Why new dentists need a legal entity
So you’ve decided to open your own dental practice. Now that you’ve told your family, friends, and dental school buddies, it dawns on you…you don’t actually know how to open a practice.
In this blog we’re going to walk you through some of the basic requirements needed to open a practice, and provide you practical steps that you can take to get your practice off the ground.
The first step to starting a dental practice is a pretty mundane one: legally forming a company entity. A legal entity is simply a company that is recognized and registered with your state. Your legal entity can be a Corporation, a Limited Liability Company, a Partnership, or any other business type that your state recognizes. It is distinguished from running your business via a sole proprietorship, or other arrangement which is not registered or recognized by your state.
Why do Dentists Need an Entity?
The short answer is you don’t. There’s no law requiring that you run your practice via an entity, you can run it as a sole proprietorship (which in plain English means, “in your own name”). However, here are some pretty good reasons why you’ll want to have an entity:
- Legal Protection
The biggest reason to form a dental business entity is that it means that your business is separate, legally speaking, from you. That’s useful because if you get sued personally, which could happen for a variety of reasons—such as a guest slipped and fell at your house, you default on your home mortgage, or you get sued for medical malpractice—then the assets of your business aren’t subject to the lawsuit. That is to say, if the lawsuit against you is successful, they won’t be able to take your business. Same thing applies if your business is sued. If the lawsuit is successful, they won’t be able to seize your personal assets. In effect, it creates two separate pots, and a successful lawsuit can only raid one of those pots if you’ve used an entity.
- Accounting Transparency
A second reason to form an entity is accounting transparency. By having your business run as a separate entity you’ll have separate bank accounts, separate accounting, a separate line on your tax return to report the earnings, etc. That accounting separation is necessary if you’re ever going to try to bring in a business partner, sell a business, or even just properly calculate your taxes. Can you do these things with a sole proprietorship? Technically yes, but it’ll be such a mess trying to disentangle your personal expenses from your business expenses that nobody, whether it be a partner, a buyer, or the IRS is going to believe your calculations and thus your valuation or tax liability will be worse than it otherwise would be.
- Business Credit Separated from Personal Credit
Another reason you want to create a separate legal entity is that you can start to develop business credit that is separate from your personal credit. In plain English, the loans you take out in the business’ name, whether for equipment, a building, etc. will go on your business’ credit report, and not your own. That’s a good thing for two reasons: first, if either your business or your personal credit isn’t squeaky clean you’ll have fewer problems; second, you can generally borrow more money in total if they’re separated, which as a new dentist trying to start a practice and likely carrying a mortgage, that’s a good thing.
In sum, it’s not legally required, but it’s a good idea to form a separate entity to run your dental practice in.
In the next article, we’ll cover what type of entity you should form, what elections to make, how to actually do it, and how much it will cost you.
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 based in Houston. Rich provides practical actionable advice for new dentists based on his experience starting and building successful businesses.
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.