Whether you are about to purchase a dental practice or you already own one, one of the first things you must do is decide on an entity type. It is very important to know what entity you have or need and the pros and cons of that entity so that you can choose and utilize it the best. Because of the high volume of material with this subject we will break this down into 3 separate parts. In the first part, we will establish a foundation and cover some entity basics.
The most common entity choices are: Sole Proprietor (Sole Prop), Limited Liability Company/Partnership (LLC), Subchapter S Corporation (S corp) and a Subchapter C Corporation (C corp).
Another very important item to understand is that when we talk about entities, there are two different aspects. The first aspect is the legal aspect. From a legal perspective an entity may or may not be able to provide asset protection or legal protection. For example a Sole Prop does not provide any legal protection or asset protection. If someone tries to sue a doctor, they can go after their business assets and their personal assets. Forming an LLC or either corporation is, in part, an attempt to provide asset protection so that a doctor can prevent their personal assets from being exposed in a business lawsuit.
The other aspect is tax. Some entities have favorable tax benefits; for example forming a C corp creates a separate entity and that entity can deduct some things that an LLC cannot. Conversely an LLC is a legal designation only. LLCs are not a tax entity, they do not change the tax situation and they do not provide any additional tax deductions. We will get into the tax benefits of S corps and C corps later but it is important to understand that the LLC does not provide any tax benefit.
Another important item to keep in mind is that none of these entities can protect the business owner from acts of malpractice. No entity can provide protection from malpractice. The only way to protect yourself from malpractice is through the use of insurance and communicating and connecting well with your patients.
Look for part II and III of Choice of Entity where we will discuss the pros and cons, costs and current trends with the various entities.
If you have specific questions about forming an entity or how best to utilize your current entity please don’t hesitate to contact us.