Texas Physician Asking About an S Corp: Why We Started with a Reasonable Compensation Study

This case started the way many conversations in Texas do: a professional earns good money, hears the words “S corp saves you taxes,” and calls asking if I can set it up. In this situation, the caller was a physician planning to work as an independent contractor across multiple clinics — not as a W-2 employee.

The request sounded straightforward: “Can you open an LLC for me? I’m thinking about an S corp.” My job was to slow everything down and make sure we understood the law, the structure, and the numbers before touching any elections.

Step 1 – Start with what they actually are today

Before talking entities, I asked what they knew about their current status. Like most people, they had never really labeled it. In reality, they were a:

• Sole proprietor – an individual doing business in their own name, reporting income and expenses on Schedule C.

I explained that:

• A sole proprietor doesn’t have a legal separation between “you” and “the business.”
• If something goes wrong, there isn’t a company wall protecting personal assets.

The physician knew they wanted protection and structure, but the details were fuzzy. That’s where the LLC conversation came in.

Step 2 – Explain what an LLC is (and what it is not)

We walked through the basics of a Texas LLC:

• LLC = Limited Liability Company – primarily a legal structure, not a tax type.
• When done correctly (and without commingling personal and business funds), it can help protect personal assets from business liabilities.
• By default, a single-member LLC is taxed as a disregarded entity for federal income tax – meaning it flows straight onto Schedule C like a sole prop.

I made it very clear:

From there, we layered in the C corp and S corp concepts.

Step 3 – C corp vs S corp in plain language

We talked through how a C corporation works:

• A C corp is taxed at the entity level.
• Under current rules, the federal corporate rate is 21% on the company’s income.
• Distributions to owners can be taxed again at the individual level (classic double taxation model).

Then we contrasted that with an S corporation:

• An S corp is generally a pass-through for federal income tax.
• Profits flow to the shareholder’s personal return, avoiding corporate-level tax.
• But there is one non-negotiable rule for active owners: reasonable compensation.

At this point, the physician admitted that everything they’d heard about S corps was a single phrase: “It saves you taxes.” No one had mentioned the responsibilities or the risk.

Step 4 – Introducing reasonable compensation the right way

I asked a simple question: “What do you know about reasonable compensation?” The answer was honest: “Nothing.”

So we slowed down and I explained:

• If you are an owner-employee of an S corp, the IRS expects you to pay yourself reasonable wages for the work you actually do.
• You cannot simply pay yourself a tiny salary and take the rest as distributions just to dodge payroll taxes.
• In an exam, the IRS will ask: “How did you arrive at this salary?”

I stressed that:

We talked about what a proper study looks at for a physician:

• Type of services (clinical work, procedures, admin, call coverage).
• Hours worked and responsibilities across clinics.
• Comparable pay data for physicians in similar roles and locations.
• Business profitability and the split between “worker” and “investor” roles.

Step 5 – Why we didn’t rush into an S corp

The physician’s contracts were still forming. They didn’t yet know:

• How many clinics would be involved,
• What the final compensation would be, or
• How profitable the structure would be after overhead.

In that situation, moving straight into an S corp “for tax savings” can actually be a mistake. You add:

• Payroll requirements,
• Extra compliance, and
• Exposure on reasonable compensation

— all before you even know if there’s anything meaningful to save.

So my recommendation was:

• Form a Texas LLC first as a single-member disregarded entity.
• Operate through that LLC while real income and expense patterns emerge.
• Then, once we have solid numbers, run a reasonable compensation study.
• Only after that, decide whether an S corp election makes sense and what salary level can be defended.

What other advisors told them (and why I disagreed)

During the conversation, the physician said something I hear often:

“I talked to two other people. They said I can just pay myself about half of what I earn as a salary and half as distributions. They’ve never had a problem, and they said there’s no need for a reasonable compensation study.”

I acknowledged that this “half and half” rule-of-thumb gets passed around a lot. Then I explained my position clearly:

• “Never had a problem” is not a legal standard.
• The IRS does not accept “someone told me half was fine” as documentation.
• If we’re going to sign returns and stand behind them, we need something stronger than a story — we need a study.

I also made my boundary very explicit:

I told them, plainly, that my license and the law are more important to me than the fees from one client.

The turning point: education over sales

At the end of that first conversation, I had not “closed” anything. I had:

• Explained sole proprietorship, LLC, C corp, and S corp in context.
• Laid out what reasonable compensation really means.
• Recommended an LLC taxed as disregarded to start, with a future study to guide any S election.
• Set boundaries around what I would and would not do without a study.

There was no pitch. I told them, “Whether you work with me or someone else, please make sure whoever you choose is honest with you about reasonable compensation and can explain how they reached your salary number.”

A little while later, they reached back out and asked to meet in person.

Final decision: form the LLC now, let the numbers tell the story later

In the in-person meeting, I repeated the same explanations. No changes, no shortcuts, no new “deal.” Just the law, their facts, and the plan:

• Open a Texas single-member LLC for their contracting work.
• Treat it as a disregarded entity initially while their contract income and schedule settle.
• Once there’s enough data, run a reasonable compensation study tailored to their physician work.
• If the study shows real, defensible savings, then consider an S corp election with a documented salary.

Right there in that meeting, they signed on and asked me to handle the LLC formation — not because I offered the most aggressive tax story, but because I was the only one who tied the structure back to the law and to documentation.

Why this case work entry exists

I’m documenting this case for three reasons:

• Internal record: So that if I ever need to look back and remember what we did and why, the story is written down in my own words.
• Client trust: So future clients can see the kind of conversations we have about entity choice and S corps — not sales pitches, but education.
• Professional alignment: To remind myself and my team that “we follow the law first” is not just a slogan; it shows up in who we agree to work with and how we structure their businesses.

Not every Texas professional needs an S corp. But if you’re going to have one, you deserve someone who will walk you through the whole picture — including reasonable compensation — and not just say, “Half salary, half distributions, you’ll be fine.”