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

2. 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

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

4. 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
Compensation for Production (25%) 450, , , ,000
Compensation for Ownership 200, , ,000 0
Total Compensation 650, , , ,000

5. 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

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

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

8. 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

9. 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

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

11. 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

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

13. 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

14. 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)

15. 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

16. 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”

17. 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)

18. 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

19. 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

20. 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

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

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

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

24. 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)

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

26. ADA News May 5, 2008

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