AUTHOR: The Dental CFO
May 01, 2023
When you open your dental practice, choosing a business entity structure is one of your most important decisions. Each entity structure is unique and has benefits and downsides. This guide breaks down how each structured entity works and what it means for your dental practice.
What Is an Entity Structure?
Your business entity structure is how your business is formed and filed with the state and federal government. It determines how your practice will be taxed, its liability protection, and its ownership structure.
Entity structuring should involve careful thought about where your business is now as you’re starting and how you think it will grow.
Why Is Entity Selection Important?
Your entity structure affects every part of your practice’s operations. For example, corporate entity structure determines liability and the separation of personal and business assets.
Your entity structure will impact how you raise capital. And if you want to expand your practice or take on additional owners, you’ll want to have the proper framework in place.
Types of Entity Structures
There are five primary forms of business entity structure. Each is unique in its advantages and disadvantages. In addition, some practices may change their business structure as the organization evolves.
A sole proprietorship is the easiest and simplest form of business structure. Its only requirement is that you operate a business in some capacity. As the name suggests, a sole proprietorship entity structure is managed by one owner.
Sole proprietorships are great for straightforward, low-risk businesses, but they can come with risks. Since no formal business entity is established, there’s no separation between personal and business assets. If someone pursues legal action against a sole proprietor business, they can also seek damages from the individual’s personal wealth.
Additionally, sole proprietorships are taxed based on the income of the individual. They must pay estimated quarterly taxes and then file tax returns based on their annual income.
It’s possible to have a sole proprietorship limited liability company (LLC) entity structure. You can maintain ownership control while getting protection for your personal assets.
Partnerships are another form of business entity structure. Instead of a sole owner who assumes all risk associated with operating the company, partnerships have multiple owners who each play a role in the organization.
The legal entity structure of partnerships can take two forms: a limited partnership (LP) or a limited liability partnership (LLP). These structures are popular with businesses like accountants or attorneys with multiple partners.
An LP has one general partner with unlimited liability. All other owners have limited liability. Limited liability partners may have less input in the business since they’re not assuming as much risk. Those terms should be explained in the partnership agreement. The general partner must also pay self-employment taxes.
A PPL spreads risk equally among the partners. This entity structure protects owners from excessive liability and any debts the other partners assume.
A partnership can be an excellent business entity structure for a dental practice. If there’s another dentist you work well with and who shares your values, partnering together in business can allow you to take on more patients and expand.
You may also find value in working with a partner who’s not a dentist. If they have financial expertise and understand the industry, a business partner can offer a complementary skill set to help you manage and grow the practice.
Limited Liability Company (LLC)
One of the most popular business entity structures is a limited liability company (LLC). You’ve probably seen the acronym LLC included in the naming conventions of many businesses.
It’s commonly used because it blends the advantages of a partnership and corporate business structures. For example, an LLC allows you to protect your personal assets if your practice faces lawsuits or bankruptcy. In addition, it limits your risk, unlike a sole proprietorship.
LLCs can involve partners or just one person. In some states, LLCs have time limitations, or there may be requirements around partners joining or leaving the business.
If you form an LLC, you won’t be taxed as a corporation. Instead, the taxes will pass through to your personal income and will be based on the profits of the practice. You’ll also have to pay estimated quarterly taxes as a self-employed person.
Also known as a C corp, a corporate entity structure is unique because a corporation is an entity all on its own. So far, all the other structures we’ve covered depend on an owner or partners to form the business. In a C corp, shareholders or owners, can come and go, but the company lives on beyond their involvement.
Because of this, a C corp offers much stronger protection than other types of business structures. Corporations are separate from their owners. They’re taxed based on their profits; if they pay dividends, they may also be taxed on those.
That said, corporations are more complex than other entity structures and require extensive record-keeping and reporting. Some may have a board of directors to oversee governance.
A C corporation’s benefit is in its ability to scale and raise money through stock sales or private equity.
An S corporation, or S corp, is similar to a C corp but is exempt from double taxation. Instead of paying corporate taxes, an S corporation’s profits and losses are passed off to the owner’s personal income.
Like a C corp, an S corporation’s life is independent of the owner. This means that if the owner sells their shares or leaves the business, it continues operating.
If you want to create an S corp, you must file a form requesting S corporation status with the IRS. Each state treats S corporations differently (though many follow the same guidelines as the federal government), so you’ll want to research and see if this is the best entity structure for your practice.
Factors to Consider When Choosing an Entity Structure
Your business entity structure will impact how your practice operates daily. It plays a role in how you’re taxed, the method by which you report income, and the protection you have against legal action.
When choosing a corporate entity structure, it’s important to look beyond the first months and years of your practice. Think deeply about your goals and where you envision your practice going.
Are you planning to take on partners in your business? You may want to consider a partnership-structured entity. If you think you’ll be the sole owner for several years, an LLC could be your best path.
Alternatively, there may be tax advantages to forming an S corporation. Or if you have extensive growth plans, a C corporation could be your best option for raising money and bringing in shareholders.
Every business entity structure has pros and cons. Taxes, growth plans, number of owners, and operational flexibility all factor into your decision. There’s no correct answer for every practice. Each business is unique based on the market and needs of the owner.
Choosing the Best Entity Structure for Your Practice
So many factors go into choosing an entity structure for your practice. That’s why we recommend working with a financial professional to help you make the right decision. Guidance from someone who intimately understands the tax and business implications can advise you on the best decision for your needs.
Our team at The Dental CFO partners with dental practice owners during every phase of their business. We have diverse professionals, including CPAs, access to financial planners, and CFO-level experts.
When you work with us, we’ll ask the right questions to understand your practice goals and guide you in creating your business entity structure.
The first step is for us to learn more about you with a free consultation.