When to Choose an LLC as a Dental Practice Entity
There is no one size fits all entity selection for a dental practice small business, just the same as with many small businesses. The tax benefits and shielding of liability benefits of each type of the many entity choices available, whether it be an S Corporation, a C Corporation, a DBA, a Partnership, or an LLC, are difficult enough so that finding the right one requires an extensive customized analysis.
But one of the more popular entity selections these last few years is the LLC, or Limited Liability Company, which has become easier to set up, maintain, and get benefits from for all types of businesses, thanks to state by state statutory changes. A particular situation involving dental practices in which an LLC might be a good choice is the beginning dentist seeking to get his or foot in the door in an ownership role, and an older dentist who doesn’t want to give up that role yet, and wants to still get the benefits of built up capital during retirement or semi-retirement.
The LLC gets its name from being able to shield the owners not only from the outside world trying to reach assets for satisfying judgments or debts, but from fellow owners. An very important aspect of the multi-member LLC is that multiple owners have risk in the corporation only to the extent of their capital contribution, and also can set up a profit sharing system based on that proportion of their contribution of capital to the company.
In dentistry, it is useful to cite some scenarios where this splitting of the contribution/risk of the practice proportionately can be beneficial for the different long term interests of each of the owners. Say, for instance, a new graduate of dental school wants to get his or her foot in the door as an owner of a practice, which is a key role for a dentist to take on to be successful financially, and start building that important good-will equity that lasts a lifetime for a dentist. But that graduate is saddled with large student loan debts, and has probably very little to contribute to an investment in a dental practice. That beginning dentist may be able to find an older dentist who may want to retire in ten years or so, but who doesn’t want to give up all the profit-making abilities of practice ownership. For that dentist to sell a small share of the practice, say for instance ten percent, which the new dentist can afford, may start the process toward the older dentist gradually selling off the practice in small increments as the newer dentist sheds debt and is able to contribute more investment in ownership to gain more profit.
The beauty of the LLC is that the capital contribution language in the statute is designed with this type of percentage splitting in mind, all held together by a contractual arrangement between the parties called an operating agreement. The statute only requires a an initial reporting to the state of how much of a percentage each member has in the LLC, but the operating agreement can set out provisions like gradual increases or decreases in capital contribution and percentage of ownership for the long-term , as well as buy-out or retirement sections. The operating agreement can be changed by mutual consent or in any other way the owners see fit to put in the agreement between them.
The LLC is not for every practice owner or prospective owner, but its benefits should be compared to benefits of having other entity formats by discussions with both an attorney familiar with drafting and liability and a CPA familiar with the tax implications of each type.