Incorporating Your Practice
by DentalPlanet on 08/12/09 at 5:53 pm
Whether you’re a recent graduate from dental school, or a veteran in the industry, common mistakes can quickly become the downfall of your dental practice. DentalPlanet.com has assembled a Rules Guide that outlines the key components of a successful dental practice. Excerpts from the guide will be posted here on our blog. Contributing writers include: Dr. Chip Faul, Kodak Dental Systems, Winters & Waite, LLC., SmartPractice, BuyDentalEquipment.com, SmartCabinets.com, SCI Design, LLC., and more.
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Today’s content provided by:
Winters and Waite, LLC
Attorneys at Law
It is a good idea to incorporate1 your dental practice for several reasons. First and foremost, a corporation stands apart as a legal entity from its owners (shareholders), officers, and directors, and, as such, serves as the repository of the legal liabilities of the business (in most cases, allowing the individual owners to avoid doing so, other than for malpractice, personally guaranteed obligations, and “corporate veil piercing” claims such as for criminal activities). For example, if while on the premises of an unincorporated dental practice, a person is injured, sues for damages and obtains a judgment, each of the owners of the dental practice will be liable for payment of whatever amount the court finds is owed to the plaintiff2 .
By contrast, the same judgment would impact only the separate corporation (and not the individual dentists) of an incorporated practice. This rule will vary to a degree from state to state, particularly with respect to malpractice claims, as most states permit all or a substantial portion of professional malpractice liability (both for the dentist’s own malpractice and the negligence of anyone working for that dentist) to flow through to the individual owners of an incorporated practice.
Second, a corporation can often be used to maximize tax deductions such as those for equipment purchases and employee-related expenses (because, as a dentist practicing within an incorporated practice, you will be considered an employee for tax purposes), including health insurance, retirement plans, life and disability insurance, and other valid employee-related expenses). Doing so may also enable the owner(s) to divide the practice’s income between the owners and the corporation.
If, for instance, the owners decide to leave a portion of that income in the practice at year-end they allow it to be taxed at the corporate tax rate3 (if a subchapters election4 has not been filed). The tax issues, however, tend to be a source of considerable confusion, and you many find that the tax benefits of incorporating may be quickly canceled out by costs such as state incorporation fees, franchise taxes, annual reporting requirements, and other burdens. Consultation with a local accountant is, therefore, essential before proceeding with the incorporation process.
Third, a corporation can add a valuable measure of control over the activities of business partners with respect to the operation of the business itself (e.g., purchasing and selling assets, borrowing money, signing contracts, etc.). This can help the owners of the practice avoid misunderstandings and facilitate planning.
For instance, the corporation’s founders may elect to execute a “Shareholders’ Agreement” which sets forth, among other things, what powers the corporation’s officers may exercise, and often more importantly, which powers cannot be exercised in the absence of a vote of the shareholders. The shareholders may, for example, want to make certain the corporation’s officers don’t sell more than 50% of the corporation’s assets, pay themselves bonuses, or borrow more than a specific dollar amount without the approval of a specific number of shareholders.
1 We use the term “incorporate” broadly in this instance to refer to a legal entity (usually a corporation) authorized by state statute to exist as a separate legal entity apart from its owners. PCs (professional corporations), LLCs (limited liability companies, not “limited liability corporations”), LLPs (limited liability partnerships), LPs (limited partnerships), and other similar entities may also be used, depending on the location (state) of the business and the relative benefits of each type of entity.
2 As one might guess, when two or more dentists decide to practice together, the potential liability issues expand dramatically. In an ordinary partnership, each dentist will be “jointly and severally liable” (i.e., individually liable for 100% of all debts) of the partnership. Incorporating will help mitigate this liability substantially.
3 In recent years, the maximum U.S. federal corporate tax rate (which is adjusted relatively frequently) has often been lower than the maximum individual income tax rate. This is not currently the case, however, as the maximum U.S. federal corporate tax rate is 39% for 2009 (on income between $100,000 and $335,000); whereas, the maximum individual rate for single taxpayers is currently 35% (on taxable income over $372,950).
4 Subchapter S of Chapter 1 (Sections 1361 through 1379) of the Internal Revenue Code of 1986 permits the shareholders of a corporation to elect to be taxed personally on the corporation’s income, rather than having it taxed at the corporate level, regardless of whether any distributions are made. This is commonly known as “flow-through” taxation. It is preferred by many owners of small corporations because it permits them to avoid “double-taxation” (i.e., being taxed at the corporate level and again upon distribution of the remainder as dividends). Check with your accountant to determine whether to file an “S-election” for your business.
