When you start a dental practice or restructure a new one, one of the first steps is selecting the right business structure. Depending on your state, your choice of structure can impact your ability to provide professional services.
To help you navigate your choice of business structure, here’s an overview of the common organizational structures that licensed dental professionals can choose from.
Sole proprietorships
A sole proprietorship is an unincorporated business that is operated by a sole business owner. In a sole proprietorship, the law doesn’t differentiate between the business and its owner.
Sole proprietorships are one of the most popular forms of business structure since they are easy to establish. Sole proprietors do not need to register the business with the state and there is no requirement for a separate business income tax filing. All profits and losses are reported and paid on the sole proprietor’s personal tax return.
A downside of sole proprietorships is that owners are responsible for all losses, expenses, debts, and liabilities of the business. This is because you and your business are considered the same legal entity.
If you choose to operate a dental practice as a sole proprietor – which you legally can – you must obtain the right business licenses and permits, register a “doing business as” name or DBA, and comply with other legal and regulatory requirements.
It’s rare for private dental practices to operate as a sole proprietorship and business owners are advised against choosing this structure. Without the protection of a legal entity, all assets, tax burdens, liabilities, and other risks are borne by the dentist.
Partnerships
General partnerships
A general partnership involves two or more individuals sharing the management and personal responsibilities of a business. It is the simplest structure to choose when starting a business with others.
The formation of a partnership is like the formation of a sole proprietorship in that no state filing is required. As soon as the partners begin doing business together, the partnership is formed.
There are no specific requirements for business structure or governance, other than filing Form 1065 and distributing Schedule K-1s. How the general partnership is run is entirely up to its partners.
Importantly, in law, the owner is considered the same as the business, so any assets owned by the owner can be considered business assets. In addition, every general partnership partner is responsible for their fellow partners' actions. Finally, unless safeguards are put in place prior to formation, a general partnership dissolves upon the death or withdrawal of a partner.
Limited Liability partnership
Another partnership option is a limited liability partnership (LLP). Similar to a limited liability company (LLC), all partners in an LLP have limited liability for business debts. However, in many states the liability protection is not as robust as that afforded to LLCs. In addition, certain states prohibit LLPs from performing certain professional services, such as dentistry.
To form an LLP, you must file formation documents with the appropriate state agency. Once formed, an LLP is flexible in terms of management, however the decisions of one partner can impact all partners.
If a partner chooses to exit the LLP, state statues often dictate that the partnership must be dissolved, unless the original partnership agreement has provisions to address this scenario.
Limited liability company (LLC)
A limited liability company (LLC) is a separate entity from its owners and combines the legal elements of corporate structures and partnerships. An LLC can be formed to operate a business or simply to hold assets.
LLCs are beneficial to your dental practice because they offer pass-through taxation, management flexibility, and protection against personal liability for business debts and liabilities. The LLC is responsible for any debts or liabilities incurred by the business. Note: LLCs don’t provide blanket protection from all legal liability. For example, in cases of professional malpractice the business owner can remain liable.
Forming an LLC is relatively easy and has fewer regulatory requirements than an S corporation or C corporation.
LLC taxation laws mean that LLC members are considered self employed and they must pay self-employment taxes and make Medicare and Social Security contributions. However, an LLC can choose to be taxed as a separate legal entity which then pays taxes on earned income.
Before forming an LLC, consider the various statutes across states that govern how LLCs operate, particularly if you choose to operate in multiple states. Different rules and regulations can lead to increased paperwork and different treatment of your LLC depending on where you operate.
Furthermore, some states may not allow a dental practice to form an LLC. Instead, you may be required to form a professional limited liability company (PLLC) or professional corporation (PC).
Corporation
A corporation is a separate legal entity from its owners (called shareholders).
A dental practice can either be a C corporation (the standard or default corporation under IRS rules) or it can elect to be taxed under IRS Subchapter S and become an S corp.
The corporation is like its own person when it comes to legal matters. It's responsible for its own debts, and its liability is limited to what it owns. Shareholders, the people who own the company, can make money from it, but they're not personally responsible for its debts. Unless there's a special circumstance where the protection of the corporation is lifted – also known as “piercing the corporate veil”.
A corporation and its assets and interests can continue to exist even after the death, incapacity, or withdrawal of directors, officers, or shareholders. These assets can be transferred freely to another entity.
There is a downside to forming an S or C corporation: corporation law is more rigid than LLC law regarding how the corporation is managed. Dividends paid by C corporations are also subject to tax, so a corporation's earnings are taxed twice.
S corporations enjoy pass-through taxation like LLCs. An S corp also has restrictions on shareholders and cannot have different classes of stock.
Some states require dental practices that wish to be a standard C or S corporation to form a professional corporation (PC).
Professional corporation (PC) and professional limited liability company (PLLC)
Some states have legal requirements which indicate that providers of licensed professional services — such as dentists, doctors, architects, and lawyers — must form either a professional limited liability company (PLLC) or professional corporation (PC).
However, certain states restrict who can own a PC or PLLC. For example, some states only allow licensed practitioners of the service that the corporation provides to own stock and serve on the board of directors. Other states require at least half of the corporation’s shareholders and directors to be licensed professionals. Many states have the same rules for PLLCs.
Furthermore, a state may require the proper licensing body to approve the formation of a PC or PLLC before formation documents are filed with the filing office.
In terms of liability, both PLLCs and PCs provide liability protection to the business owner against any lawsuit filed against other members and shareholders. However, each owner of the business can be sued for individual negligence.
Although every state allows the formation of a PC, not all states permit the establishment of PLLCs. For instance, in New Jersey, professional service providers cannot choose PLLC as an option, but they have the alternative of forming an LLC or a PC (also known as a Professional Association or PA). In California, dental practices have the option to establish PCs, but they are prohibited from forming PLLCs, LLCs, or standard corporations.
Why dental practices should form an entity
Here are three key reasons why you should form a legal entity for your dental practice.
- Legal protection: The primary reason for establishing a dental business entity is to create a legal separation between your business and yourself. This is beneficial because if you face lawsuits, which can occur for various reasons like a patient having an accident at your practice, defaulting on a business loan, or facing a medical malpractice lawsuit, the assets of your business remain protected and unaffected by the legal claims.
- Accounting transparency: Operating your business as a distinct entity entails maintaining separate bank accounts, independent accounting records, and separate reporting of earnings on your tax return. This separation in accounting becomes crucial when considering scenarios such as bringing in a business partner, selling the business, or accurately calculating taxes.
- Developing business credit: Creating a separate legal entity can help you build business credit distinct from your personal credit. This allows you to take out a loan in your business name and ensure that credit doesn’t impact your personal credit score.
Forming a Professional Corporation or Professional Limited Liability Company
A PC or PLLC is a good choice for professional services businesses that require a license, such as dentists. BizFilings can help you form a PC or PLLC in your intended state of incorporation and seek necessary approvals. Since regulations differ across state and local jurisdictions, we will file the right registrations based on the location and nature of your business operations. Learn more.
