Pharmacy Growth, Startup Pharmacies

Pharmacy Start-Up Costs: Entity Selection and Timing

There are several steps to opening a start-up pharmacy, the first one being entity selection. The entity must be chosen before the owner can obtain a federal ID number. For most start-up pharmacies, the go-to entity is an LLC with an S Corp election.

But these aren’t the only things that must be in place — and in the right order — before the pharmacy opens. To support a successful opening and avoid months of red tape, timing of each step is critical, including setting up contracts with major carriers.

In this video, Ollin Sykes, CPA.CITP, CMA, and Bonnie Bond, CPA discuss entity selection and several other important steps for opening your start-up pharmacy.

Sykes & Company, P.A. offers an entire series on start-up pharmacy topics and operations. View a variety of articles and videos here.

If you prefer to read this content, the video transcript is below.

Why is entity selection important?

Ollin: Before you begin any process here with a start-up, you’ve got to have a federal ID number. And you don’t want to get a federal ID number until you decide exactly how the entity should be set up. So, we typically will suggest our go-to entity being an LLC, and we typically make an S election. So once the LLC operating agreement is formed, we can get a federal ID number. And Bonnie, once the pharmacist gets the federal ID number and we have an LLC set up and have an operating agreement, what typically do we see as the next steps there?

Bonnie: There’s gonna normally be various set-up items that need to be taken care of within that particular state, depending on, what state that’s in. Obviously, this is kinda why it’s important to have someone, a CPA, and especially a CPA maybe that works with pharmacy that can help in this process, cause a lot of that information is really important to make sure that it’s done correctly from the very beginning. And keeping in mind when you do, the second that you set up a federal ID number, even if your pharmacy doesn’t open for a couple years, there is gonna be tax returns and that sort of thing that are gonna be due immediately for that particular year, so it’s just really important to keep that in mind that even if no business is taking place, there will be tax returns that are due.

Ollin: That’s correct. And once that entity is set up and a federal ID number has been procured, and this is something that can be procured by somebody who’s familiar with this in about 10 minutes electronically with the IRS, then we suggest you set up a bank account for that entity, and you start to run all your transactions, preliminary start-up cost, due diligence costs, any and all costs that you have associated with the start-up entity through there.

So even if you have to put money in it yourself as either a member loan or as permanent equity, whatever the case may be, the information and data can be tracked for tax purposes because as Bonnie mentioned clearly a tax return is gonna be due even if you have one transaction in it for the year if you’ve made an S election. If you don’t file a return, and you say I don’t have to file a return because I haven’t started operations, you’re probably under false premise there and could be subject to some pretty stiff IRS penalties, depending on how many S corporation shareholders that you have. So, also, as Bonnie mentioned a moment ago, you know, checking with your board of pharmacy in your state to see what the requirements are.

Once you have that in place, you’ve got your federal ID number, you typically will have to find out what the DEA requirements are in your states. There are different requirements in each state about what takes place, and as you move forward you typically get your MPI, your NCPDP numbers. You’ve got those squared away, and then as you begin to talk with your wholesalers and buying groups, you select who you’re going with there and, to a great degree, that has a big impact on who your PSAOs are gonna be.

Many of your PSAOs have relations already with the third-party carriers and can get you literally hundreds of contracts with carriers. However, the big nut here is that Express Scripts, CVS Caremark, Prime Therapeutics, Optum. Did I miss one, Bonnie?

Bonnie: I believe that’s it.

Bonnie: Yeah.

Ollin: I think that’s got it.

Bonnie: Yeah.

Ollin: Those you have to get yourself, and obviously those names are critical and key. And in certain markets they may be half of the scripts that you fill. You cannot open your pharmacy until you get all those approvals, and typically some of the larger ones may hold you up in that process.

So how long can it take to open a pharmacy?

Bonnie: Well, we work with many start-ups over the years and obviously we’ve seen start-ups that have opened rather quickly within a few months and then we’ve seen situations unfortunately where it take two to three years. So it’s really all about planning and making sure you have the right steps in place.

One of the worst things we see is when a situation in the start-up where a lease is signed very early on, but the store is not ready to be open for you know, eight to 10 months so that rent is being paid for all that period of time. You’re burning through cash, and the insurance isn’t in place as well when the store opens to fill scripts for everyone that walks through the door. So patients are having to be turned away and you know, the question always comes up is how many times are they gonna walk away before they go somewhere else. Are they gonna come back? So you wanna make sure before you open the door that you are able to serve all of your customers that come in.

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