When forming your dental practice, there are several choices in structuring your business:
- Sole Proprietorship
- Partnership
- Corporation
- Professional Limited Liability Company
We encourage you to discuss these options with your attorney and CPA.
The sole proprietorship is the simplest and least complex option. The dentist conducts business in their name and uses their social security number for tax purposes. If you use a practice name, you denote such as DBA, meaning “doing business as.”
The disadvantage of a sole proprietorship includes personal liability for business actions, including business debts. Therefore, it is common for dentists to form corporations or professional limited liability companies.
A Professional Limited Liability Company is a company formed to provide professional services. The entity is created through the Secretary of State website by filing the Articles of Organization.
The PLLC is one of my preferred entities for dental practices. Recordkeeping is less extensive compared to a corporation. Owners are referred to as “members.” Members are shielded from one another’s malpractice. Like a corporation, the PLLC protects personal assets from business liabilities (unless the dentist personally guarantees a loan).
Single-Member vs. Multi-Member PLLCs
A single-member PLLC is common for solo dentists. A multi-member PLLC is appropriate for multiple owners. In this scenario, an operating agreement is critical and functions like a partnership agreement. Never rely on oral communications or a vague template you found online. We spend time with clients determining the roles and responsibilities of the owners and if decisions are made jointly or by a managing member.
Owners who work in the practice may also have an employment agreement with the PLLC to minimize any issues related to compensation for services provided versus owners’ distributions of profit.
Importance of an Operating Agreement
We spend time with owners to determine the roles and responsibilities of the members to create an agreement. PLLCs refer to this document as an operating agreement. Understanding and capturing these responsibilities in writing contributes to a healthy business relationship. Preserve your friendship and maintain your agreements in writing. Define how decisions are made.
Discuss in the operating agreement a buy-out provision or what you will do if one of the owners dies. Granted- you go into business thinking this is a forever venture into the world of success and profitability, but the reality is you need a backup plan in case it does not work out.
Therefore, a good understanding of what the terms in the agreement actually mean and how it affects your ownership interest is critical, especially if you end up “divorcing” your business partner.
It’s much easier to go into business with other individuals but complicated to get out of it. This makes operating agreements important to dental practice law.
A corporation is formed under state law by filing articles of incorporation with the state. Like a PLLC, a corporation separates personal assets from company assets. Corps must maintain a copy of their bylaws, meeting minutes, and all corporate documents. There are S corps and C corps.
With S Corps, profits and some losses pass through to shareholders, who pay taxes on them at their personal income tax rate. S corps file an information return with the IRS, not an income tax return.
With C Corps, profits and losses stay in the company, which files its own income tax return and pays taxes at the corporate income tax rate. C corps are taxed as separate taxable entities.