Optimal Business Structure for a Dental Practice

Selecting the optimal business structure for dental practices is crucial. Your chosen structure will significantly impact your business's finances, liability, and administrative requirements.

Your business entity you choose for your dental practice also significantly impacts how you pay taxes. That's why choosing the right business structure and getting professional tax planning assistance is key to optimizing your bottom line.

Sole Proprietorship

A sole proprietorship is a simple business structure in which one person—in this case, a dentist—owns and operates the business. In this type of business, there is no legal distinction between the business and the owner. 

The dental practice owner is personally liable for all business debts and obligations. This makes it an unappealing option for many dentists.

How Are Sole Proprietorships Taxed?

Dentists running sole proprietorships are considered self-employed workers. As a result, they're subject to the 15.3% self-employment tax. This includes 12.4% for social security contributions and 2.9% for Medicare.

Sole proprietors are also subject to individual income tax rates. Dental practices functioning as sole proprietors report and pay their sole proprietorship taxes (including self-employment taxes) as part of their individual tax return. 

Sole proprietorships are classed as pass-through entities as the tax liability flows straight to the business owner. This means they avoid “double taxation” (being taxed first at the corporate level and then at the individual level). 

Pros and Cons of a Sole Proprietorship for Dental Practices

PROS	CONS
Easy to establish	High risk of personal assets being seized to pay off business debts
Easy to run, as profits and losses are reported on the owner's personal tax returns	Typically have less access to funding options than other business structures
Easy to dissolve or change the business structure	May require specialized insurance coverage to protect personal assets
Pass-through taxation

Partnerships

Partnerships have multiple owners who share the responsibilities and risks of running a dental practice. Partnerships can take the form of a general partnership (GP), limited partnership (LP), or limited liability partnership (LLP).

• In a general partnership (GP), all partners share in the management and decision-making of the business. They’re also all personally liable for the debts and obligations of the partnership. Profits and losses are shared among partners in line with the partnership agreement.

• A limited partnership (LP) has one general partner who assumes unlimited liability. The other owners have limited liability. The owners with limited liability tend to have less input in the business as they take on less risk. In this structure, the general partner must pay self-employment taxes. 

• A limited liability partnership (LLP) spreads the risk equally among all the partners.

A partnership is a good option for some dental practices. Partnering with another dentist who shares your values will allow you to take on more patients and grow your business. 

Remember that a partner doesn't have to be a fellow dentist. A partner with financial expertise, for example, will offer a complementary skill set to help you expand your business.

How Are Partnerships Taxed?

Partnerships are pass-through entities that avoid double taxation. How each member is taxed will depend on the type of partnership they set up. 

It's important to get expert advice from a professional in accounting for dentists. Your tax professional will take you through the implications of setting up a partnership or any other type of business entity and help you get set up with an effective accounting system. They can also advise on other crucial tax issues like the tax consequences of selling a dental practice.

Partnership Pros and Cons

Remember that the terms of a partnership will vary depending on the terms of your partnership agreement. However, the following table represents some overarching pros and cons of partnerships for a dental practice:

PROS	CONS
The initial costs and ongoing expenses of setting up and running a dental practice are shared between partners.	Partners are personally liable for business debts and obligations.
Partners bring diverse skills and experiences to the practice.	Disagreements between partners can arise, leading to conflict and potential business disruption.
A partnership allows for increased patient capacity and revenue potential.	Partners must pay income and self-employment taxes on all of their taxable income.
Partners enjoy pass-through taxation.

Limited Liability Company (LLC)

An LLC is a separate business entity from its members. This offers several benefits. For example, members have liability protection against business debts and have flexibility over the management of the LLC. However, an LLC may not protect dentists against professional malpractice cases.

How Are LLCs Taxed?

Limited liability companies are appealing from a taxation perspective as they offer various tax benefits. For example, LLC members can choose how they're taxed. If you set up your dental practice as an LLC, you can choose to pay taxes as a sole proprietorship, a partnership, or an S or C corporation (depending on the number of members in the LLC).

Most dentist LLC owners choose pass-through entities. This is possible by setting up your dental practice as a sole proprietorship, partnership, or S corp. Alternatively, setting up your LLC as a C corp means your dental practice pays a fixed 21% corporate tax rate. This amount doesn't change regardless of how much profit your dental practice makes.

LLC Pros and Cons

PROS	CONS
Limited personal liability for business debts	More complex to form and maintain than some other business entities
Tax flexibility	More complex management and decision-making processes
Flexible ownership structure allowing for multiple members
Generally easier to obtain financing than in a sole proprietorship

Professional Limited Liability Company (PLLC)

A PLLC is a business entity that is only available to professional service providers like dentists. PLLCs must comply with state-level limitations on ownership. Most states require all members of a PLLC to be licensed professionals. 

Like an LLC, a PLLC may not protect members against claims of malpractice. However, it does protect individual members against any claims of wrongdoing against their partners.

How Are PLLCs Taxed?

PLLCs benefit from pass-through taxation. Each partner uses Schedule K-1 to show their share of the PLLC's profits. Each member must also file a Schedule SE and is subject to self-employment taxes.

PLLC Pros and Cons

PLLCs offer very similar advantages and disadvantages to regular LLCs. However, it's important to note that specific tax implications can vary depending on factors like the number of members, state laws, and the election of specific tax statuses.

C Corporation

A C corp is often overlooked as a possible legal entity for dental practices. However, this structure can work for some dentists. 

C corp designation means your profits are essentially taxed twice. C corps are also limited liability entities, protecting your personal assets from the corporation's debts and liabilities.

How Are C Corps Taxed?

Corporate income tax is first paid on the corporation’s net income after offsetting income with dentist tax deductions, losses, and credits. Shareholders then pay taxes on all personal income gained from dividends. There are strategies your tax professional can recommend to decrease your double taxation liability.

Pros and Cons of C Corps for a Dental Practice

PROS	CONS
Easier to raise capital as C corps can attract an unlimited number of investors	More complex and expensive to run than some other entities
Lower maximum tax rate; C-Corps pay a flat 21% corporate tax rate.	Complex tax filings
Limited liability for owners	Double taxation
Ability to offer stock options

S Corporation

An S corporation is a tax election that can be made for an LLC or corporation. It offers limited liability protection to its shareholders while allowing the business to pass its income, losses, deductions, and credits through to its shareholders for federal tax purposes. 

This means that the corporation itself doesn't pay corporate income tax. Instead, the profits and losses are passed through to the shareholders, who report them on their individual tax returns.

S corps are generally a better option for dentists than C corps because of the potential tax savings they offer. However, the savings you make also depend on state tax rules. Ask a tax professional about S corp benefits and disadvantages for your dental practice.

How Are S Corps Taxed?

Setting up an S corp allows you to avoid double taxation. Unlike in C corps, profits and losses pass through to the owners' personal income. This means profits aren't subject to corporate tax rates.

The shareholders of an S corp can be classed as employees. This means they receive reasonable salaries as well as dividends and distributions. This can prove to be highly advantageous to business owners as they reduce their self-employment tax liability while benefiting from the tax deductions that come with paying wages.

Pros and Cons of S Corps for Dental Practices

PROS	CONS
Limited liability: Protects personal assets from business debts	More complex to set up and maintain compared to a sole proprietorship or LLC with pass-through taxation
Pass-through taxation	Additional administrative costs, such as annual meetings and filings
Tax-favorable income characterization	Limitations on the number and types of shareholders

Professional Corporation

Professional corporations (PCs) are specifically designed for professionals like doctors, lawyers, and accountants. They offer several key differences from traditional C corporations and S corporations:

• Professional licensing: PC shareholders must be licensed professionals in the field.

• Liability protection: While PCs offer limited liability protection, the professional liability of individual members may still be exposed in certain circumstances.

• Taxation: PCs can be taxed as C corporations or S corporations. The choice depends on the specific state laws and the number of shareholders.

• Ownership and management: Ownership and management are often restricted to licensed professionals within the specific field.

Pros and Cons of Professional Corporations for Dental Practices

The tax flexibility and prestige that comes with a professional corporation are factors that make this structure appealing to some dentists. Professional corporations also offer limited liability for business owners. The complexities surrounding tax and compliance regulations and the costs involved with forming and maintaining a corporation are downsides to this business structure.

Choose a Business Structure with a Tax Professional

Choosing between business entities is a crucial decision that impacts many aspects of your dental practice. Ensure you make sound decisions that offer you the financial and legal protection you need to grow your practice.

Consult a local tax professional about taxation considerations and a local attorney about the legal considerations of each business structure. An informed decision will help you ensure that your business is protected and you reap the maximum financial benefits from your dental practice.