Dentistry – Sole Proprietorship, Professional Corporation, or PLLC? And What’s an S-Corp Anyway?
It’s important to note that the term legal entity simply means a business with legal standing in the eyes of the state. Each dental entity operates under a different set of legal and tax requirements, and again, it’s an important decision but choosing one doesn’t have to be daunting. Read on for an outline and guide to the four common legal entities for dentistry and other medical professionals.
Sole Proprietorship in Dentistry (DBA)
A sole proprietorship means doing business as yourself – you and the company are the same entity for legal purposes. While it’s rare for private practices, it can be more common for associates working as independent contractors.
Select CPAs may recommend a sole proprietorship for your dental practice because
- You report income and losses on a 1040, not a corporate tax return.
- If you start your dental practice from scratch, you can take advantage of the losses on your 1040 in the early years, likely before your business starts making and reporting a profit.
Other legal and accounting professionals may advise against a sole proprietorship because
- If you’re sued for medical malpractice, your personal assets can be taken.
- It makes the web of personal and professional finances very difficult to separate.
- Your personal credit is at risk.
- As an associate, your profits are subject to self-employment tax; you will pay payroll taxes as an employee and an employer.
- You will pay more in Social Security and Medicare taxes.
Professional Corporation (PC)
A Professional Corporation (“P.C.”) is simply a corporation for licensed professionals, like doctors or lawyers.
This structure can be appealing to a single dentist because
- The financials are much more clear – your income is separate from the practice’s income and profits.
- The corporation can offer you health insurance as its employee and deduct the cost as a business expense.
- There are caps on self-employment taxes.
Because of its corporation status, however, PCs
- Require more paperwork.
- Require formal annual meetings.
- Pay franchise taxes.
A Professional Limited Liability Company (PLLC)
A group of licensed professionals that want to form an LLC must form a PLLC which ensures that all managers of the entity must be of the same licensed profession.
Attorneys often recommend PLLCs for dentists starting out because
- PLLCs offer the tax and liability advantages of a corporation
- They are generally considered to have less of an administrative burden, meaning less paperwork.
The drawbacks of a PLLC include
- A dentist’s medicare and self-employment tax liability is capped based upon the profitability of the practice, not personal income, so the tax burden will likely be higher.
What’s the deal with an S-Corp for Dentists?
An S-Corp is actually a federal election and doesn’t affect how the state sees your business. It does, however impact how you and your practice are taxed.
Electing an S-Corp may be advisable
- Because only the income paid to employees is subject to employment taxes. Other distributions made to owners are not considered wages and aren’t taxed as such.
- If you’ve selected to form a PLLC. Because of the self-employment tax savings mentioned above, it can be a good match for a PLLC, which has less burdensome administrative requirements making for a ‘best of both worlds’ match.
Which is best? Talk with a specialist.
Setting up a dental practice means knowing the significance of each entity option and choosing one that aligns most with your vision.
At Practice Real Estate Group, we strongly encourage you to sift through dentistry incorporation, PLLC status, a dental partnership agreement, and other entity options with a lawyer or CPA who specializes in healthcare. A specialist will help you weigh each option available in your state, file paperwork, and act as an advocate for you as you’re setting up a dental practice.
Need a recommendation? We do that too. Let us connect you with an attorney or CPA that our clients trust to get deals done.