When starting a dental practice or restructuring an existing one, choosing the right entity and tax structure can be a crucial decision. However, there are many nuances and considerations that make it hard to pinpoint an all-encompassing answer. In this blog post, we will highlight some practical options for one or two-person dental practice entities.
Avoid Sole Proprietorship and General or Limited Partnerships
Sole proprietorships should be avoided since they do not offer personal liability protection for the dentist. All tax consequences and liabilities would be borne by the dentist, which is an unfavorable scenario. General and limited partnerships also lack limited liability protection, which makes them less desirable than other options.
Consider Limited Liability Companies and Corporations
For personal liability protection, it is best to form either a limited liability company (LLC) or a corporation. Both entities shield the owner(s) from the acts or omissions of the entity employees and other business operation liabilities. LLCs and corporations are both good choices when it comes to personal liability protection. However, they have different corporate formalities that must be followed. Corporations have more formalities, such as requirements to maintain minutes and have certain meetings, while LLCs do not have such obligations.
Understand the Tax Implications of Each Entity
When it comes to taxation, the entities have different requirements and implications. A partnership is a pass-through entity, which means all income, losses, and credits flow through to the partners’ individual income tax returns. However, partnerships must file a tax return even though the entity itself is not subject to tax. A C corporation is subject to double taxation, which means the corporation is taxed on all the business earnings, and those earnings are taxed again when paid out as dividends. An S corporation is subject to only one level of tax and can reduce the employment tax liability of the owners by managing their reasonable compensation in relation to the S corporation’s net-profit distributions.
For LLCs and corporations, the entities can be taxed as either a C corporation or an S corporation. However, if a dentist chooses a corporation as their entity, they must understand the corporation’s limitations in terms of tax flexibility from initial formation through to the sale of the dental practice.
Choose What Works Best for Your Dental Practice
There is no right or wrong answer when it comes to choosing the best entity and tax structure for a dental practice. Each option has its advantages and disadvantages, and the choice will depend on various factors, such as the number of dentists, business objectives, personal liability protection, tax implications, and more. Consulting with tax and legal professionals to help evaluate the options is a crucial step towards making an informed decision. Please call Brenden Kelley Law at 216-644-3359 so that we can assist you starting or restructuring your dental practice.
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