A business owner’s choice of corporate structure dictates a multitude of different factors, including taxation, asset allocation, and day-to-day operations. It also determines the extent to which the business owner’s personal assets are jeopardized by business debts or litigation.
Whether you are just establishing your dental practice or reevaluating an existing operation’s structure, it is vital to structure your business in the right way to protect yourself.
Seeking out professional legal and accounting advice can help you to identify the pros and cons of each business structure, particularly in the context of state laws and tax provisions, and choose the most advantageous structure for you. In this article, we explore three business structures that are popular with dental practitioners, looking at some of the main benefits and disadvantages of each.
1. Professional Corporation (PC)
A PC is a special type of corporation for dentists, doctors, lawyers, and other professionals. It operates in basically the same way as a regular corporation, with a few subtle differences.
A PC with an S-corp election provides a liability shield, streamlined tax accounting, and the ability to distinguish between practice profits and individual dentists’ income, reducing the amount of Social Security and Medicare taxes dental practitioners are required to pay compared to a sole proprietorship. On the flip side, since PCs are a form of corporation, they require more paperwork to set up and maintain, in addition to annual meetings and many of the administrative complexities associated with traditional corporations.
2. Professional Limited Liability Company (PLLC)
Like traditional corporations, PCs incur certain tax and administrative burdens. PLLCs sidestep many of these issues, so the lower administrative burden makes this business structure an attractive model for many dental practices. Nevertheless, it is important to seek out professional advice relevant to the home state of your business since PLLCs are not a viable option in all states, notably California, where LLCs cannot be used in any form of medical practice.
One of the biggest disadvantages with the PLLC business structure is that you could end up paying up to 13.3 percent more in self-employment taxes since the amount of Medicare and self-employment tax liability is based on the practice’s overall profitability rather than your individual self-employment income.
3. Professional Limited Liability Corporation with S-Corp Election
Conferring the advantages of the PC’s caps on self-employment taxes combined with the low administrative hassles associated with a PLLC, most states (again, except for California) allow PLLCs to be treated as either an S-corp or PC for tax purposes. In effect, a PLLC with an S-corp election is treated as an S-corp from a tax perspective and an LLC in terms of its corporate obligations. A dentist who adopts this business structure benefits from the self-employment tax savings associated with the corporation business model but with significantly fewer administrative legal hassles. The PLLC with S-corp election is rapidly becoming the default business model for new dental practices, although as pointed out, you need to consult with local attorneys and financial advisors in your state before committing to a particular legal structure.
Why is setting up a legal entity important?
The primary objective of any dentist creating a legal entity is to insulate the practice owner or owners from legal liability. Dentists can always be held personally liable for negligence or malpractice. Nevertheless, limited liability entities afford some legal protection, potentially cushioning individual practitioners from claims made against the business. Setting up a legal entity can also afford individual dentists some protection from the legal repercussions of other dental practitioners’ or hygienists’ actions.
What is the process for forming a legal entity?
Once the business owners have chosen a legal structure, they need to decide where to form it. Most business entities are formed in the state they operate in. If the state is reasonably business friendly, the benefits presented by basing the business elsewhere will generally be eclipsed by the convenience and cost savings achieved by avoiding involving an out-of-state agent. The practice owners may have their reasons for basing the business outside of the state it operates in, however, in which case it is vital to get a professional overview and take your time to weigh all the relevant factors.
Once the stakeholders have chosen a state, forming the business entity is a relatively straightforward process. In some states, the first step will be visiting your licensing board to obtain documentation proving that you are a licensed dentist. The next step is to visit the relevant secretary of state website, download the forms, fill them in, and return them. In some states, the entire process is conducted online in a matter of minutes. The costs involved vary from state to state, ranging from $45 to $800. In New York, there is an additional publication requirement, which costs up to $1,600 extra.