September 23, 2019
Choosing the right business structure for your dental practice is a vital decision that can have significant consequences for the future of your practice. If a dentist selects the wrong structure, it can cost their business thousands of dollars down the line. Choosing the correct business structure for your dental practice is a fundamental decision that will impact your business daily and should be guided by a specialized attorney.
The main factors to consider when structuring your business are: (1) the financial and tax consequences; (2) liability protection; and (3) flexibility versus formality. Selecting a business structure is one of the most important decisions you will make for your practice. When selecting the right entity, substantial tax, legal, and accounting expertise is recommended. It is advantageous to start your business on good footing, and while it may look daunting to hire expert consultants at the beginning of your endeavor, it is a valuable investment for your future success.
The proper structure of your dental practice will allow you to reap all the possible benefits and increase your chances at a successful practice. However, it is recommended for dentists to stay active in the process in order to ensure that the expert’s proposals reflect the needs and goals of your practice.
Tax Considerations
Tax benefits are a primary driver when choosing a proper legal structure for a dental practice. Key aspects include: taxation on income/profits; taxation on the sale/transformation of a practice; and the deductibility of practice expenses and starting costs. A proper business structure agreement will maximize tax opportunities and can greatly affect the profit margin of your business.
Liability Protection
Liability protection is another significant consideration when deciding between business entities. Because it combines features of a corporation with elements of a partnership, a limited liability company (“LLC”) can be tactical from a tax standpoint. Single member LLCs are taxed as sole proprietorships. Multi-member LLCs on the other hand, can elect to be taxed either as ‘S’ Corps or partnerships.
For certain dental practices, it can be advantageous to be the only owner and in complete control of the practice; there would be no requirement for seeking approval and or consent of any partners, members, or officers. With a sole proprietorship, there are also minimal to no reporting requirements. Sole proprietorships do not need to file an annual report with the state or federal government. However, under a sole proprietorship, a dentist will be held personally liable for all general debts and liabilities of the practice. Similarly, in a partnership, each partner is jointly and severally liable for the debts and obligations of the business. In comparison to sole proprietorships and partnerships, the significant advantage of a corporation or LLC is that the owners of the business (the shareholders/and or members) enjoy the benefits of limited liability.
There is one big exception; however, in that a dentist is always liable for his/her own professional negligence and negligence of other employees. Insurance is the only avenue to mitigate this kind of liability, and it an absolute necessity for any dental practice.
Benefits of Flexibility and Adhering to Formalities
Certain entities also provide more flexibility and can be less burdensome than others. Many dentists often ignore corporate formalities, which can be a serious mistake. In certain instances, courts have looked past the liability shield and have held owners personally liable for failing to observe the formalities of separating their personal affairs from their dental practice. This is why it is so important to have your decision guided by specialized professionals.
A Word of Caution
It is important to note that each state has its own rules governing choice of entity. For example, some states prohibit dentists from owning practices in an LLC format. To ensure the best for the future of your practice, it is important to guide your decision through a specialized attorney.
Attorneys: William Barrett, CEO and Casey Gocel
Category: Practice Purchases