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BUSINESS OF
MEDICINE
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The S-Corp. must continue to meet all of the above require- tering national or international amateur sports competition, and
ments. Failure to comply can result in revocation of the S election. preventing cruelty to children or animals. The term charitable is
For example, if a shareholder receives both a salary and dividends used in its generally accepted legal sense and includes relief of the
from the S-Corp., and the IRS reclassifies some or all of the salary poor, the distressed, or the underprivileged; advancement of religion;
as a dividend (or vice versa), that individual could be deemed to advancement of education or science; erecting or maintaining public
have more (or less) dividend than the other shareholders, thus trig- buildings, monuments, or works; lessening the burdens of govern-
gering a violation of requirement no. 5 above. That could trigger ment; lessening neighborhood tensions; eliminating prejudice and
revocation of the S-election, and subject the company to the dou- discrimination; defending human and civil rights secured by law;
ble-taxation of a regular (C) corporation. Ouch. This makes S- and combating community deterioration and juvenile delinquency.
Corps less attractive.
The basic economic bargain is that the government tells the po-
Limited Liability Company (LLC) tential investors, “If you will refrain from extracting profits, we will
LLCs are a popular alternative because they are simpler than an refrain from extracting taxes. That way the organization will have
more money to carry out its socially-desirable operations.” There is
S-Corp. while still providing liability protection. A single-member also the notion that NP organizations relieve the government of bur-
LLC is taxed like a sole proprietorship, while a multiple-member dens in society it would otherwise have to bear. Presumably the pri-
LLC is taxed like a partnership. An LLC can also opt to be taxed vate NP organization can carry out those operations more efficiently
like a corporation. But remember, the limited liability of any orga- than government.
nizational form can always be “pierced” in a court of law.
Well, this is just a brief introduction. Page space sure runs out
Nonprofit Organization (NP) fast. “The time has come,” the Walrus said, “To talk of other things.
An NP organization can be incorporated as a stock corporation Of shoes and ships and sealing wax. Of cabbages and kings…”
(Lewis Carroll, Alice in Wonderland). Maybe more, next time…
(but the shares cannot be owned by any individual) or a non-stock
corporation, or unincorporated. The primary distinguishing feature
is potential eligibility for federal and state tax exemption, although
they may be subject to Unrelated Business Income (UBI) taxation.
The IRS allows for 35 different categories of NP entities that gen-
erally include:
• Charitable Organizations
• Churches and Religious Organizations
• Political Organizations
• Private Foundations
The most common type is the section 501(c)3 organization. Most Dana A. Forgione, Ph.D., CPA, CMA, CFE is the
NP hospitals are 501(c)3 organizations. To be tax-exempt under sec. Janey S. Briscoe Endowed Chair in the Business of
501(c)(3) of the Internal Revenue Code (IRC), an organization must Health at the University of Texas at San Antonio. He is
be organized and operated exclusively for exempt purposes set forth also an Adjunct Professor in the School of Medicine, De-
in sec. 501(c)(3), and none of its earnings may inure to any private partment of Cardiothoracic Surgery, the Department of Pediatrics, and
shareholder or individual. In addition, it may not be an action or- in the School of Public Health, all at the University of Texas. He previ-
ganization, i.e., it may not attempt to influence legislation as a sub- ously held a joint appointment in the School of Pharmacy at the Uni-
stantial part of its activities and it may not participate in any versity of Maryland, where he taught in the Doctor of Pharmacy
campaign activity for or against political candidates. program. His research interests are in international comparisons of
healthcare payment systems, costs and quality of care, as well as financial
The exempt purposes set forth in sec. 501(c)(3) are charitable, re- management for hospitals and physician practices.
ligious, educational, scientific, literary, testing for public safety, fos-
36 San Antonio Medicine • May 2016
