Why Would One Want to Form an S-Corporation?

As with other corporations or LLCs, an S-corporation can provide its owners with legal protection; also known as Assets Protection or Limited Liability.  This can help protect the owner if someone decides to sue the corporation.  Keep in mind that no entity can protect the owner from acts of malpractice.  It would only be a good lawyer and malpractice insurance that would protect the doctor.

Another reason to form an S-corporation would be for the tax savings.  When a dentist forms an S-corp, they can have some tax savings if they can argue and defend paying S-corp distributions.  As an owner and employee of your corporation, you would need to take a salary or payroll from your company.  This is because you are an employee and you are in charge of providing services to bring in revenue.  It is very important to make sure the salary level is reasonable and at a level we can defend in an audit.  However, there may also be income available to take an S-distribution and these distributions are not currently subject to self-employment tax (social security, medicare and other payroll taxes).

If you are able to take a reasonable salary and still have income available for S-distributions, then part of your income will avoid these self-employment or payroll taxes.  You need to work with your CPA to make sure your salary is reasonable and your S-distributions are not in excess of the allowable amount.  You also need to work closely with your CPA to make sure your paycheck covers the federal and state income taxes on the S-corp income.  The S-corp income flows through to the owner and the owner is responsible for paying the tax on this income (even if the cash is left in the practice).

Please keep in mind that the folks in Washington DC have talked, in the past, about taking away this tax benefit or loophole.  It has not come to fruition in the past, but it is currently back on the table for discussion.

There are also benefits to forming an LLC or a C-corporation.  I will discuss these benefits in a future blog.

It is important, when deciding which entity is best for you and your practice, to examine your needs and specific situation.  Your CPA can look at your particular situation and help you decide if the S-corporation is right for you.

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