecessary complexities and increase the tax burden, so understanding the variables is vital. Arguably, you’ll want to make tax-informed decisions when you’re setting up the company initially, as it will save you time, money, and stress later on. 

What is an S-Corp? 

Unlike a C-Corp, an S-Corp is not actually a business entity in and of itself. Rather, it’s an election made by LLCs and traditional corporations. 

The structure allows income to be split into two categories, salaries and distributions. The biggest benefit to the company is that it enables pass-through taxation, in which the company’s profits are passed through to members and reported on their individual tax returns. In so doing, the company avoids corporate-level taxation. 

In contrast, in an LLC, all profits are subject to self-employment taxes. When we can split the income, only the salary portion is subject to payroll taxes, which can lead to massive tax savings.

Here’s an example. Let’s say the clinic sees $200,000 in net annual profits. 

If the company were an LLC, its members would pay self-employment tax on the entire amount. 

As an S-Corp, let’s say half of that was paid out in salaries and the rest as distributions. Only the salary portion is subject to self-employment tax. The result? Thousands of dollars in tax savings. 

That’s just one example of how an S-Corp can save you money. 

Conditions Where an S-Corp is Financially Advantageous

Longevity clinics can benefit from an S-Corp election if the following conditions are met:

• Consistent profitability. If the clinic sees steady, predictable annual profits (let’s say $100,000 or thereabouts), an S-Corp election makes sense. Below that threshold, the benefits are minimal and may not be worth the extra documentation. Clinics with a stable client base will likely benefit the most. 

• A reasonable salary is justified. Under an S-Corp, companies are required to pay their members a reasonable salary based on fair market value. If the market value is much higher than your ability to pay, the option to shift into a lower tax bracket is limited. So, if profits exceed salary expectations, the remainder can be distributed more tax-efficiently. 

• You want to reduce self-employment taxes. This is usually the main reason for electing an S-Corp. If a significant enough portion of income can be allocated to distribution (rather than wages), you reduce payroll taxes. Year-on-year, the savings can compound meaningfully.

• You don’t intend to seek outside investment. S-Corps are limited in the number and types of shareholders they can have and in the shares they can issue. If you have no intention of seeking venture capital (for instance), this probably won’t be an issue. However, if scale is in your future, if you intend to seek investors or enter global markets, an S-Corp can be limiting. 

After this discussion, there are scenarios where an S-Corp won’t save you money or provide any meaningful value. It’s not a universal solution and may actually add to the tax burden. 

Here are a few examples of where an S-Corp isn’t recommended:

• Your profits are modest. If the clinic earns less than $100,000 in annual profit, the tax savings won’t be significant. In fact, you’ll likely see costs rise in certain areas, such as payroll processing, corporate tax filing, and added accounting complexities. In this scenario, simplicity is preferable. If the situation changes, you can always elect later on. 

• Most of your profits are allocated to salaries. If there is little left over to distribute after paying reasonable market salaries, there is no advantage to an S-Corp. Scenarios where we see this most often are in solo operations, where a single practitioner drives revenue. 

• You are reinvesting most of the income back into the company. If you are using your profits to hire more staff, add services, or expand into new locations, the S-Corp has limited benefits, as you will only see tax savings on distributions. 

• A capital raise, rapid scale, or investment is imminent. S-Corps aren’t the best for companies seeking outside investment. Rules around share types and types of shareholders limit your options, and VCs tend to prefer the structure of a C-Corp. You might be hesitant to convert to a C-Corp, but if this is the trajectory you’re on, you will need to do it at some point. 

• Additional admin and accounting costs will eat into your profit. The extra work that comes with an S-Corp may not be worthwhile in the long run. You’ll need to run regular payroll, tax filings are more complex, and you’ll also face increased compliance. If the costs of managing the S-Corp overshadow the tax savings, it’s probably not the best way to go. 

Understanding the “Reasonable Salary” Concept

The IRS looks very closely at what you consider to be “reasonable salary” and will penalize you if you’re off track. If you underpay yourself compared to fair market value, your audit risk increases, and you may face penalties and income reclassification. 

Determining what your reasonable salary should be hinges on three main criteria: 

• Your role in the organization (operator/physician/clinician/executive, etc.)

• Broader industry salary benchmarks

• Market rates in your geographical area

If you’re unsure, working with the healthcare finance experts at Growise can help you parse it out. 

Is an S-Corp Right for Your Clinic?

The following strategy is basic, but it’s a decent starting point:

If your clinic has $100,000 or more annual profit, and you can reasonably pay yourself 60-70% as salary and 30-40% as distributions, then an S-Corp is worth considering. 

If this allocation doesn’t make sense, you’re likely better off sticking with a straight-up LLC structure. 

Of course, there’s no expectation that your situation will remain static. If things change, you can phase up to an S-Corp once profits become more consistent, and to a C-Corp if scale and investment come into play. 

Working with a qualified accountant and tax professional who understands the Longevity Clinic landscape will give you a leg up on tax savings and growth. It’s worth a quick call to see how we can help, so let’s start the conversation!