Should you incorporate your dental practice?
By Matt Dickstein
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In this article I answer the question, should you incorporate your dental practice? What are the costs and benefits of forming a dental corporation? It’s a tough question. The answer depends on a balancing of different factors. Most of us suffer information overload not long after starting this analysis. All of the factors start swimming around in our minds and we don’t know what to think.
This article gives you a quick roadmap. The first factor is whether you want limited liability, which is the primary benefit of forming a dental corporation. Next you determine the costs of forming and maintaining a dental corporation. Then you delve into the tax advantages and disadvantages of forming a corporation. Last, you weigh the factors and make a decision.
Benefit – Limited Liability
Limited liability is the primary benefit of incorporating your dental practice. A solo dentist is personally liable for all general debts and liabilities of the practice, including vendor contracts and real property and equipment leases. On the other hand, a shareholder of a corporation is not personally liable for the corporation’s debts (except payroll taxes, workers compensation premiums and related obligations imposed by the government). There is one big exception, however: the dentist is always liable for his or her own professional negligence and the negligence of employees under the dentist’s supervision. Only insurance can mitigate such liability.
Partners Need a Corporation
Practices with more than one dentist should use a dental corporation. The dental corporation not only shields each dentist from general liabilities of the dental corporation (discussed above), but also shields each dentist from liabilities arising from the acts of other dentists in the group. Although two or more dentists can work together as a partnership, this is not your best choice. Partnerships are risky because each dentist is liable for the acts of each other dentist. Incorporation mitigates this risk by protecting against liability from other dentists in the group.
You want the benefits of limited liability. But it costs money – corporations pay franchise taxes and require legal and accounting costs for their organization and maintenance. Worse yet, because dentists are subject to special regulation, you need specialized legal advice. A dentist probably will incur more legal fees than the run-of-the-mill service corporation.
Disclaimer: Consult your accountant about all tax matters. I do not give tax advice. If your accountant disagrees with my opinions below, listen to your accountant, not me.
In my experience, tax analysis causes a lot of confusion. The various and sundry tax advantages and disadvantages of forming a dental corporation all depend on your circumstances, which change from year to year, not to mention the endless changes in tax law. Worse, sometimes you find that after weighing the tax advantages and disadvantages, they all seem to cancel one another out, leaving you with no clear-cut decision.
To sum it up quickly, there are few remaining tax benefits for incorporating a dental practice. Moreover, the few remaining tax benefits work only for “C” corporations (not for “S” corporations). In brief, forming a professional C corporation helps a little with fringe benefits (most notably health insurance) and life insurance, but not much else. On the other hand, incorporation means you must pay the annual franchise tax (explained above).
If after all this analysis you decide to incorporate your dental practice, go to my next article, Legal compliance checklist for a dental corporation.
This article only gives a short roadmap of the issues involved in deciding whether or not to incorporate your dental practice. There is a lot more to this topic than introduced here. Please get competent legal and tax counsel before you form a dental corporation.