Why Is Entity Selection Important?
Today we will begin dealing with some of the questions and concerns surrounding business entity selection for your dental practice. Specifically, we’ll talk about the following business entities:
– Sole Proprietorship
– S Corporation
– C Corporation
If you are just starting out with a new practice, it is important to select the best business entity for your business. However, many dentists leave this decision up to their accountant or attorney. While this isn’t a bad idea, I recommend you work with these professionals to understand the important factors at play when choosing a type of business entity. Just like in carpentry, it is best to measure twice and cut once.
Current and projected number of business owners
If you plan to have more than one business owner, a Sole Proprietorship is likely not the best way to go. Other types of entities are better tailored to allow for multiple business owners.
Personal liability of the owner(s)
S Corporations and C Corporations were designed to shield owners from personal liability. However, in some states, dentists are personally liable for malpractice regardless of their business entity type. This is an important reason to purchase malpractice insurance.
Local, state and federal taxes
To be sure, your dental practice income will be subject to a number of taxes. The key here is to understand what and how much you pay. For example, certain business entity types are classified as pass-through entities, meaning that practice income will be reported on the owner’s individual tax return rather than taxed at the corporate level. An S Corporation is a pass-through entity for federal income taxes. However, some states impose an income tax on S Corporation income, which may effectively make selecting this entity a costly mistake.
Getting money out of the practice
This factor relates closely to how an entity is taxed. Cash flow is critical for dentists when it comes to enjoying the income earned in their practice. Some business entities make it easier to withdraw cash from a business than others. For example, if you are a C Corporation, the only practical way to withdraw cash from your practice is to pay yourself a wage or dividend. Your wages are subject to not only federal and state income taxes, but also FICA and Medicare taxes. Dividends may be taxed on both the corporate tax return and the owner’s personal tax return. Other business entities allow you to avoid some of these taxes.
Number of tax returns
Should you select an S Corporation or C Corporation, you must file not only state and federal personal income tax returns, but also corporate returns as well. This additional set of returns can be expensive and add a layer of complexity to your business.
Changing entity types
As I mentioned at the beginning of this article, you should select your business entity type after considering all factors. Tax authorities impose certain restrictions upon, and potential penalties for, changing entity types. Your accountant and attorney are in the best position to help you understand the consequences of changing your business entity.
This commentary originally appeared July 3 on DentalTown.com
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