Before you open your doors for your first patients, you need to decide what type of business structure you want for your dental practice. You may choose to be a sole proprietor, to go into partnership with one or more other licensed dentists, or to form a dental corporation.
This article focuses on corporations. It explains the benefits of forming a corporation, types of corporations available for a dental practice, the role of shareholders, who can be a shareholder, and other legal requirements for opening and maintaining a dental corporation. It is important to note that in some states, you can form a professional limited liability company in lieu of a corporation but it is important that you speak to your CPA and dental attorney before you decide which entity is best for you.
If you are already in business and have not formed your corporate entity, you can now form a corporation, but you will likely need to redo contracts you have with vendors and dental insurance companies. The name of your business might change, and you will need a new tax ID number for the IRS.
Your dental attorney will know the laws of your state. Some states allow dentists to form a Limited Liability Corporation (LLC). In other states such as California, an LLC is not available for dentists, therefore they must incorporate according to the law governing professional corporations. If your state does not allow an LLC for dentists, you will then need to choose between an S corporation or C corporation. A tax professional will advise you on which corporation best meets your needs.
C-Corporations. C-Corporations are taxed at both the corporate and individual levels. The net income of the dental corporation is taxed by both the state and federal government’s corporation tax rates. If shareholders receive dividends, they must report those as income on their personal tax returns. This results in double-taxation.
S-Corporations. Most dental corporations are S-Corporations. Dentists are required to pay themselves wages and to pay self-employment tax, but the taxes can be deducted from their business income. The business income that is not designated as wages can be distributed as bonuses and these funds are not subject to self-employment tax.
There are other tax advantages to S-Corporations, and it is sometimes referred to as a “pass-through” corporation. There are also more business deductions that can be made which also lower the tax liability for the corporation.
There are quite a few financial benefits of forming a corporation for your dental practice. Some advantages include:
Protecting Personal Assets. If there are debts against the dental corporation, the dentist’s personal assets cannot be used to pay those debts. If there are lawsuits against the dental practice and a plaintiff wins an award, the award must be paid with assets of the dental practice.
One example of this is if someone slips and falls on the premises of the dental practice and subsequently sues for their injuries and wins an award or enters into a settlement, the funds must come from the corporation. The dentist’s personal assets are protected. The same is true if the dental corporation is sued for breach of contract. Dentists who are shareholders in the dental corporation are only liable up to the maximum of their investment in the practice. Their personal assets are protected.
It is imperative that the dental corporation follows all the laws regarding forming and maintaining corporations. Otherwise, the person suing may “pierce the corporate veil” of the corporation. This means the court may go around the corporation and allow collection of the award to come from the personal assets of one or more dentists involved.
There are a few exceptions to the rule that personal assets are protected. In general, if a person wins a case for malpractice against a defendant who is one of the dentists in the corporation, that dentist’s personal assets are not protected. The personal assets of the other dentists in the corporations are protected. They may lose their investment in the dental corporation, but their own personal assets cannot be reached.
The same principle applies if one dentist is found liable for fraud. His or her personal assets may be reached in a settlement or jury award, but the assets of the other shareholders will be protected.
Tax Advantages. Although a corporation may be taxed at a higher rate than a sole proprietorship or partnership, there are more deductions that can be made from the taxes of the corporation. This almost always results in the corporation paying less taxes than a sole proprietorship or partnership.
Credit Application Benefits. There are times when a dental corporation applies for credit and the lender, whether a private or a government agency, may ask for a Certificate of Good Standing. This can be provided by the Secretary of State. You will need to fill out a form and order Business Entities Records, and the Secretary of State will provide a Certificate of Status which shows you are in good standing. Once that is submitted to the lender you may receive preferred rates and other terms, and the debt will not appear on your personal credit report.
Corporation Continues Even After Death or Incapacitation of a Shareholder. When a shareholder dentist dies or becomes incapacitated, the dental corporation can continue with “business as usual.” The remaining shareholder dentists can continue seeing patients without interruption.
State laws in general provide that if the decedent was the major shareholder, the representative of his or her estate may employ other dentists to keep the practice going for up to one year after the death if the Dental Board and patients have been notified. If the decedent dentist’s shares are sold or distributed to other shareholders, this must be done within six months of the dentist’s death.
Choosing a Name for the Corporation. Most state Dental Boards require the name of the corporation to include the name or last name of one or more shareholders, former shareholders, or prospective shareholders, and include the words “dental corporation” or some type of wording or abbreviations that clarify to the public that it is a corporation.
There are provisions for choosing a fictitious name after the dental corporation is created but only if the Dental Board approves it. The fictitious business name must be registered with the county clerk’s office.
The application sent to the state Dental Board must include all dentists who have an ownership interest in the practice, and all of them must be listed as operating at the one address designated on the application. If the dental corporation is going to practice in more than one location, most state dental boards require the dental corporation to obtain a permit from the state Dental Board for each location where the dental corporation maintains a practice.
Filing Articles of Incorporation. In most all states, Articles of Incorporation must be filed with the Secretary of State. On the website of the state's Secretary of State, you will likely find that your state has a form you may use. You may also choose to submit your own Articles. If you submit your own Articles, they must include:
Establishing Shareholders. In most states, a dental corporation may have just one shareholder or an unlimited number of shareholders, including people who are licensed in other professions as long as the number of shares held by non-dentists does not exceed the total number of shares held by the dentists.
Many states allow some who are licensed in other professions to be shareholders in the dental corporation. For example, licensed medical doctors, registered dental assistants, and registered dental hygienists may be shareholders. Your dental attorney will provide you more information on the laws of your specific state relevant to permissible shareholders.
Shareholder Meetings. Dental corporations must hold annual shareholder meetings. Each year, the shareholders elect officers for the next year. Minutes are to be kept of these meeting and all issues presented must be included. The corporation secretary certifies that the minutes are correct. The minutes prove the meeting took place and must be kept where they can be inspected by any shareholder.
Choosing Corporation Officers. The requirements covering corporation directors and officers depends on the size of the dental corporation. The officers needed are:
If there is only one shareholder, that dentist may serve as director, president, and treasurer. If there are two shareholders, both will be directors, and between them, fill the positions of the four required officers.
If a shareholder loses his or her license to practice dentistry, or becomes unqualified to provide professional services, within 90 days of the loss of license or date the shareholder becomes unqualified, the shares must be acquired by another shareholder or licensed dentist. There are serious penalties for violating this section and puts the corporation at risk for no longer being allowed to perform professional services.
Insurance for the Dental Corporation
State laws governing professional corporations generally require a dental corporation to provide adequate insurance that will cover it for claims filed against it by its patients arising out of the rendering of professional services.
Forming a Dental Corporation is beneficial but complicated. You want to be sure you do it right. There are state monetary penalties for failing to meet the legal requirements. At Dental and Medical Counsel, we have years of experience assisting dentists in complying with state laws covering professional corporations. Contact us for a free consultation with dental attorney Ali Oromchian. Find out if forming a dental corporation is the right approach for your business structure.
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