Business Organization
Incorporating the Dental Practice as an S Corporation
When deciding on a business organization model for the dental practice, incorporation is often seen as the way to go to shield an individual dentist owner from liability for business debts that could otherwise threaten personal assets. The S Corporation is often viewed as the ideal for a solo owner dentist, both for the simplification of filing for and maintaining the organization legally, as well as the possibility of shielding the dentist from personal liability.
The first advantage of incorporating is protection from liability. There isn’t a corporation or business entity setup that can shield dentists from liability incurred because of work as a dentist. However, for business debts an S corporation is the better choice over a sole proprietorship because of the of the protection of personal assets from business creditors who would like to put liens on houses, cars, personal bank accounts and other personal assets. Dentists who find themselves going through the personal bankruptcy route find it a godsend to have gone through the relatively simple process of setting up an S Corporation for their dental practice.
Secondly there is the question of flow through taxable income. Income earned by a corporation is taxed at both the corporate and personal levels, thus triggering the unwanted result in most cases of double taxation. With an S Corporation there is flow through taxable income so the income is taxed only at the personal level, but not at the corporate level. There is another entity called a limited liability company (LLC) which is a hybrid between an S Corporation and
a regular doubly taxed corporation (known as a C Corporation). Income for federal income tax purposes in multiple owner LLCs is generally taxed as a partnership and is sometimes more favorable than the flow through taxation evident in an S Corporation. Since there also is protection against liability for corporate debts in an LLC, it is important to note though that there are other distinctions between the two entities which makes one or the other more preferable to an owner dentist.
With an S Corporation there is a requirement that only one type of share denoting percentages of ownership be distributed among the owners. This makes the splitting up of the profits of the practice easier because the capital that is put in comes out according to the original ownership distribution. However, in an LLC there can be multiple types of shares that can be issued to indicate ownership. Generally, a capital account can be set up for each owner that comes into the practice and so a different type of share is distributed for each capital account. An owner can adjust his or her ownership by adding to or taking away from the capital account. This particular explanation indicates that with only one owner an S Corporation seems like the logical answer, while with multiple owners the LLC may be feasible. This is even more apparent because of the requirement that single owner LLCs (now allowed under Mass. Gen. Laws c. 156C) have flow through income tax treatment. If the owners have separate purposes such as running the business as opposed to an investment vehicle, then the LLC can be attractive. Since dental practice owners oftentimes have the same purposes in their ownership, the more simple
S Corporation setup can be attractive both in maintaining the business and possibly selling its assets at a future time. Although there are differences of opinion, there is general agreement that in most states an S Corporation is the better entity for dental practices with one or more owners. An S Corporation is easily set up and less expensive to form and maintain than other entities. Articles of Organization and other documents such as bylaws can be drafted by an attorney at Hatch Legal Group. IRS Form 2553 must be filed shortly after election to become an S Corporation
An S Corporation is easily set up and less expensive to form and maintain than other entities. Articles of Organization and other documents such as bylaws can be drafted by an attorney at Hatch Legal Group. IRS Form 2553 must be filed shortly after election to become
an S Corporation.
Forming Dental Practice Professional Corporations
The organization of dental practices into professional corporations is an important alternative to setting up a dental practice than a sole proprietorship or a different entity in a number of different ways. Particularly with dental practices with more than one dentist, it can avoid liabilities of individual dentists for actions which may allow for the access to a dentist’s personal assets. In Massachusetts, a new statute titled c.156D was enacted in 2004 to provide a more modernized approach to forming corporations which supplements the statute exclusively devoted to professional corporations, c.156A.
A professional corporation is limited to individuals who are licensed to perform work in
a particular licensed profession. Other employees are able to be employed by the corporation as long as they are under the supervision of these licensed individuals or are performing work that doesn’t require a license. This is a main difference between professional corporations and incorporations formed for other purposes.
Articles of Organization must be filed in order to initiate the process of forming a professional corporation. There are forms for this purpose that can be located at the Commonwealth’s web site. Articles of Organization can be filed for a minimum of $275 for a small corporation. A name must be chosen which indicates that the practice is incorporated such as P.C. and which has not been taken by another business which has its Articles of Organization filed with the Secretary of State. The corporation must state in its Articles of Organization how many shares of stock it is issuing for each shareholder.
By-laws of a corporation can also be included in the additional filing of the Articles of
Organization. The by-laws contain provisions for managing the business and regulating the affairs of the corporation. The by-laws should identify the officers of the corporation, describe their duties and state how they are elected, appointed, removed or replaced. The corporation must have a president, treasurer, and secretary, and other officers can be named in the by-laws.
An important consideration in forming a professional corporation is the limitation
of liability of dentists in case other dentists have a malpractice action filed against them.
A dentist’s personal assets cannot be reached when liability for individual dentist’s work is determined. However malpractice actions can be maintained against individual dentists for their own work. Corporate assets are shielded from these malpractice actions taken against one of the dentists.
The tax considerations in forming a professional corporation are significant and separate it from other entities. The profits from the “C” corporation are taxed at two rates, first at the
corporate level and then at the level of the individual. In this circumstance, an incorporation of a different entity called an S corporation eliminates this double taxation of the corporation and is simpler to set up for the solo practitioner, who is only taxed at the personal level. There is a possibility in the case of a regular corporation that a dentist can choose which channel to direct profits into salary or the corporation, and decide which is at a lower tax rate. With a professional corporation, the dentist is considered an employee of the corporation and can deduct such fringe benefits as life and disability insurance, and health insurance from the corporate profits.
Most larger dental practices seem to prefer using the “C” corporation model for the professional corporation because even with its more complex regulatory and record keeping aspects (annual reports have to be filed, for example), there are readily transferable ownership interests and continuity of existence advantages. The taxes on the sale of the business are generally lower than with other models as well. An accountant or business attorney can go over the alternatives and decide which is best for the size practice that is involved.