Choice of Operating Entity: Which is Best for You?

By: Bruce Bryen

What is the choice of operating entity for the dentist ready to go out on his or her own to acquire or start up his or her own practice?

There are many different types of organizational structures for young dentists to consider when they are ready to go out and acquire or start up a dental practice.

Which is the Right Operating Entity and is There Really a Right One?

The dental practice CPA or financial advisor is the first person to speak with about the choice.

Each of the options has pros and cons that the new owner of a dental practice would not know about until probably after the fact and too late to make an informed opinion about the selection process if done on their own. 

We’ll start with a name for the operating entity and then give a brief explanation of its pros and cons of it. 

Sole Proprietorship

The first and easiest choice to make is that of a sole proprietorship.

This is the type of business operating entity that is the cheapest to form but also one that probably offers the least benefit to the owner.

Your name and title are registered such as Rob Smith DDS. You have a sign with your name, the telephone is answered with your name and the employees work for you on an individual basis.

The downside compared to some other types of organizations that will be discussed later are:

  • lack of liability protection
  • restrictions on the use of fringe benefits
  • other loss of “corporate benefit packages”

Limited Liability Company (LLC)

Next would be the formation of an LLC.

This type of business organizational structure offers the owner more of a variety of benefits than the sole proprietorship described above.

There is a cost to this type of entity that is more than that of the proprietorship as it gives “corporate benefits,” to the owner but also offers liability protection as well.

A sign may have the name of the corporate entity on it as well as the name of the individual who is involved with the organization.

Marketing may be accomplished by using the name of the entity with the individual or by inserting the name of the dental practice without the name of the person involved.

This dental practice also offers entry to other dentists who may want to participate in the ownership of the practice since the operating agreement only needs to be modified where there is no operating agreement for the individual proprietorship because there is no need for one. 

S Corporation

On many occasions, there is a struggle between advisors who may compare and argue about the upside and downside of the LLC with that of an S corporation since each gives a format of liability protection and benefits.

There are a lot more technical differences between an LLC and an S corporation.

Examples are the ability to draw a salary from the S corporation compared to a guaranteed payment from the LLC.

Each gives an amount of earned income for the owner to be used for retirement plan calculations when the time is right to adopt a formally qualified employer-sponsored plan for the dental practice.

There are many tax differences in operating these types of entities. As an example, an LLC offers complete tax write-offs against loan balances and operating losses while the S corporation has a limit on the deductibility of tax losses based on underlying personal guarantees.

An S corporation requires a separate tax return to be filed while the LLC is filed as the individual would file his or her own personal 1040. 

C Corporation

What about the use of a C corporation?

This type of operating entity may have come back into vogue when the Trump tax laws passed equating an opportunity for the wealthy to reduce their costs to operate their businesses without spending the time and money to have their tax advisors find the loopholes that are always within the system. 

The tax rates dropped with this type of entity so there was no need to do much of anything to find areas to reduce them further as the money spent on advisors would not compensate for the much lower tax rates already in place.

An example would be that at a 50% federal and state tax rate every dollar spent could save 50 cents whereas a 30% federal and state rate would save 30 cents.

If the tax rate dropped to 20%, there was only a 10% difference between the tax rate and the savings offered by the advisors finding an additional tax write-off for the dentist, not counting the charge from the advisor for his or her services in performing the research needed to produce the newly found tax write off.

The C corporation does allow the payment of a salary to the owner and an accumulation of corporate earnings for expansion with the acquisition of additional practice, added staff, and a larger space.

Hybrid Options   

Hybrids and acquiring an interest in an existing dental practice with the use of the already-in-place organizational structure is another option.

Besides the names and short explanations of the types of dental practice business entities listed above, there are various mutations and joint ventures of the above with different names but sometimes the advisors take the best parts of each business entity to create a new one for a particular client. 

For this type of individual approach, the entrepreneurial dentist would have to be very understanding of what is out there, the trust in the wisdom and experience of the dental CPA or other dental advisors, and the risks and costs associated with this new type of business structure for his or her own dental practice.

These dentists would probably have much more experience from a prior job opportunity or really enjoy the research and development opportunities available with this type of endeavor. 

Consult a Dental CPA when Choosing an Operating Entity

The most important thing is to engage a dental CPA who would have experience with almost all types of dental practice organizational structures. 

Up Next: Tax Return Preparation for Dental Professionals

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Bruce Bryen

Bruce Bryen

Bruce Bryen, CPA/CVA Dental Practice Valuation Analyst, Baratz & Associates, PA