The Dental Practice: Business Foundations Business Entities in Dentistry Dave Willis, DMD, MBA, CFP® Dental Simulations

Business Type Decision Points Asset Protection (Liability) Tax Consequences Separate Tax Entity Employee Benefits Management Perks Re-characterize Income Sale of Business Aggressiveness of Owner Compliance Problems vs/ Benefits

Making Money in Dental Practice Worker (doing the dentistry) Owner Worker Non-Owner Worker Ownership (business profit – if any) Solo Multiple

Example - Paying for Equity (Ownership) Interest The group practice has three dentists, one associate (non-owner) and two owner dentists. Dentists are paid 25% of production. They divide any money left over (profit) equally between the owners. The practice produced $1,800,000 last year. Total Costs (not including payments for doing dentistry) were $1,150,000. The resulting compensation for the three dentists is shown below. Practice Production $ 1,800,000 less Payments for Production $ 450,000 less Office Costs $ 1,150,000 equals Business Profit $ 200,000 Total Owner #1 Owner #2 Associate Production 1,800,000 700,000 600,000 500,000 Compensation for Production (25%) 450,000 175,000 150,000 125,000 Compensation for Ownership 200,000 100,000 100,000 0 Total Compensation 650,000 275,000 250,000 125,000

Incidents (Rights) of Ownership Ability to make a profit from the business Decision making authority (may delegate) Increased responsibility and liability Pledge assets (for a loan) Gain in the value of the business

Dental Business Arrangements Form of Business (Business Entities) Degree of Practitioner Autonomy

Dental Business Arrangements Form of Business (Business Entities) Proprietorship Partnership Corporation C Corporation S Corporation LLC (Limited Liability Corporation)

Proprietorships One owner Owner is the business Owner is NOT an employee Profits and losses are personal Business debts are personal Unlimited personal, business & professional liability Not a separate tax paying entity Report on Schedule C (Individual Form 1040) Flow through to personal return Form 1040 Can’t conduct business with yourself

Partnerships Two or more owners Owners are the business Owners are NOT employees Profits and loses are shared on personal tax return Business debts are personal Unlimited personal, business & professional liability Joint and severable Low start-up costs Not a separate tax paying entity Partnership return (Information only) Flow through to personal return Form 1040 Can’t conduct business with yourself

Partnerships (Flavors) General Partnership Limited Partnership Different classes of ownership Limited Liability Partnership

Corporation 1 or more owners Owners own shares (stock) in company Stockholders vote for Board of Directors Board of Directors hires “management team” to run business Management team hires employees to work in the business Dentists are employees of the corporation (benefits and perks) Separate tax paying entity Corporate tax and tax return Can do business with other separate entities Business debts are not personal Unless co-signed by an individual Limited personal (business) liability Unlimited professional liability (provider of care) High start-up costs, more complex record keeping, lower audit rate

Corporation (Flavors) C Corp S Corp PSC, PA, PC, etc PLLC

Corporation (“C” Corp) Any number of owners Separate tax paying entity Deductions do NOT flow through to individual Dividends are paid from profits Potential double taxation Business debts are not personal Unless co-signed by an individual Limited personal (business) liability Unlimited professional liability Dentists are employees of the corporation Eligible for employee benefits, perks

Subchapter S Corporations Tax election, not business form Owners of a corporation elect to be treated as a partnership, for tax purposes Pass through income, losses, deductions, credits and dividends Lose your employee tax status Used especially in: Start-up practices (tax credit pass through) $200,000 + netting practices (dividend re-characterization)

Public Service Corporations (PSC’s, PSA’s, PA’s, PC’s) Provide a public service May have special ownership rules e.g.: Only dentists may own dental practices in many states Special tax rules 35% flat corporate tax rate Special liability rules Provider of care Piercing the corporate veil

Other Forms of Ownership Limited Liability Corporations (LLC’s) Limited Liability Partnerships (LLP’s) Limited liability of corporate structure Tax treatment of partnership Flow through of tax advantages Loss of “Employee” status Simpler record keeping “New kid on the block”

Exceptions to Limited Liability Professionally injure someone Personally and directly injure someone Personally guarantee a bank loan or a business debt on which the entity (Corp, LLC) defaults Fail to deposit taxes withheld from employees' wages Intentionally do something fraudulent, illegal, or reckless that causes harm to the company or to someone else Treat the entity (Corp, LLC) as an extension of his or her personal affairs, rather than as a separate legal entity (Don’t act like a corporation)

Characteristics of Entities Sole Prop. Gen Partner C Corp S Corp LLC Separate tax entity? No Yes Number of owners 1 2 or more Unlimited Max 100 Foreign ownership Unlimited ? What you own Assets Portion of assets Shares of stock Required Documents None Should have partnership agreement (not required) Articles of Incorporation, Bylaws, Minutes, Employment Agreements Should have Operating Agreement Personal Liability Unlimited, joint and severable Limited with exceptions

Characteristics of Entities (2) Sole Prop. Gen Partner C Corp S Corp LLC Employment Status Owner Employee Owner (Member) Management Owner is the manager Managed by partners (agreement) Board of Directors and Officers of Corp Members (by agreement) Transfer Sale of assets May be limited by state law Sale of assets May be limited by state law or partnership agreement Sale of stock Usually limited by shareholder agreement and state law Sale of stock Usually limited by shareholder agreement and state law & Sub S requirements

Characteristics of Entities (3) Sole Prop. Gen Partner C Corp S Corp LLC Taxation Level Individual Schedule C SETA Form K-1 Partnership Information (Form 1065) Form W-2 (Wages, bonus) FICA Corporate Tax on Profits (Form 1120) Dividends from profits Corporate Information (Form 1120S) Dividends flow through Single Owner Multi Owner Schedule E Information return (Form 1065) Varies by State Individual Taxes Estimate, prefile quarterly (Form 1040ES) Corporation withholds as employee

When Do You Use the Various Business Entities? Proprietorship Simple Start-up Solo

When Do You Use the Various Business Entities? Partnership Seldom in dental practice Family Limited Partnerships (FLP’s) Real estate, equipment rental

When Do You Use the Various Business Entities? Corporation (C Corp) Established practices Owner wants employee benefits Groups

When Do You Use the Various Business Entities? Corporation (S Corp) Start-up practices (deduction flow through High netting practices (dividend re-characterization) Groups Practices for sale (10 yr rule)

When Do You Use the Various Business Entities? Limited Liability Company (LLC) Dental practice – state specific Real estate holding Management holding

ADA News May 5, 2008

The Dental Practice: Business Foundations Business Entities in Dentistry Dave Willis, DMD, MBA, CFP® Dental Simulations