With doctors increasingly adding side income streams and looking to utilize the tax advantages of 1099 income, many physicians are thinking about the legal and tax implications of having a business and how to appropriately structure their business finances and documentation. As they move to make their side businesses ‘official,’ many wonder whether a legal business entity, such as an LLC, S corp, or C corp, is necessary or advantageous. The LLC option is popular as it offers flexibility and the ability to evolve as your business goes through different stages of growth. On our physician communities, we often see physicians asking, “Do I need an LLC for my side gig?” or “Will forming an LLC help me save on taxes?” Below, we cover important aspects of LLCs to understand, asset protection and taxation considerations, and advantages and disadvantages to having an LLC to help you decide if you need an LLC (or other structure) for your side hustle.
Disclaimer: Our content is for generalized educational purposes. While we try to ensure it is accurate and updated, we cannot guarantee it. Rules/laws can change frequently. We are not formal financial, legal, or tax professionals and do not provide individualized advice specific to your situation. You should consult these as appropriate and/or do your own due diligence before making decisions based on this page. To learn more, visit our disclaimers and disclosures. For this piece in particular, please note that LLCs are different from state to state and that laws and tax policies are always subject to change. Please consult with a lawyer and/or accountant familiar with local guidelines who can help you in your specific situation.
Article Navigation
What Is an LLC?
An LLC is a limited liability company. It is a type of business structure that is allowed and regulated by state statutes. Note that as such, regulations for LLCs can differ from state to state, so we recommend working with a local business attorney who understands the laws in your state.
In general, most physicians will register their LLC in the state in which they operate the side gig or business and in which the income is received. There can be notable exceptions to this if you need anonymity or are a startup planning on accepting investors and eventually selling the company. Your attorney can guide you on this if applicable, and on whether an LLC makes sense in this situation.
While there are several different ways to structure your business, the LLC structure is popular because it offers a lot of flexibility compared to the other options, and allows you to take advantage of various aspects of each of the structures as your business grows and enters different stages. This includes the ability to be taxed as a corporation for the tax benefits and asset protection while maintaining the flexibilities of a partnership and relative accounting simplicity if desired.
If your physician side gig is medicine related, it’s worth noting that your state may require you to form a PLLC (professional LLC) instead.
Owners of an LLC are called members. Typically, states don’t restrict ownership. Members can include multiple individuals, corporations, other LLCs, and foreign entities. For side gig income, you can have what is known as a single-member LLC, which has only one owner.
There are a few types of businesses, such as banks and insurance companies, that generally cannot be LLCs. While these typically don’t apply for most physician side gigs, we’ve seen some of our physician members who have gone on to provide services such as insurance for physicians, so it can be worth checking before beginning the registration process.
Alternatives to Forming an LLC for Your Side Hustle Income
As you may have guessed with the PLLC potential requirement, an LLC is just one type of business entity you can form to help manage your side gig and related income. Each business type or form of reporting has its own advantages and disadvantages, depending on factors such as what your side gig is, how much you work, who you work for, and how much you make. Different types of business structures and ways of reporting side gig income include:
Sole proprietorship
DBA (doing business as)
Partnerships
LLPs (limited liability partnerships)
C-Corporations
S-Corporations
Note that you can also have an LLC which you elect to have taxed as a corporation, and this election can be changed as your business changes. This is another reason why businesses just starting out may find the LLC structure most flexible.
Learn more about the different types of businesses for side gig and self-employed income.
Below, we’ll touch on some of these and how they compare to LLCs for common situations of physician side income.
Advantages and Disadvantages of an LLC
Before deciding if you need an LLC for your side gig, it’s important to know the benefits and restrictions of what LLCs are and offer.
Advantages of an LLC
Provides asset protection. This is ostensibly one of the most important advantages for physicians. Unlike with a sole proprietorship or DBA, when you form an LLC, your personal assets are generally protected from the LLC’s debt and liabilities.
An LLC can also protect your business assets, such as real estate investment properties, from any personal claims against you. In situations such as real estate investing, you can even hold each property, or a small number of properties, in separate LLCs to protect them from claims or issues arising from other properties outside of that specific LLC.
It can also provide better creditor protection. Unlike a corporation, there are no shares or shareholders in an LLC, so creditors cannot generally come after shares of an LLC in a lawsuit.
Note that depending on the state, a single member LLC may not provide as much asset protection from creditors as multi-member LLC. It’s worth discussing with an attorney if this is a big part of the reason you are creating the LLC.
Learn more about asset protection for physicians.
Offers flexible taxation options. As your business grows or changes, it may be advantageous to be taxed in different ways. The LLC allows the potential to be taxed either as an individual or a corporation. Because it can be taxed as a 'pass through' entity, the finances can flow easily onto your tax return, which provides simplicity in accounting for those starting out with their businesses. If your business grows to the point where you may want to take advantage of some of the tax advantages of a corporation, you can then elect to have your LLC be taxed as a corporation instead.
Allows clean separation of personal and business income and finances. When you run your side gig income through your personal finances, it can make it difficult at tax time to pull together records and information to ensure you’re properly accounting for your income and 1099 associated tax deductions. An LLC with its own bank accounts and credit card can help you to separate out your side gig income and related expenses. While this might seem like a hassle, it’s actually a huge advantage. It can save you significant time when filing your taxes, or reduce the cost of hiring an outside accountant to sort out the mess. In the worst case scenario, it also makes your records cleaner in the case of an IRS audit.
Low complexity of administrative requirements. While LLCs are regulated by the state, they generally have low oversight requirements, especially when compared to a corporation. Corporations can have complex structuring requirements including bylaws, annual reports, and requirements to hold shareholder meetings. While LLCs have annual reporting requirements to the state, it’s typically a quick process that requires far less paperwork and formalities than a corporation. LLCs can generally be set up very quickly. Depending on the state, sometimes it just requires going onto the Secretary of State's website, filing an "articles of organization" that states the business name, the members of the LLC, and an address, and paying a relatively small filing fee. For those that know what they're doing, it can be done in less than a half hour.
Offers privacy protection for physicians. When you work your side hustle through a sole proprietorship, your side gig income comes directly through you and your identity. In situations where you make enough income to require a 1099 (most physicians will as the limit is low, at $600 per payor in a year), you have to complete your tax identification form under your personal identity. An LLC allows you to use a business name and business mailing address instead of your personal name and home address.
Gives credibility to your side hustle. An LLC allows you to create a formal business name. Depending on your side gig, this can help provide credibility to your side gig. While you may not care about your side gig’s name when completing paid medical surveys or doing one-off consulting gigs, it can be useful for side hustles such as developing a medical device or a telemedicine practice.
Can be held in a living trust. If you have real estate properties or other assets that you are managing in a living trust for your beneficiaries, LLCs can be put into, and managed by, a living trust. A business can also be passed down through a trust as well.
Learn more about revocable (living) trusts and differences versus irrevocable trusts.
Flexibility in allocation of how ownership and profits are done. For companies where the amount invested may not directly correlate with how the profits are distributed or the percent of the ownership stake, the LLC offers the ability to set customized terms based on its operating agreement. Practically speaking, this means you can accept investors without giving them a proportionate share of ownership, or have people take profits in accordance with how many hours they've worked or what they've achieved instead of just how much of the company they own.
Disadvantages of an LLC
Doesn’t always offer tax advantages. LLCs have different tax structures available, but the standard way to treat your LLC is as a pass-through entity versus being treated as a corporation for tax purposes (see below for when to consider taxation as an S corp). As a pass-through entity for tax purposes, all income generated through your LLC business is treated and reported as your personal income and taxed accordingly. As such, most LLCs don’t offer any tax advantages, though you will still be able to take tax deductions on your side income for qualified related business expenses.
Learn more about tax deductions for the 1099 side gig physician.
Requires filing and renewal fees. While LLCs aren’t as complex as corporations when it comes to structure, oversight, and reporting requirements, they are still more complex than a simple DBA or sole proprietorship. There is an associated cost with starting an LLC and for annual renewal filings. In some states, it’s less than $100 to form an LLC and to renew your filing annual. In other states, it can be multiple hundreds of dollars for each. The costs by state vary significantly, so make sure to research the initial and ongoing costs for your state.
Can be difficult to transfer ownership or find investors. Many physicians look at creating an LLC tied to their specific services, such as coaching or consulting. In these cases, you’ll likely only be interested in a single-member LLC and won’t be concerned about selling your side gig business in the future. Other doctors, however, create side gig businesses with the hopes of building or developing products or services, such as an app, and then selling the business. In these latter situations, an LLC can make it more difficult to transfer ownership of the company when you’re ready to sell it.
In addition to higher complexity when selling an LLCs, a side gig business set up as an LLC may be less favorable to future investors because of the way they are structured and the inability to offer shareholder options, like a corporation can.
Electing to Tax Your LLC as an S-corp
For most physicians and other small business owners, the LLC is a pass-through entity for tax purposes, especially for side gigs. This is because the default tax treatment of a single member LLC by the IRS is as a sole proprietor, and the default tax treatment of an LLC with more than one member is as a partnership. In these situations, LLCs don’t provide any tax advantages, and are mostly for the asset protection, privacy, or practical purposes outlined above.
However, another option you can choose when forming your LLC (or by electing it later when it makes financial sense to do so) is to treat your LLC as a corporation for tax purposes. It can benefit entrepreneurs earning higher incomes with their side gigs to elect to tax their LLC as an S-corporation to save on payroll taxes.
Typically, if all of your income runs through an LLC, it passes through to your personal return and is all reported as self employed income, which means that you pay self-employment taxes on both sides, the employer and the employee, on all the income. In 2024, this currently comes to 15.3% between Social Security (12.4%, with 6.2% paid as the employer and 6.2% as the employee) and Medicare taxes (2.9%, with 1.45% paid as the employer and 1.45% paid as the employee).
On the other hand, if you choose to be taxed as an S corporation, your business is seen as a separate entity with you as an employee. That means you can choose to receive some of your income as an employee (with that part subject to employment taxes on both the employer and employee side), and some of that income as the owner of a company as a dividend (not subject to self-employment taxes).
If your business generates a lot of income, the amount of self employment taxes not owed on the portion paid out as dividends rather than salary can really add up. Keep in mind that you cannot just say that all the earnings are being paid out as dividends and you are not taking a salary. The IRS requires that you pay yourself a reasonable income for the job that you do. It is very important to get advice from a licensed professional about what amount of salary is considered "reasonable," as the IRS will (rightfully so) not look kindly on anything perceived to be done for the purposes of tax evasion. If it feels you didn't set a reasonable salary, it may reclassify some of your dividend income as salary, in which case they may charge you not just the self-employment taxes on that, but also any relevant penalties and interest on those earnings.
Another potential advantage of electing S-corp status and paying yourself on payroll as W2 is the ability to factor this income into calculations for the 20% Qualified Business Income (QBI) deduction, which is a powerful tax deduction currently available in the tax code in 2024 that can be quite significant for qualifying businesses that generate a lot of revenue. Learn more about the Qualified Business Income (QBI) deduction.
You can read about this in more detail on our dedicated article, "Should I have my LLC taxed as an S-corp?"
So why doesn't every LLC elect to tax themselves as an S-corp for whatever savings it brings, even if minimal?
Being treated as an S-corp is not without its own hassles. S corporations need to run payroll to pay their employees. Additionally, the S corporation is required to file a completely separate tax return every year (Form 1120), instead of the earnings just passing through on Schedule C with your personal income tax for your side gig income. This tax return has different tax deadlines than personal returns. There may also be additional documentation, record keeping, and meeting requirements. All of these things can add additional costs from accounting and payroll, as well as administrative burdens. These typically aren’t worth the hassle unless you are making significant income.
Also note that S corporation status is not appropriate or allowed for every business. For example, if you want to have investors, you aren't able to offer different classes of shareholders with an S corporation. Additionally the number of owners and whether they reside in the US determines whether they meet criteria for eligibility for S corporation status. Last, but not at all least, one of the biggest tax advantages for self-employed income for physicians is the ability to contribute to more tax advantaged retirement accounts such as the solo401k and the defined benefit plan. How much you earn in salary from your side gigs will determine how much you can contribute to most of these options, so if you don't designate enough of your side gigs earnings as W2 earnings (which are subject to the payroll taxes), you will lose out on your ability to maximize your contributions to those tax advantaged retirement accounts, which may be bigger deductions than the payroll tax savings.
Because of these factors, in very general guidance, most physicians on the communities have said that their accountants have recommended that they be making at least 6-figures before considering if electing to have your LLC taxed as an S-corp is worth the savings in payroll taxes. Working with a trusted accountant can help you determine the trade off between the taxation options available for LLCs and whether it's right for you.
Do I Need an LLC for My Physician Side Gig Income?
As outlined in this article, there are pros and cons to LLCs, as well as how you elect to be taxed as an LLC. With this knowledge, when determining if you should form an LLC for your side gig income, ask yourself about these factors to help guide your decision about whether you need an LLC.
How much money are you making or plan to make with your side gig? If it's not a lot, and you just plan to pick up one or two small gigs a year that pay a few hundred dollars each, it may not be worth the cost and hassle of forming and maintaining an LLC with the associated fees. Instead, you may decide to keep it simple with a sole proprietorship or DBA, and let the income flow through on your schedule C. You'll still be able to take many of the most popular deductions associated with having 1099 income.
How much do you intend to grow this business line? As your business grows, keeping your personal accounting separate from your business accounting will get more challenging. If you want to keep things clean, having a separate business bank account and credit card will likely be much easier for bookkeeping purposes and in the case of an audit. You may also find that having a business entity presents you more seriously to those you are working with, and may give you more leverage in negotiations. Additionally, you will keep open the option of being able to elect to be taxed as a corporation if you do the assessment above on whether it's worth it to elect S-corp taxation status for your LLC and decide it's worth it.
What is the associated risk or need for privacy? Asset protection is a real concern for physicians. An LLC can offer additional security you may need, or just want, depending on the risk exposure associated with your side gig. Also, for some physicians, it may be nice to have an extra layer of privacy that presents an additional hurdle to others finding out who owns the business or potentially where you live.
What are your goals with your side gig? As noted above, LLCs can offer a great way to add credibility to your side gig without driving up the cost of forming and maintaining a corporation. If, however, you hope to bring in additional investors into your side gig business or hoping to build a business to sell to pocket a hefty profit, a corporation might be a better alternative for your side gig with its structure and features.
How do I pick between sole proprietor, LLC, S-corp, and C-corp?
We've already discussed when you might want to form an LLC instead of conducting your business or side gig work as a sole proprietor, but the decision between LLC (and just being taxed as a corporation) versus actually being a corporation is more complicated. If your goal is to bring on investors and raise capital, it may be necessary to be a C corporation. Additionally, if your intention is to sell the business, there are certain tax benefits with exclusion of a certain amount of profit being exempt from capital gains if you are a corporation. However, keep in mind that until you have accept those investors or have that exit, you may be subject to double taxation, many additional administrative requirements, and more as a corporation. Therefore, in complicated businesses or startup situations, it is well worth the cost of consultation with an attorney and/or accountant to determine what structure is best for you at the beginning, knowing that things can always be restructured if and when it makes sense.
Conclusion
LLCs offer many advantages for doctors looking to start side gigs or businesses. They aren’t without their drawbacks, however, and since they are managed on the state level, there is some research required before moving forward with forming an LLC.
If you haven’t created an LLC in the past, calling your Secretary of State's office or working with a local business attorney can help walk you through the process and to ensure you know what the requirements and regulations are.
If an LLC doesn’t sound like the right option for you, learn about other business types for self-employed and side gig income.
Additional Resources for Your Side Gig
For additional resources on starting and running your doctor side gig, explore:
If you want to be alerted of side gig opportunities, join our Physician Side Gigs Facebook group and sign up for our side gig databases. Both the community and databases are free for physicians to join.
You can also check out the IRS’s guidance for Limited Liability Companies (LLCs).