What type of entity should a dentist consider selecting and why?

By | July 1, 2015

In my previous blog post, I explained why, as a new dentist you may wish to form a legal entity to run your practice instead of running it as a sole proprietorship. In this article, I’ll explain what type of entity you should consider forming, what tax elections you should consider making when forming that entity, how to actually do it, and how much it will cost.

Rich McIver

Rich McIver

What type of entity you should consider forming

There are a lot of options when selecting what type of legal entity you will operate your practice out of. There is a traditional corporation (denoted by “Inc.”), a professional corporation (“P.C.”), a limited liability company (“LLC”), a professional limited liability company (“PLLC”), a limited partnership (“L.P.”), a general partnership (“G.P.”), a limited liability partnership (“L.L.P.”), and in some states a limited liability limited partnership (“L.L.L.P.”), along with a number of other industry specific entity types.

When you form your entity, you need to select one of these types, each of which operates under a different set of laws and tax rules thus each of which has different advantages and disadvantages. Because of the different laws and tax rules, you are urged to consult with your personal attorney in the state in which you will be practicing before making a final decision on the type of entity to form.  Once you select one you’ll need to append it to the legal name of your practice (e.g. “Dallas Dentistry PLLC”).

Professional Corporation

A Professional Corporation (“P.C.”) is simply a corporation for professionals such as doctors, lawyers or dentists. It operates just like a corporation (“Inc.”) with a few differences that aren’t relevant to this discussion. P.C.s using an S-Corp election (discussed further below) were the original option for dentists who wanted to form an entity. The P.C. with an S-Corp election provided a liability shield, cleaner tax accounting, the ability to distinguish between a dentist’s income and the practice’s profits and thus pay less in Social Security (10.4 percent of self-employment income up to $117,000) and Medicare taxes (2.9 percent of self employment income uncapped) than under a sole proprietorship. Plus a number of other benefits. Unfortunately, because P.C.s are a derivative of corporations (“Inc.”) they also generally require more paperwork, formal annual meetings, and other administrative hassles that traditional corporations require.

Professional Limited Liability Company

Certain administrative and tax burdens associated with a traditional corporation (and thus P.C.s) led states to create a new type of entity, the Limited Liability Company (“LLC”), and in its professional form the PLLC. A professional limited liability company (“PLLC”) is simply an LLC for businesses involving professional services. The benefit of a PLLC is that it generally has less burdensome administrative requirements than a P.C. This lower administrative burden made PLLC’s very attractive for dental practices (except in a few states, most notably California, where LLC’s cannot be used to practice medicine) . The downside of a PLLC relative to a P.C., however, was that a dentist’s Medicare and self-employment tax liability couldn’t be capped at his or her self-employment income, but instead was based on the overall profitability of the practice. This meant that dentists under a PLLC might be paying an extra 2.9-13.3 percent in self-employment taxes.

Professional Limited Liability Company With S-Corp Election

Obviously a combo of these two entity types, the P.C. with its caps on self-employment taxes, and the PLLC with its low administrative hassles, could be advantageous. Thankfully, that is possible with the PLLC with an S-Corp election.

States now almost universally allow PLLC’s to elect to be treated as P.C. or S-Corp’s for tax purposes (again, notably not in California). So, in effect, they are treated as an LLC from a corporate perspective, but when it comes to taxes they’re an S-Corp. This means that a dentist who forms their entity as a PLLC with an S-Corp election gets the benefit of lower administrative legal hassles, with the self-employment tax savings of a corporation. As such, this has become the default answer for many dentists when considering what type of entity to form.  However, as noted above, a dentist would be wise to consult with his or her personal attorney in the state in which he or she will be practicing before making a final decision on the type of entity to form.

How to Form an Entity

Now that you’ve selected the type of entity, you need to decide where to form it. For many dentists, the right answer is usually the state that you will practice in. That’s because if your state is reasonably business friendly, the advantages you can get elsewhere may be outweighed by the convenience and cost savings of not having to hire an out of state agent. But, there are valid reasons for deciding otherwise, so take your time and consider all the factors, perhaps after discussions with your personal attorney. (http://www.nolo.com/legal-encyclopedia/where-form-your-llc.html).

Once you’ve selected a state, actually forming an entity is really easy. For some states you need to first contact your licensing board and get documentation proving you’re a licensed dentist.  Then, just visit your state’s secretary of state’s website (find your state’s here)  to find the forms, download them, complete them and send them in. In many states the application can be completed all online, and in total it’ll take you about 5 minutes. The cost of forming an entity depends on the state, with some as cheap as $45 and others as expensive as $800 (for a state by state cost breakdown read this). You can pay via check, or in some states via credit card online. Note: In a few states, like New York, there is an additional publication requirement to complete formation which can cost up to an additional $1,600.

Once you’ve completed the application, the Secretary of State’s office will review it, and assuming it’s completed correctly, send you a stamped copy in the mail (or increasingly online). With that stamped copy, your entity now formally exists, and you can start doing things like obtaining a bank account, credit card, signing contracts with vendors, etc. all in the company’s name.

In the next article we’ll discuss some of the first vendors and service providers you’ll need to contract with to begin your practice.

For information on ADA legal resources, click here.

Rich McIver is a New Dentist Now guest blogger. He graduated from the University of Notre Dame in 2005 and obtained his law degree at the University of Chicago Law School in 2008. After graduating law school, Rich founded and managed three tech startups that were each acquired through private equity, private sales and a merger, respectively. In 2010, he founded and managed a Houston-based plaintiffs law firm which he sold via a buyout in 2014. In 2013, he and his wife, Holly McIver, an ADA member dentist, founded Kingwood Orthodontics, where he continues to manage back-office operations. His current project is running Merchant Negotiators, a Web startup that reviews credit card processors. Rich provides practical actionable advice for new dentists based on his experience starting and building successful businesses.

Disclaimer: The purpose of this article is to promote awareness of legal and other issues that may affect dentists and dental practices, and is not intended to provide either legal or professional advice. Dentists are urged to consult directly with a properly qualified professional or with an attorney admitted to practice in their jurisdiction for appropriate legal or professional advice.

Rich McIver is a New Dentist Now guest blogger. He graduated from the University of Notre Dame in 2005 and obtained his law degree at the University of Chicago Law School in 2008. After graduating law school, Rich founded and managed three tech startups that were each acquired through private equity, private sales and a merger, respectively. In 2010, he founded and managed a Houston-based plaintiffs law firm which he sold via a buyout in 2014. In 2013, he and his wife, Holly McIver, an ADA member dentist, founded Kingwood Orthodontics, where he continues to manage back-office operations. His current project is running Merchant Negotiators, a Web startup based in Houston. Rich provides practical actionable advice for new dentists based on his experience starting and building successful businesses.

45 thoughts on “What type of entity should a dentist consider selecting and why?

  1. Sam

    As a small start-up, I would prefer Professional Limited Liability Company the best option.

    Reply
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  3. Mike

    Hello Newdentistblog,

    I agree with Sam, I’d also rather use LLC for my own business.
    Overall, the article is informative and easy to understand.

    Thanks.

    – Mike

    Reply
  4. Dr. Joe Tagliarini

    There are different types of dental practices out there so when it comes time to select the type you’ll be, you can start by considering the needs of your target customers. If your practice will be in a relatively small town, you may not need to create a larger business entity. Choose the wrong one and it can make both you and your customers’ lives more complicated.

    Reply
  5. Dr. Steffany Mohan

    Great article you have shared. Thank you very much for such a complete guide. Buying a dental practice can be one of the most important milestones in a dentist’s career. First and foremost, is the buyer purchasing the goodwill of the practice (including the patient base) or simply the physical plant. These are two very different transactions. If the goodwill is being purchased, there are many additional factors to consider. A significant part of the value of the practice, of course, arises from its location. Nice sharing.

    Reply
  6. Theresa

    This article contains a lot of valuable information that helps aid those who are confused or still not acquainted on what to do. Thank you for sharing such useful information.

    Reply
  7. Dental Van

    Buying a dental clinic may not be affordable, but mobile dental clinic is the easiest way to reach out worldwide to serve dental care.

    Reply
  8. John A

    Thank your for sharing this article. My dentist was asking me business advise and i couldnt give him an answer last week.

    Reply
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  10. edward penza

    First and most important, find an accountant who understands all of this and is committed to staying up to date. I made a major mistake in staying with the same accountant for 35 years and probably have given up in excess of 1 million dollars because of this mistake.

    Reply
  11. Ricky Lane DDS

    Great information! This is a pretty daunting process for new dentists, and as you said it’s really important to leverage a personal attorney when making these decisions. Thank you for breaking this down!

    Reply
  12. Chris Gatterson

    Wow talk about thorough, I really appreciate you taking the time to break this all down for us. Helpful and easy to understand.

    Reply
  13. family dentist Ross Township PA

    This is really helpful for dental surgeons. I loved reading your blog and keep up the great posts. Its good to share ideas and thoughts. I will share this with my friends who are dentists as well. Thanks and keep updating more tips.
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    Reply
  14. Naveen Dental Clinic

    Hello Newdentistblog,

    This article contains lots of important information and this is very helpful for dental surgeons. Thank you very much for sharing such a Wonderful article…….

    Reply
  15. what is a professional corporation

    Personally, I think that, On the off chance that your training will be in a moderately residential community, you should not have to make a bigger business substance. Pick the wrong one and it can make both you and your clients’ lives more entangled. By the way thanks for sharing.

    Reply
  16. David Pinkhasov

    Great article…..this is a very important step….always take professional advice but more importantly ask other dentists what they did to set up their partnership or practice….don’t just take advice from one dentist….

    Reply
  17. Kyle Hornby

    Thank you folks for the comprehensive info! Only aware of DPCs as an option previously…will be asking my tax team about some of the other options moving forward.

    Thanks again!

    Reply
  18. Dr. Greg

    My comment would be to also consider Delaware as a state to form your corporation in. You’re protected better there than any other state, at least according to my lawyers. Obviously seek your own legal counsel!

    Reply
  19. Andover HVAC Contractor

    Found you while looking for Dental Info. Even though I am not in the dental business I found your article on various business types very informative.

    I can see from your post improvements/changes I should make in my new business.

    Thanks

    Reply
  20. Dr. Dalwin Harvard Dentist

    Being an established Family Dentist I truly appreciated your article. One of the best decisions we made years ago was seek help on setting up our practice. Years later we realised how important that was when we brought on partners.

    Great Article
    Dr. Dalwin

    Reply
  21. Margaux White

    As usual I am searching for some useful information, immediately I found this post and gain some knowledge, great work! Thanks a lot!

    Reply
  22. M. Marc Liechtung

    Best advice is ask as many dentists as possible and always seek an attorneys advice who has experience in helping dental practices. Could save you a lot of money in the long run…

    Reply
  23. Abhinav Singh

    It is advisable to discuss plans for opening a new practice with professional trusted advisors (CPA, attorney, banker, real estate agent) before any decisions are made. The wrong choices will have an enormous impact on the success of the practice

    Reply
  24. Dr. Sonahita Agarwal

    The entity that’s best for you depends on what type of business you have and your objectives. Typically choosing a business entity comes down to three considerations: asset protection, estate planning, and tax issues. And there are three main types of business entities to handle these aspects.

    An LLC can be a great choice as the business entity for a dental practice.

    Reply
  25. M. Marc Liechtung

    The most popular entity for a dentist is an S Corp. However always seek the advice of an attorney. Especially one that is proficient in dealing with setting up dental LLC’s, professional corps or corporations.

    Reply
  26. Magesh

    It is advisable to discuss plans for opening a new practice with professional trusted advisors (CPA, attorney, banker, real estate agent) before any decisions are made. The wrong choices will have an enormous impact on the success of the practice
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    Reply
    1. Trish

      Lots of comments on your article. Both you and the visitors suggest the same sound advice: Seek a professional law firm to help create your business entity.
      Thanks!
      Dworken & Bernstein

      Reply
  27. Advanced Dental Specialists

    There are several different types of dental practices, so when deciding which one to open, start by thinking about the needs of your target customers. You do not need to form a larger business company if your practice will be in a small town. If you choose the wrong one, it will make life more difficult for both you and your customers.

    Reply

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