Dental and Medical Counsel Blog

Choosing the right legal entity can shape the future of your dental practice. Select a structure aligning with your financial, operational, and long-term goals. From liability protection to tax implications, your decision affects every aspect of the business. 

At Dental & Medical Counsel, we guide dental professionals through these complexities, ensuring they understand their options and make informed choices. Learn more about the options for your dental practice below. Then, contact our dental attorney for help selecting the right option for your needs.

Why Choosing the Right Legal Entity Matters for Dental Practices

A selection of strategic legal entities provides the groundwork for financial security and professional success. The right entity shields personal assets, streamlines tax obligations, and supports future growth. A few reasons why choosing the right legal entity is so important for dental practices include:

• Tax Efficiency: The chosen structure can influence how you report income, deductions, and credits. Proper structuring helps minimize tax burdens, resulting in more resources to reinvest in technology, staff training, or patient outreach.
• Liability Protection: Certain entities offer limited liability, safeguarding personal assets from business debts. This peace of mind is invaluable in an industry where malpractice claims or unexpected financial strains can occur.
• Ownership Flexibility: Some entities allow multiple owners or investors, fostering collaboration and scalability. Entity choice matters if you plan to bring on partners or eventually sell the practice.
• Easier Succession Planning: With the right entity, passing your practice on to a successor can be smoother. Reducing legal hurdles ensures patients continue to receive care without interruption.
• Professional Image and Credibility: Certain entities, like professional corporations, signal higher professionalism. Patients and partners may perceive your practice as more established and trustworthy.

Ultimately, the right legal entity prepares you for growth, resilience, and long-term prosperity. By aligning legal structure with your practice’s vision, you establish a stable foundation for enduring success.

Sole Proprietorship: Pros and Cons for Dentists

A sole proprietorship is the simplest form of business ownership. It requires no formal legal filing, and the owner retains complete control. All income flows directly to the proprietor, who reports it on their personal tax return. However, the owner is personally liable for all debts, which can be a significant risk. 

Pros:

1. Easy Setup: Minimal paperwork and no complex legal filings mean you can start operating quickly. This simplicity appeals to dentists opening a practice for the first time.
2. Direct Control: As the sole decision-maker, you have full authority over every aspect of your practice. This autonomy fosters rapid decision-making and responsiveness to patient needs.
3. Straightforward Taxation: Profits are taxed once on your return, avoiding the double taxation seen in some entities. This reduces administrative burdens and can lower overall tax costs.
4. Flexible Decision-Making: With no partners to consult, you can implement changes rapidly. Whether adjusting office hours or investing in new equipment, agility enhances competitive advantage.
5. Low Administrative Costs: Without corporate formalities, you save on administrative and legal fees. This cost-effectiveness is attractive for smaller practices with limited budgets.

Cons:

1. Unlimited Liability: You are personally responsible for business debts and liabilities. This puts your personal savings, home, and other assets at risk in case of malpractice or financial challenges.
2. Limited Access to Capital: Securing large loans or investments can be challenging without partners or investors. This may restrict your practice’s growth or ability to expand into new services.
3. Lack of Continuity: If something happens to you, the dental practice may not easily continue operating. This vulnerability can affect patient care and staff stability in the long term.

General Partnership: When It Works and When It Doesn’t

A general partnership involves two or more dentists sharing ownership, profits, and responsibilities. It works best when partners bring complementary skills, shared values, and a mutual vision for patient care. Partnerships can facilitate resource sharing, co-management of expenses, and collaborative decision-making. If done right, a general partnership enables a stable team environment that can foster patient trust and loyalty.

However, it doesn’t work when partners have misaligned goals, differing ethical standards, or incompatible management styles. Conflict may arise over financial distributions, hiring decisions, or long-term strategies. These issues can harm patient care, damage the practice’s reputation, and even lead to legal disputes. Without a clear partnership agreement and ongoing communication, a general partnership can become more of a liability than an asset.

Limited Liability Company (LLC): A Popular Choice for Dental Practices

A limited liability company (LLC) combines elements of corporations and partnerships, offering personal asset protection and flexible taxation. Many dentists choose an LLC for its balance between simplicity and liability protection. Profits pass through to owners, avoiding double taxation, and the entity itself is relatively easy to maintain. LLCs are also known for adaptability, allowing dental practices to scale and evolve.

Forming an LLC requires adherence to state regulations and periodic filings despite its many benefits. Dentists should work with legal counsel to ensure compliance and maintain the entity’s good standing. Owners must also clearly define roles, responsibilities, and profit-sharing arrangements in the operating agreement.

Professional Corporation (PC): Key Features and Benefits

A professional corporation (PC) is a corporation formed by licensed professionals, including dentists. It allows these professionals to offer services under a corporate umbrella, providing liability protection and credibility. It’s often considered a preferred option for health-related industries, where regulatory compliance is paramount. A few key features include:

• Enhanced Professional Image: Operating as a PC can enhance your reputation by signaling a commitment to high standards. This perceived credibility may attract patients seeking reliable, expert care.
• Limited Personal Liability: PCs protect owners from personal liability for the corporation’s debts. In the event of malpractice claims, your personal assets remain shielded.
• Tax Advantages: PCs can sometimes offer beneficial tax treatment, including deductible benefits for owners. However, consulting a tax professional to optimize these advantages is essential.
• Continuity of Practice: As a separate legal entity, a PC can continue operating even if ownership changes. This stability ensures that patient care remains uninterrupted.
• Regulatory Compliance: PCs often have stringent requirements that align with professional licensing standards. Meeting these criteria ensures your practice adheres to industry regulations and ethical guidelines.

S Corporation: Tax Benefits and Limitations for Dentists

An S corporation provides a framework for transferring profits, losses, and deductions to shareholders without incurring corporate-level taxes. This can reduce the overall tax burden, leaving more resources available to invest in patient care, equipment upgrades, or marketing initiatives. Many dentists appreciate the simplicity and tax benefits of S corporations. However, maintaining S corporation status requires meeting certain eligibility criteria, including limits on the number and type of shareholders.

Despite these benefits, S corporations have limitations. For example, they can’t have foreign shareholders or multiple classes of stock. Certain deductions may also be restricted, and compliance with IRS regulations is crucial.

C Corporation: When It Makes Sense for Dental Practices

A C corporation is a legal entity separate from its owners, providing robust liability protection. It can raise capital by issuing shares, making it attractive for dentists with ambitious expansion plans. Unlike pass-through entities, profits are taxed at the corporate level, and distributions (dividends) are taxed again on the individual level. This double taxation can be a drawback if not managed strategically.

However, C corporations can still be beneficial when a practice anticipates substantial growth, multiple shareholders, or international expansion. Strategic tax planning may offset the impact of double taxation. Furthermore, C corporations have well-established corporate governance structures, lending credibility and attracting investors.

Comparing Legal Entities: Factors to Consider for Your Dental Office

• Liability Protection: Different entities offer varying degrees of personal asset protection. Ensuring robust liability coverage gives you peace of mind in a litigious environment.
• Tax Implications: Each structure has its own tax treatment, which influences how much revenue is retained. A thorough tax analysis can enhance profitability.
• Administrative Complexity: Corporations and PCs have more formalities than sole proprietorships or LLCs. Balancing complexity with benefits helps maintain smooth operations.
• Ownership Flexibility: Consider whether you plan to bring on partners or investors. Entities like LLCs and certain corporations offer more flexible ownership structures.
• Growth and Succession Planning: Entity choice can ease the process if you anticipate expanding or transitioning ownership later. A structure that supports long-term strategies simplifies future changes.
• Professional Regulations: Certain entities, like PCs, must meet industry-specific requirements. Compliance ensures you uphold licensing standards and ethical guidelines.
• Brand Perception and Credibility: Patients and peers may perceive some entities as more professional or stable. Choosing the right structure can improve public perception.

Contact Dental & Medical Counsel for Help Choosing the Right Legal Entity

Establishing the right legal entity is critical to securing your dental practice’s future. At Dental & Medical Counsel, we offer industry-specific knowledge and strategic guidance. Our dental lawyer can help you choose the right legal entity for your needs. Contact us today for help and guidance to ensure you choose the right legal entity for your dental practice.

Frequently Asked Questions

Q: Why is choosing the right legal entity important for my dental practice?  
A: The legal entity you choose impacts tax efficiency, liability protection, ownership flexibility, and long-term growth. The right structure helps minimize risk, maximize financial benefits, and ensure a smooth transition if you plan to expand or sell your practice.  

Q: What are the benefits of a sole proprietorship for a dental practice?  
A: A sole proprietorship is easy to set up, offers direct control, and has straightforward taxation. However, it also comes with unlimited personal liability and limited access to capital, which can be risky for dentists.  

Q: When does a general partnership work well for dentists?  
A: A general partnership works best when partners share a common vision, complementary skills, and clear financial agreements. Without proper planning, misaligned goals and financial disputes can create challenges.  

Q: Why do many dental practices choose an LLC?  
A: An LLC offers a balance between liability protection and tax flexibility. It shields personal assets while allowing pass-through taxation, making it a popular choice for dentists who want legal protection without excessive administrative burden.  

Q: What are the advantages of forming a professional corporation (PC)?  
A: A PC enhances your professional image, limits personal liability, offers tax advantages, and provides continuity for your practice even if ownership changes. However, PCs must meet strict regulatory requirements.  

Q: How can an S corporation benefit my dental practice?  
A: An S corporation allows pass-through taxation, helping dentists reduce their tax burden. However, it has restrictions on ownership and requires compliance with IRS regulations to maintain its status.  

Q: When does a C corporation make sense for a dental practice?  
A: A C corporation is beneficial for large practices with multiple owners or expansion plans. It provides strong liability protection and investment opportunities but is subject to double taxation.  

Q: What factors should I consider when comparing legal entities?  
A: Key considerations include liability protection, tax implications, administrative complexity, ownership flexibility, growth potential, compliance with regulations, and professional credibility.  

Q: Can I change my legal entity later if my practice grows?  
A: Yes, but restructuring a business entity can be complex and may have tax and legal implications. It’s best to choose the right structure from the start with guidance from a dental attorney.  

Q: How can Dental & Medical Counsel help me choose the right entity?  
A: Our team provides tailored legal advice for dental professionals, helping you navigate tax, liability, and operational concerns to select the best entity for your practice’s success. Contact us today for expert guidance.

About the Author

At Dental & Medical Counsel, we've been instrumental in realizing the practice goals of countless dentists. Whether you're looking to purchase, launch, or sell a dental practice, our expertise is your guide. Beyond the initial stages, we're committed to ensuring your dental practice remains legally compliant.

We provide comprehensive support, including employment law protections, dental contract reviews, and assistance with dental employment agreements. Additionally, we specialize in incorporating dental practices and securing trademarks. And for long-term planning, our services extend to helping dentists with succession and estate planning. Trust us to be your partner in every step of your dental practice journey.

About Ali Oromchian, Esq.

Your Dental Lawyer

Ali Oromchian, JD, LL.M. is the founding attorney of the Dental & Medical Counsel, PC law firm and is renowned for his expertise in legal matters

Ali Oromchian, JD, LL.M., is a leading legal authority in dental law and the founding attorney of Dental & Medical Counsel, PC, with over two decades of experience. His deep connection to dentistry comes from his wife's nearly two-decade-long career as a pediatric dentist. 

This personal insight fuels his dedication to empowering dentists to navigate their legal challenges and achieve their practice goals. In doing so, Ali has helped thousands of doctors open their practices while maintaining legal compliance. 

Ali is frequently quoted and contributes articles to dental publications, including the California Dental Society, Progressive Dentist, Progressive Orthodontists, Dentistry Today, Dentaltown, and The New Dentist magazines, further showcasing his commitment to the dental community.