When you open a new dental practice, you will need to decide what legal structure to use for the business. The choice of entity structure can have several critical implications for dental startups, including liability protection, tax consequences, and options for growth and investment.
Common Entity Options for Dental Practices
Dentists have several options for structuring their practices. Some of the most common legal forms for dental practices include:
- Sole proprietorships: Easiest to set up as they require no formation paperwork beyond a “doing business as” certificate, but expose personal assets to business liabilities
- Partnerships: Often used by dentists who collaborate in a practice, but may also expose personal assets to business liability
- Professional limited liability company: Provides both liability protection and flexibility in management structuring and tax options
- Professional corporation: Professional corporations also offer liability protection with specific tax rules
Each state may also have unique rules about the legal structure that a dental practice can take.
Liability Protection and Risk Management
Entity structure can matter for dental startups due to concerns about liability protection and risk management. Legal entity forms that offer limited liability protection, such as PLLCs or professional corporations, can protect an owner’s personal assets from the business’s liabilities. An owner in a limited liability entity only faces the loss of their investment in the practice. However, dental practitioners should recognize that limited liability entities do not shield them from professional liability in a dental malpractice claim. Malpractice liability is personal liability.
Tax Implications of Different Structures
The choice of entity structure for a dental startup can also have tax consequences for practitioners. Sole proprietorships and partnerships operate as pass-through entities, passing the practice’s tax liabilities onto its owners. Professional limited liability companies also operate as pass-through entities by default, but they allow owners to elect corporate tax forms. Finally, professional corporations utilize “double taxation” under Subchapter C, taxing the business’s profits and then imposing an additional tax when owners receive dividends from profits.
Dental practices may also qualify for Subchapter S taxation, which facilitates pass-through taxation. Corporate taxation may also allow dentists who structure their practices as PLLCs or professional corporations to avoid self-employment taxes.
Growth, Investment, and Exit Planning
The legal structure of a dental practice can also have implications for future growth, outside investment, or exit planning for dentists. Some legal structures can simplify the process of bringing on new partners or hiring other dentists as associates and eventually elevating them to partner status. Certain legal forms can also make it easier for dental practices to raise the capital needed to fund ongoing operations or facilitate growth through the opening of new practice locations or the acquisition of strategic partners. A dental practice’s legal form can also help facilitate exits for owners through mergers, acquisitions, or a sale of the business to other dentists or the practice’s associates.
How a Lawyer Helps Dentists Choose Entity Structures
A dental attorney can help practitioners who are launching a new dental practice choose a legal structure for their business by:
- Evaluating state-specific rules that may restrict choices or place requirements for legal structures
- Discussing goals, needs, and concerns to provide advice regarding liability protection, taxes, and regulatory compliance
- Drafting and filing registration paperwork with the state
- Drafting or negotiating governance documents, such as bylaws, partnership or operating agreements, shareholders’ agreements, and buy-sell agreements
Contact Our Firm Today
When you open a dental startup, one of the first matters you will need to address is choosing and setting up the legal structure for your new business. Contact Mahan Law – Dental Attorney today for a free, confidential consultation with a dental lawyer. We’ll explain more about the importance of entity structure when starting a new dental practice. Let us advise you about your options regarding the different types of business structures. Call now.
