Whether you’re about to open a new practice or reevaluating the structure of an existing operation, careful consideration of how to structure your business is paramount to protect the hard-earned fruits of your labor. There are a number of strategies you can employ with the guidance of your attorney that offer the protection of limited liability, mainly, the formation of a business entity. The key questions you must entertain are: (1) What business entities are available for dentists in your state? (2) Of the available options, which option is the most optimal for you?
Limited Liability Company (LLC)
An LLC can be a simple, effective structure for your dental practices depending on your goals. While treatment of an LLC may vary from state to state and may not always be available to dentists, some of the legal and tax benefits remain uniform across the board.
The first thing to know about and LLC is that it is the most basic business structure without many of the formality requirements of corporations. It provides legal protection for your personal assets. As the owner, you enjoy separation and are shielded from the business debts and obligations of your practice. An LLC also provides the flexibility to have as many or as few owners as you’d like. However, you must understand that the entity is called a “limited liability company” and not a “no liability company”. For example, the LLC will not protect you from malpractice claims against you personally. The good news is you likely will have malpractice insurance to cover you in the event of malpractice claims against you.
– Unlike corporations, which we’ll discuss shortly, an LLC provides the benefit of pass-through taxes without the added cost and labor of corporate taxation and accounting. Owners are able to report profits and losses on their individual tax returns and aren’t required to hold annual meetings. The LLC also hs tax flexibility in the sense it can also be taxed as a partnership or, as many of you may opt for, an S-Corporation.
Professional Limited Liability Company (PLLC)
A PLLC shares similar legal advantages of the LLC. However, the distinction resides in the fact some states either require or make available the PLLC for licensed professionals. This is something to consider depending on your personal preferences and whether budgeting for quarterly taxes suits your practice.
Professional Corporation (PC)
A Professional Corporation is another example of a type of business entity available only to a limited number of occupations which require licensing in the states in which they operate. Asset protection remains similar in this type of structure, but unlike an LLC or PLLC a PC may receive similar treatment to a corporation and is thus subject to different tax rules—on the other hand, a PC may be able to claim deductions that other business structures can’t. As an employee of a PC you report the salary you pay yourself on a W-2. Again, a conversation with your attorney and tax advisor can help you plan the best strategy for your unique needs and goals.
Professional Association (PA)
Only a limited number of professions can set up a Professional Association, however it may be another effective strategy in states where dentists may not form an LLC. A PA offers the corporate veil of asset protection as well as an array of tax choices and consequences. While you are still liable for your actions as a professional a PA can protect your practice against the actions or omissions of your associates.
P/LLCs vs. Corporations
LLCs, PLLs, and the types of corporations we discussed all offer the basic advantage of asset protection for your practice. Some of the key advantages of a forming an LLC or a PLLC as opposed to incorporating are pass-through taxation and a reduced need for paperwork and corporate formalities. Incorporating requires annual meetings and you will incur the additional cost of maintaining corporate accounting; however, for some, reporting income on a W-2 may be better suited for their business goals.
In short—there are many options available to as a business owner to plan a legal structure for your practice. Whether you prefer to incorporate or believe you may benefit from an LLC or a PLLC your attorney can help you navigate the laws surrounding the creation of your practice and develop a strategy tailored to your specific business needs and preferences. The important thing is to set up a solid legal framework so that you can practice your art with peace of mind knowing that you’ve prepared for whatever may come.