Aspen Dental in partnership with Wiley Publishing presents:
Business Entities
Objectives
Key Terms
At the completion of the chapter the student will be able to:
• board of directors
• business entity
• C corporation
• corporation
• dividends
• employee status
• joint and severable liability
• limited liability company (LLC)
• ownership interest
• partnership
• partnership agreement
• pass-through entity
• piercing the corporate veil
• professional service
corporation (PSC)
• S corporation
• shareholders
• sole proprietorship
• stock
1. Understand the various forms (business entities) of dental practices
Proprietorship
Partnership
Corporation
• C corporation
• S corporation
• Limited liability company
Business Entities
Goal
Entity Decision Points
Make students aware of the various business
arrangements that are available to dentists. The
student should be able to define his or her desires
regarding participation in such an arrangement.
Dentists should consider four main factors when
deciding which business entity to use for a
practice (Box 6.1).
Business entities in dentistry can take any of several
forms. There is no “right” business arrangement for
­dentists. Many physical, financial, managerial, and
legal considerations will influence their decision.
Because a dentist’s circumstance is unique, his
or her resolution of these issues will be similarly
unique. Understanding the differences between
these arrangements will help match a dentist’s
needs with the particular type of entity. A business
arrangement should maximize factors that are
important in a person’s particular situation. A
­dentist will work with an accountant, lawyer, and
management consultant to decide which business
entity is best for his or her circumstance.
The business entity that is chosen has almost
no bearing on the day-to-day operations of
the practice. A dentist still sees patients, hires
staff, collects payments, and pays expenses
regardless of the form of business.
Rather be helping patients than
figuring out your taxes? At Aspen
Dental, we’ll handle the business and
administrative headaches for you.
1. The tax liability can be different between the
various types of entities. Because each
circumstance is unique, some practitioners
can take advantage of tax situations that
others can not.
2. Business entities also differ in liability protection.
Some entities provide general liability protection
(though not professional protection) that
others do not. Along with adequate insurance
protection and a personal level of risk tolerance,
the choice of the business entity contributes
to the office risk management plan. As with
taxes, each circumstance is different, so no
one business entity is best for all dentists.
3. Some types of entities limit the number of
owners. Some require that owners be US citizens.
4. Finally, some entities (particularly corporations)
require additional administrative burdens in tax
forms, meeting minutes, and officer elections. If
­dentists are not willing to put in the extra time and
effort to comply with the regulations, then they
should choose a different, less burdensome entity.
The owner(s) of the practice must understand and
evaluate the ­advantages and disadvantages of
each form of business, given his or her particular
circumstance. Lawyers, accountants, and
management consultants can give valuable advice,
but it is up to the owner(s) of the practice to decide
the form of business the ­practice should take.
Box 6.1
Four Business Entity
Decision Factors
1. Liability protection
2. Tax implications
3. Owner characteristics
4.Administrative burdens
2
Business Entities
Types of Entities
Sole Proprietorship
A general business (such as a hardware store or
building contractor) can be any of the five types
of entities listed in Box 6.2. Each state defines
these types of ­businesses (or entities) in state
laws and the tax codes. The federal government
has tax rules regarding the entities as well. These
basic forms of business each have a unique
combination of advantages, disadvantages,
and ownership and compensation issues.
A sole proprietorship is the simplest form of
business. It exists anytime an individual earns
money on his or her own. In this form of business,
the owner is the business. Profits and losses are
therefore personal. The person who has day-today responsibility for running the business usually
owns the business. There are ­advantages and
disadvantages to a sole proprietorship (Box 6.3).
There are special rules for health professionals
and others who perform professional services
for the community (e.g., architects, accountants,
and lawyers). These businesses (including dental
practices) must be one of the four types of entities
given: sole proprietorship, general partnership,
professional limited liability company, or a PSC.
The actual business entity is the same as those
for general businesses, but special liability and tax
rules govern these professional associations. State
laws generally require incorporated health care
providers to use a special form of a corporation.
Different states have different names for them
(Professional Corporation [PC], PSC, Professional
Service Association [PSA], or Professional
Associations [PA]). Each state has a professional
association act that governs these entities. Some
states require that only practicing providers be
shareholders; other states allow corporate or
nonprovider ownership of PCs. Dentists should
check with an attorney to be sure of the state’s rules
on the entity types for professional businesses.
Proprietorships are easy and inexpensive to
establish. If a person operates a business and does
not declare another type of entity, he or she is by
default a proprietorship. There are no administrative
requirements other than filing a doing business as
(DBA) form if the practice has a name. There are no
special accounting rules to follow except general
IRS rules and rules of good accounting practice.
Box 6.2
Types of Entities
Types of General Business Entities
•Sole proprietorship
•General partnership
•Limited partnership
•Limited liability company (LLC)
•Corporation
Business Entities for Professionals
•Sole proprietorship
•General partnership
•Professional corporation (PC)
•Professional limited liability company
(PLLC)
Advantages
Disadvantages
Because a person is the business in a
proprietorship, he or she cannot be isolated from
legal or financial responsibility and liability of the
business. A person must sign personally for loans,
pledging personal collateral. He or she can use
personal assets to satisfy any debts or judgments
against the business. This liability is both personal
and unlimited. Because the person is an owner, he
or she is not considered an employee. This limits,
to a degree, the tax-advantaged employee benefits
that the owner can provide for himself or herself.
Box 6.3
Advantages and Disadvantages
of Sole Proprietorship
Advantages
•Easy and inexpensive to form
•Complete control of the business
•One-time tax on owner’s income
•No separate tax returns required
•Flow-through of losses to owners
•Easy to form or dissolve business
Disadvantages
•Unlimited liability for owner
•Fringe benefit deduction lost for owner
3
Business Entities
Ownership
General Partnership
As the name implies, sole proprietors are the only
(sole) owner (proprietor) of the business. If there
are two or more owners, then by definition the
business is not a proprietorship, but it is instead
a partnership (or other form of business).
A partnership is a business entity in which two or
more people have a common interest and share
ownership, profits, and losses from a business.
Although the ­partnership is a separate legal entity
from its owners, it is conceptually similar to a
multiowner proprietorship. If two people join to
own and operate a business, they are a partnership,
unless they explicitly state that they are establishing
another form of business. This ­arrangement combines
the abilities, energies, and ­financial risk of each
participant. Partnerships have no limits as to the
number of partners. (However, there must be at
least two.) From a practical standpoint, large groups
often take a corporate structure for reasons that
are discussed in this section. There are advantages
and disadvantages to a partnership (Box 6.4).
Compensation
A proprietorship builds up assets (including
cash) in the business. Because a proprietor is the
owner rather than an employee, he or she does
not pay himself or herself a salary or a wage.
Instead, he or she takes a draw (­withdraw) from
the assets of the business or practice. In the
short run, he or she can borrow money and then
withdraw it from the practice to live on. Over
time, he or she can only take compensation from
the practice’s profits. If a person does not make
a profit, then he or she cannot take a draw.
Taxation
A proprietorship is not a separate tax entity. The
owner reports all profits or losses on his or her
personal Schedule C. He or she must estimate
income tax liability and prepay it quarterly. He
or she must also pay self-employment taxes
(SETA)—the equivalent of Social Security (FICA)
and Medicare taxes for the self-­employed. From
a tax perspective, it does not matter how much
a person takes out of the business as a draw. The
issue is how much money (profit) the business
made. This defines the income tax due. If a person
does not take a draw, then the asset (cash) remains
in the practice but has already been taxed.
Dental Practice Implications
Proprietorships are the most common form of
individual dental practices because they are
so easy and ­inexpensive to set up. Dentists
typically protect themselves from liability
through adequate insurance. There used to be
advantages, such as retirement plan funding,
for other forms of business, but tax codes
have ended most of those advantages.
Advantages
A partnership is perhaps the most versatile
method of group dental practice organization.
It allows varying degrees of ownership, income
distribution, and cost allocation. Compensation, for
example, may be based on fixed dollar amounts
or percentages of production or collections.
Partnerships can make allowance for including
new partners or for partners who leave the
partnership. There are few paperwork and technical
requirements in setting up and operating the
Box 6.4
Advantages and
Disadvantages of a
Partnership
Advantages
•Combined resources of partners
(financial, managerial, or personal)
•Easy and inexpensive to form
•One-time tax on owners’ income
•Flow-through of losses to owners
Disadvantages
•Unlimited liability for owners
(joint and severable)
•Profits must be shared with others
•Tax return (informational) must
be filed
•Fewer fringe benefits for owners
4
Business Entities
­ artnership. Start-up costs and technicalities
p
are low because each member has a personal
investment in the partnership, and their combined
creditworthiness may make securing loans easier.
Disadvantages
Several significant disadvantages to the
partnership form of a group practice exist. First,
partners share “joint and severable liability” for
partnership debts. That means that a person is
personally liable for debts of the partnership
or the acts of other partners. For example, if
one of the partners, acting for the ­partnership,
buys a piece of property, other partners are
responsible for the debt as if they had purchased
it themselves. If a partner is guilty of malpractice,
the court may require other partners to help pay
any judgments not covered by insurance. Another
disadvantage may occur when one partner wants
to leave the partnership. Lacking a ­properly
constructed partnership agreement, ownership in
the partnership may be more difficult to transfer if
one partner decides to leave. Finally, management
of the partnership may be more complicated
because each partner has a voice in the decision
making. A well-­written partnership agreement that
lists responsibilities, provisions, and requirements
of the members of the group helps to overcome
these problems. Another ­disadvantage concerns
employee benefits. Like a ­proprietorship, a
partner is an owner, not an employee. Therefore,
partners are limited in what they can provide to
themselves as tax-advantaged employee benefits.
Ownership
Partnerships involve more than one owner. These
do not need to be equal owners. One person can
provide more of the start-up capital and have
more say in the operation of the business. Also
classes of partners, each with different rights
and responsibilities, can be set up. Because
partnerships can take so many forms and can
exist on a handshake, dentists should always have
a written partnership agreement when entering
a partnership. A written partnership agreement
clarifies each partner’s role and identifies the rights
and responsibilities of each partner. The written
agreement compels the partners to define their
relationship in advance. With this exchange of ideas,
partnerships can have a greater chance of success.
Most states have enacted some form of the
Uniform Partnership Act that generally defines the
rules of a partnership for that jurisdiction. For these
reasons, consult an attorney familiar with the law
in this area before an arrangement is completed.
Compensation
Partners are compensated like proprietors. They
take a draw on the assets of the partnership.
Partners do not necessarily need to divide income
from the business evenly, but whatever the
method of income distribution, the partnership
agreement should state it clearly. For example,
dentist partners may decide to divide income
according to production levels for the month or
may allocate specific payments to specific dentists.
Taxation
The partnership is similar to the proprietorship
from a tax perspective. The IRS does not tax the
partnership itself, but the partnership must still
determine its profit or loss and file an informational
tax return. Like a ­proprietorship, a person must
estimate individual income taxes and prepay them
quarterly, and pay SETA. Once the partnership
determines the profit or loss, they pass it through
to the individual partners for taxation purposes
based on their profit-and-loss ratio. For example, if
a person has a 50/50 partnership with an income
of $10,000, a partner would receive and pay tax
on $5,000 in compensation. If losses occur, these
apply to the individual partners’ tax returns as
well. The partner might offset income from other
sources with the loss from the partnership. The
partnership files an informational return with the
IRS, and each partner tells the IRS how much
income each partner has for the year. The IRS
then runs a computer match to be sure that
each partner has reported income properly.
Dental Practice Implications
True partnerships are not common in dentistry.
Most practitioners prefer the independence
of an individual practice or the protection of a
corporation or limited liability company (LLC).
5
Business Entities
Corporation
A corporation is the third most common business
form a dental practice may take. Incorporated
dental practices operate similarly to other business
corporations. Owners form corporations under
applicable state law. They issue stock or shares in
the ownership of the corporation. They may issue
one or millions of shares. The number of shares
that a person owns is proportional to his or her
ownership interest. People who buy stock buy a
share in the assets of the company. If the value of
the company increases or decreases, the value of
each share of stock also changes. If the corporation
makes a profit, the board of directors may elect to
pay out some (or all) of the profits to the owners
of the stock as dividends. Changing ownership of
a corporation is easy; a person simply sells shares
of stock. There are places where a person can buy
or sell shares of publicly traded stock called stock
exchanges (e.g., NYSE, NASDAQ). No one publicly
trades shares of individual dental practices, so the
sale takes place between two private citizens. (In
the real world, dental practice transfers get more
complex.) Some of the larger networks of dental
practices do trade on the public stock exchanges.
A corporation functions as a separate legal entity.
It has an unlimited life, unless the shareholders
dissolve it. It pays tax on its profits. A corporation
owns the practice assets and hires the staff and
dentists. The individual dentists may be owners
of the corporation, employees of the corporation,
or both. Those who are employees receive a
salary or other compensation that they pay
tax on individually. If the dentists are also owners
(­stockholders) in the corporation, they also pay
tax on any profit (earnings) that the corporation
distributes to its shareholders. There are advantages
and disadvantages to corporations (Box 6.5).
Advantages
Corporations provide the major benefit of liability
­protection for the owner(s). Liability is of two
types, either professional liability (malpractice)
or general business (slip and fall) liability. If
someone sues a person as a health care provider
for professional ­negligence (malpractice), then
he or she will be sued as both the owner of the
business and personally, as the provider of care.
Because the corporation is a ­separate entity, the
owners are not personally responsible for acts of
­negligence by other shareholders or employees.
Owners can only lose the money they have
When you’re an Aspen practice
owner, you have all the advantages
of a DSO—a different type of entity
altogether. The advantages include
day-to-day business and marketing
support, so you can focus on patients.
invested in the ­corporation. Therefore, they protect
their personal assets in case of a shareholder’s
professional negligence but not from acts of their
own negligence. If a corporate shareholder is guilty
of an act of professional negligence, someone
may sue them both as an individual ­practitioner
(personally) and as an owner of the corporation.
The ­plaintiff may sue another shareholder as well
but only as an owner of the corporation. They can
only recover what the ­shareholder has invested in
the corporation, not his or her personal assets.
Corporate practices have a decreased tax
audit frequency. Accountants complete most
corporate returns; individual dentists complete
many Schedule C forms. Some auditors may
assume that a Schedule C (proprietorship) return
may hide many personal expenses not found in
a corporate return. Although that may or may
not be true, the result is a lower audit rate for
­corporations (based on IRS audit statistics).
Disadvantages
Corporations are more costly to initiate and require
significant amounts of paperwork to maintain. A
person in a corporation must be sure to act like
a corporation (hold annual meetings, formally
Box 6.5
Advantages and
Disadvantages of a Corporation
Advantages
•Limited shareholder liability
•Separate entity for tax purposes
Disadvantages
•Time and cost of setup
•More paperwork and legal formalities
•Federal and state securities law
compliance
•Possible double taxation
6
Business Entities
At Aspen, practice owners can earn
$750,000 a year on average. Many
dentists own two or more practices.
elect officers, have ­minutes, etc.). Otherwise,
during a legal action, the courts may rule that
if a group has not acted like a ­corporation, it
should not be treated like a ­corporation and
will remove the corporate protection. Once
formed, corporations are difficult to dissolve.
Because it is a ­separate business entity, a person
may pay tax on income twice, once as earnings
of the corporation and again as distributions to
the shareholders or employees as dividends or
bonuses. As an employer, the c
­ orporation must also
pay FICA, federal unemployment taxes, and state
unemployment taxes on an employee. However,
these are similar to self-employment taxes.
Transfer of the shares in case of a dental practice
corporate sale can cause tax problems because
the stock is neither ­depreciable nor deductible to
the buyer and is a gain (over basis) to the seller.
Ownership
In corporations, the shareholders are the owners
of the corporation. They own the individual
shares (or ownership rights) of the corporation.
The shareholders elect a board of directors that
makes the major management decisions for the
corporation. These people serve at the pleasure
of the stockholders, and the stockholders can
remove them under the articles of incorporation
and bylaws. The board then elects officers (such as
a president) to manage the day-to-day operations
of the corporation. The officers then hire employees
to work for the corporation. In a practical sense,
this means that dentist shareholders elect people
(employees, others, or themselves if a solo
practitioner corporation) to the board of directors.
The board then appoints the corporate officers,
including the president of the corporation. In an
individual-incorporated practice, the dentist may
be the sole stockholder, the chairperson of the
board, president of the corporation, and dentist–
employee all at the same time. Only “qualified
professionals” (dentists) can be shareholders
in a PC in some states. Being an owner does
not necessarily mean being an equal owner. A
dentist may only own 5 percent of the stock of
a corporate practice and, therefore, only have a
minority (5 percent) say in management decisions.
Compensation
Two forms of compensation exist in a corporation.
In the first, a person earns money for the work he
or she does as an employee of the corporation.
This is the more common compensation method
and may take the form of a salary, commission,
or wage. The corporation withholds FICA, federal
income, state income, and any local taxes from the
wages, the same as it does for other employees
of the corporation. This person, therefore, does
not have to estimate income taxes and file them
quarterly as in a partnership or proprietorship.
In the second form, a person earns money for the
ownership of the corporation (if he or she is an
owner). Corporations pay dividends out of their
earnings (profits) to the owners as a payoff for
investing in the corporation (owning shares).
Taxation
A corporation is a separate tax-paying entity.
Therefore, the corporation files its own tax return
and pays taxes on any profits earned by the
corporation. Corporations take two forms (or
“flavors”) from a tax perspective: the regular
(or “C” corporation) and the pass-through (or
“S” corporation). The IRS assumes that a
corporation is a C corporation, unless the owners
elect or declare themselves to be an S corporation.
These other forms affect how the IRS taxes the
corporation’s profits but really do not affect
corporate structure or day-to-day function. General
(nonprofessional) corporations have a graduated
tax rate, in which lower earned income is subject
to lower tax rates. PCs lose the graduated tax
rates that nonprofessional corporations enjoy.
This causes all of the practice income to become
taxed at the same rate, eliminating the income
shielding that is available in “normal” corporations.
Dental Practice Implications
After proprietorships, corporations are the most
common form of business that dental practices take
(although LLCs are increasing quickly). Several good
reasons exist for incorporating a dental practice.
In group practices, especially high-risk groups, the
liability shielding is worth the costs of incorporation.
If a per­son is practicing in a group that does
many high-risk p
­ rocedures (such as surgeries and
implants), the ­corporation shields his or her personal
assets from the professional negligence of other
providers in the c
­ orporation. Practice transfers
become easy in corporate practices, especially in
7
Business Entities
large groups in which owner-dentists may enter or
leave the practice frequently. Depending on the tax
form of the corporation (C or S corporation), tax
savings may result. Special ownership rules (such
as no foreign owners) apply to S corporations.
Types of Corporations
Professional service corporations (PSCs) may take
two forms.
Regular C Corporations
C corporations are formed under applicable state
law and are subject to Subchapter “C” of the
Internal Revenue Code. There are many advantages
and ­disadvantages to a C corporation (Box 6.6).
Because this is a separate tax entity, it pays
income tax on any profits. If the C corporation
then chooses to pay dividends, it pays them from
after-tax profits. Dividends are taxable income for
the individual who receives them. So ­dividends are
taxed twice, once at the corporate level and again
at the individual level. PCs generally must pay a flat
(nongraduated) rate (currently 35 percent) on all
profits retained in the corporation. Individual state
and federal income tax rates may add an additional
45 ­percent (depending on applicable dividend
tax rates) to the previously taxed dividends. For
these reasons, ­prudence ­dictates that PCs pay out
all of their profits for the year as bonuses to the
providers and owners, ­showing no ­corporate profit
for the year (and therefore declaring no dividends).
This is not only legal, but the tax code encourages
it through the flat 35 percent tax rate on PCs.
In the C corporation, the dentist files his or
Box 6.6
Advantages and Disadvantages
of a C Corporation
Advantages
•Maintain full deductibility of
employee benefits
Disadvantages
•Possible double taxation of
corporate profits
•Loss of flow-though of losses and
tax credits
her wages and earnings on his or her personal
Form 1040 based on the W-2 provided by the
corporation. Employees of the corporation
are eligible for many employee benefits
offered by the corporation that pass-though
owners are not. These may include cafeteria
plans, dependent care allowances, or certain
insurances. Depending on a person’s needs,
this may be an important decision factor.
Most of the disadvantages of the C corporation
may be overcome with proper planning. By
reducing the ­corporation’s profit to zero, a double
tax on annual ­corporate earnings can be avoided.
Paying bonuses to owner–dentists at the end of
the year and making retirement plan contributions
usually accomplish this. Double ­taxation in the sale
of the corporation through restrictive covenants,
consulting agreements, or deferred compensation
can also be managed. Finally, most dentists who
are used to the need for proper documentation
and formal ­paperwork in their dental lives
can manage the paperwork requirements.
Pass-Through (Subchapter S) Corporations
S Corporations are formed under applicable state
law and are subject to Subchapter “S” of the Internal
Revenue Code. That is to say, the corporation
follows all of the regular corporation rules about
incorporation, ­shareholders, and liability protection.
However, the owners have elected to be treated like
a partnership for tax purposes, so the S corporation
becomes a hybrid tax entity. There are many
advantages and disadvantages to S corporations
(Box 6.7). These corporations do not pay a tax on
their corporate profits. Instead, the income, expense,
and credit items of the corporation pass through to
the shareholders. The shareholders then report them
on their personal income tax returns. This election
allows business expenses such as depreciation, tax
credits, and losses to flow through to the owners,
just like a partnership. The S corporation washes all
income, losses, credits, and deductions through the
S corporation at the end of the year. The individuals
carry them directly to their personal tax returns
Because these are emptied each year, the S
corporation has no retained earnings. This eliminates
any possibility of double tax on corporate earnings,
because they tax all earnings on the dentist’s
individual tax return, whether actually received or not.
Like a partnership, the S corporation files an
­informational return for the IRS. The individual owners
receive a form from the corporation that describes
8
Business Entities
how much income they should declare on their
personal taxes. Owners (shareholders) may also
receive ­distribution of profits of the corporation. The
­corporation d
­ istributes profits as corporate dividends.
Unlike the C ­corporation, the S corporation does not
pay taxes itself but passes through tax items to the
owners. So the S c
­ orporation does not pay taxes
on profit, and therefore dividends, at the ­corporate
level. When the individual receives a dividend
payment, this payment is considered unearned
income because it was earned through investment,
not through sweat and toil. Because this income is
unearned, the individual does not pay Social Security
or Medicare taxes on the dividend payment as he
or she would have on earned income. The IRS rules
require that the ­corporation compensate owner–
dentists for the dentistry they do at a “reasonable”
level. (Owners can not claim all income as dividends.)
However, significant tax saving may be available
for S ­corporation owners who use this strategy.
In an S corporation, a person loses many of the
fringe benefit advantages of being an employee
of a C corporation. Many special rules concern
converting to and from a subchapter S corporation.
As a rule, this election is especially valuable for
start-up corporations that have many deductions
Box 6.7
Advantages and Disadvantages
of an S Corporation
and show a loss for tax purposes. This loss can
offset “ordinary” income of the shareholders, up to
the amount they have invested in the corporation
(“basis”). (The accounting for this is complex,
so dentists should check with an accountant.)
Tax credits flow through to the owners’ personal
returns as well. The IRS taxes all of the income of
S corporations, whether from earnings or the sale
of assets, directly to the shareholders in proportion
to their interest, even if the income is not actually
distributed. This can lead to “phantom income”
that shareholders must pay income tax on.
If a person is planning to sell a corporate practice,
the S corporation election has an advantage over
the C ­corporation status. The IRS will tax the capital
gain from the sale of a corporation’s assets at the
corporate level and again at the individual level,
leading to another form of double taxation. With the
sale of an S corporation, the IRS taxes the gains once
(to the former owner’s personal income), eliminating
the double taxation of the capital gain from the sale.
Piercing the Corporate Veil
Piercing the corporate veil is a legal doctrine
that allows the courts, when justified, to ignore
the corporate structure. The courts then hold
the shareholders of the corporation personally
responsible for the actions carried out in the
name of the corporation. States differ somewhat
in their interpretation of this doctrine. Generally,
piercing the corporate veil is justified when
someone does one or more of the following:
1. Professionally injures someone.
Advantages
•Maintain liability protection
•Early losses become personal
deductions
•Profits are passed through without
double taxation
•Family income shifting is possible
•Easier accounting and paperwork than
C corporation
2. Personally and directly injures someone.
Disadvantages
•Lose tax deductible employee benefits
for owner(s)
•Must follow corporate rules and
regulations
•Profits are taxable based on ownership
percentage
8. Intentionally does something fraudulent,
illegal, or reckless that causes harm to
the company or to someone else.
3. Undercapitalizes the corporation.
4. Fails to deposit taxes withheld
from employees’ wages.
5. Fails to observe the formalities of corporate
existence, such as annual meetings and minutes.
6. Siphons funds to the dominant shareholder(s).
7. The majority shareholder(s) guarantee
corporate ­liabilities in their individual capacity.
To protect a PSC from being “pierced,” dentists
should practice good preventive business practices.
They should maintain adequate insurance and
corporate assets and follow all corporate formalities.
Shareholder and director meetings should be
held as required, and directors and officers should
9
Business Entities
be elected as called for in the charter. Dentists
should keep accurate and timely minutes of all
corporate meetings, noting all personnel issues,
such as changing salaries or benefits, in the
­corporate minutes. Each state views this differently,
so dentists should check with a lawyer and an
accountant for local preventive business practices.
Limited Liability Company
LLCs are a relatively new form of business
organization. This legal entity combines the best
aspects of the corporate entity (i.e., limited liability)
and the partnership entity (i.e., pass-through tax
flow). In addition, the LLC has greater flexibility than
the S corporation in adapting to various forms of
ownership. In the past, the most common use of an
LLC was to replace limited partnerships, notably,
to hold and operate real estate ­investments. The
LLC is becoming more common in the dental
­practice world. Like the corporate form, professional
practices are generally professional limited liability
­companies (PLLCs), subject to those state laws.
Advantages
LLCs are flexible. There may be one or many (even
unlimited) owners, known as members. An LLC
is a separate legal entity from its members. LLCs
are easy to establish. Like a corporate entity, the
LLC has an unlimited life unless dissolved, and
LLC members have limited personal liability. There
are few administrative requirements. Members
set the level of these requirements through the
LLC’s operating agreement. They can run the
business themselves or elect or appoint one (or
more) of the members to operate the business.
The members may elect the tax status of the LLC.
Disadvantages
There are few disadvantages to the LLC
form of business. The members are generally
subject to SETA tax (depending on the entity’s
tax choice), similar to a ­proprietorship. Most
states have a nominal annual fee for LLCs.
Ownership
The owners of the LLC are the “members.”
There may be one or many members. They may
each own equal or different shares in the LLC.
The operating agreement, which is similar to
a partnership agreement or corporate bylaws,
defines how the LLC operates. LLCs may be
managed by the members or a manager.
Compensation
Members are compensated according to the
LLC’s operating agreement. This leads to great
flexibility in methods of compensation.
Taxation
Taxation for LLCs is flexible. The members may
elect how they want the LLC to be taxed.
Single-member LLCs by default are treated as
a sole proprietor for income tax purposes. In
this form, they are considered a “disregarded
entity” so the individual does not have to file
a separate LLC return, only a personal federal
Schedule C. The member may elect to be treated
as a corporation (either C or S corporation) and
file appropriate tax forms and information.
Multimember LLCs by default are treated
as a general partnership for income tax
purposes. They must file informational
returns similar to a partnership. The members
may elect for the LLC to be taxed as a
­corporation (either C or S corporation) and
file appropriate tax forms and information.
Generally, then, profits and losses pass through
to the individual members for income tax
determination. In this form, LLCs are passthrough entities and have only one level of
income taxation (unless they have elected
to be taxed like a C corporation).
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Dental Practice Implications
PLLCs are the newest form of business entity
for professional practices. They are rapidly
becoming the most popular. They have the
limited liability of the ­corporate form, the ease
of setup of a proprietorship, open ownership
rules, few administrative requirements, the passthrough tax characteristics of an S corporation,
and flexibility to change the structure.
10
Business Entities
When to Use the Various Entities
Partnership
There are some common instances when
dentists use the various business entities
for their practice formation (Table 6.1).
Partnerships are not common in dentistry
because of the shared liability. They are often
seen in family limited partnerships that lease
space or equipment to the practice. These are
frequently set up to have different ownership
and management rights (limited partnership) in
the family situation. Limited partnerships in real
estate ventures, in which one partner (the general
partner) has expertise that the contributing
(limited) partners do not, are also frequently seen.
Proprietorship
Proprietorships are the simplest form of business,
so they are often used for start-up practices.
Because the owner is personally liable for his
or her acts of professional negligence, the form
of business does not give much protection
in this regard. Many established individual
practitioners who do not use tax-planning
strategies (such as renting space or equipment
from themselves) use this simple form of
business their entire professional careers.
C Corporation
C corporations may be used for established
practitioners who need the employee benefits
that are available to employees of this form of
Table 6.1: Characteristics of Different Business Entities
Characteristic
Sole Proprietor
General
Partnership
C Corporation
S Corporation
Limited Liability
Company
Separate tax entity?
No
Yes
Yes
Yes
Yes
One
Two or more
Unlimited
Limited to 75; limited
foreign ownership
Unlimited
Assets
Portion of assets
Shares of stock
Shares of stock
Membership interest
None
Should have
a partnership
agreement (not
required)
Articles of
incorporation,
bylaws, minutes of
annual meeting,
employment
agreements
Articles of
incorporation,
bylaws, minutes of
annual meeting,
employment
agreements
Should have
operating agreement
Unlimited
Unlimited, joint and
severable
Limited, except
for an individual’s
professional errors
Limited, except
for an individual’s
professional errors
Limited, except
for an individual’s
professional errors
Owner is the
manager
Managed by partners
Board of directors
and officers of
corporation
Board of directors
and officers of
corporation
Managers or
members, by
agreement
Sale of assets (or
portion) may be
limited by state
law (e.g., only to
dentists)
Sale of assets
(or portion)
may be limited
by partnership
agreement or state
law (e.g., only to
dentists)
Sale of stock
(ownership interest);
usually limited
by shareholder
agreement and state
law (e.g., only to
dentists)
Sale of stock
(ownership interest);
usually limited
by shareholder
agreement; complies
with Subchapter S
requirements
Sale of assets may be
limited
by state law
Individual, reported
on Schedule C; no
practice income tax
Individual reports
share of income/
expenses;
partnership
informational return
Individual earnings
taxed as wages/
salaries; corporate
income tax on
corporate profits
Individual reports
share of income/
expenses; taxed
like a partnership;
corporate
informational return
Single owner:
withhold or estimate
depending on election
Estimate, prefile
quarterly
Corporation
withholds taxes as
employee
Number of owners
What a person owns
Required
documentation
Personal liability of
owners
Management
Transfer
Taxation level
Individual Taxes
Estimate, prefile
quarterly
Corporation
withholds taxes on
earnings, estimate on
distributions
Multiowner:
informational return,
depending on election
Estimate, prefile
quarterly
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Financial Analysis and Control in the Dental Office
business. They are ­sometimes used for group
practices to shield the owners from liability, but
tax advantages of the S corporation or simplicity
of the LLC often are an important deciding factor.
S Corporation
S corporations are common in dentistry. Startup ­practices enjoy the flow-through of start-up
deductions and losses while keeping the liability
protection of the corporate entity. High netting
practices (above $250,000 per year) can distribute
some profit as a dividend, reducing Medicare
taxes. Group practices can use this form for liability
protection. Practice sales have more favorable tax
implications than those of C corporations. However,
there are rules about S corporation ownership
(such as only US citizens may be owners) that
might limit the usefulness of this entity.
LLC
Rules for LLCs vary by state, so the value may
change depending on specific state rules.
Generally, they are easy to establish. They hold
the limited general liability of the corporate
form without many administrative requirements.
They are a separate business entity, so dentists
may set up both the practice and a real estate
or leasing company as LLCs so that they
can do business with the separate entity.
This is an electronic version of a chapter published in Business Basics for Dentists, First Edition, David O. Willis. © 2013 John Wiley & Sons, Inc.
Published 2013 by John Wiley & Sons, Inc.
For more information or to purchase the full content for Business Basics for Dentists, please visit:
http://www.wiley.com/WileyCDA/WileyTitle/productCd-EHEP002770.html
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