One of the most important decisions you will make on the business side of your practice is how to structure it. Each type of business entity provides slightly different liability protections as well as tax treatment, which you should take into consideration when making your choice.
Protection Against General Liability
Dental practices face the same types of general liabilities as any other business. You might be sued after a slip and fall in your parking lot, run into hard times and default on a loan or have a former employee bring a wrongful termination claim.
If you lose, the plaintiff will first be able to collect from your insurance if it applies. If insurance doesn’t cover all or part of the claim, you will then need to pay from your practice’s cash reserves or sell assets belonging to your practice.
What happens next depends on how you structured your practice.
- Sole proprietorship or partnership: Any remaining debts and liabilities become your personal responsibility. You could be forced to turn over your personal savings or sell your house to cover a judgment.
- LLC or corporation: You have zero personal responsibility for general business debts or liabilities. The most you can lose is your investment in your practice.
Protection Against Liability for Malpractice
Most states believe that a skilled professional should not be able to escape malpractice claims because of their chosen business entity. The idea is that because the professional personally performed the work, they are not a separate entity in the sense that a business is usually considered to be.
For sole proprietorships or partnerships, this doesn’t change anything. Because there is unlimited personal liability for any and all debts, each dentist is responsible for their malpractice as well as the malpractice of other dentists in their practice.
For LLCs and corporations, the rules change based on who committed the malpractice. A dentist is personally liable for their own malpractice just as if they were in a sole proprietorship.
If another dentist commits malpractice, the other dentists can lose no more than their investment in the practice. If the practice cannot cover the judgment and is forced to close, the plaintiff can only seek a judgment against the personal assets of the dentist who actually committed the malpractice.
Because of the above differences from standard business forms, some states require dentists and other professions to use Professional Limited Liability Companies (PLLCs) or Professional Corporations (PCs) rather than the general LLC or corporate forms. In other respects, there are no material differences between the professional and general forms.
Taxes
Your tax rate also depends on your chosen business entity.
- Sole proprietors pay their personal tax rate on the practice’s net profit.
- Partners pay their personal tax rate on their share of the practice’s net profit.
- Corporations will generally meet the IRS rules for a professional corporation and pay a flat tax rate of 35 percent of net profits. State taxes and treatment vary by state.
- S-corporations are a special type of corporation that are taxed similarly to a partnership by the IRS. Some states also honor S-corporation status, while others tax them as a general corporation.
- LLCs can elect to be taxed as a sole proprietorship (if one owner), partnership (if multiple owners), or corporation.
Salaries are deductible business expenses that are not included in net profits. Because most of a dental practices revenue’s are paid out as salary, the problem of corporate double taxation is largely avoided. Therefore, tax planning can play a slightly reduced role in how you structure your practice compared to how you would structure another business.
While the general guidelines above can help you understand your potential choices, remember that the rules may vary based upon your state as well as your specific situation. Talk to your attorney and CPA before you make any final decisions on how to manage your dental practice.
