I was speaking to a doctor over lunch today and we were laying out a game plan of what to do, when to do it, and prioritizing the list. This dentist has been a client off and on for 15-20 years and I assume that this just never came up. He has two practices and I was creating this list and the first thing I listed was to “begin with the end in mind”. What do you want these two practices to look like in 12 months, 5 years, and 10 years? To make this easier, I was suggesting that he run them completely separate as far as taxes, overhead, expenditures, and all of the numbers. As a follow up question, I asked if they were both the same corporation or were they individual corporations. His comment was a little sheepish (I think maybe this had come up before after all) when he said: “I operate them as a sole proprietorship.” I don’t think my mouth fell open, and I am pretty sure that I didn’t disparage his mom, or say anything untoward, but I was thinking: “Are you crazy?” I definitely believe that having 7 generations of attorneys in my family really made my hair stand on end when I heard he was not incorporated.
I tore up my list. You know, the list showing what to do first, second, third, etc., and started all over. Number one on the new list: Create a corporation for each practice. So let’s start here. Do you need to incorporate? YES and yesterday would have been good.
There are a lot of reasons to incorporate, but the number one reason is that it limits your personal liability, which is not true in partnerships or as a sole proprietor. Currently this young doctor’s assets are exposed from every direction. Having a corporation would create a barrier between business and personal assets. The way he is set up, his entire net worth is in jeopardy. There are 90,000 lawsuits filed in the U.S. every day. With or without merit, anyone can sue anyone for anything, and if you think you are not an attractive target to a patient and a predatory attorney, think again. Yes, you need insurance and asset protection, but your business structure is the first, and some would argue the most important, place to start. Let me take a moment and describe the normal assortment of corporate entities with just a few bullet points.
- The Limited Liability Company (LLC): limited personal liability, separate legal entity, more relaxed filing requirements and documentation. You should consider it to be like a partnership with limited liability. No stock, just own a % of the company. Non-uniform distribution of income is possible.
- Corporate structure: General information about formation and structure;
- Corporations are a legal entities formed under state laws.
- Corporations are owned by shareholders. (stock ownership)
- Shareholders elect a Board of Directors (responsible for overall management) and hires corporate officers (to run daily operations of the corporation). A corporation can have as few as one shareholder who can elect him or herself to the board and can run the daily operations of the corporation. A corporation can be either an S-Corp or C-Corp.
- C Corporations: For large corporations, they are taxed twice: Once when profits are realized and a second time when those profits are passed on to the shareholders (dividends). There is likely no reason for you to consider a C Corp structure for your practice.
- S Corporations: Designed for smaller businesses, like a sole proprietorship or partnership, while still giving you the protection of limited personal liability. This is the entity most often recommended and used in Dentistry. The main benefit to an S-Corp is the ability of its owners to take partner distributions. If your company is an S-Corporation, you have the ability to take upwards of 40% of your income as a partner distribution (the number ranges from 10-40% depending on what your CPA advises). Why would an owner want to take a partner distribution? To minimize taxes.
When a corporation gives partner distributions, the partners receiving that income will avoid paying 1.45% in Medicare taxes AND the corporation will avoid paying a matching 1.45% in Medicare taxes (a match) for a total savings of 2.9% in taxes on the money taken as a partner distribution.
For example, if an owner makes $500,000 and takes $200,000 of that money as a partner distribution, the owner would save $2,900 a year as would the corporation (an expense that gets line-item expensed to each owner) for a total savings of $5,800 in taxes a year per owner. If a business owner takes partner distributions, the partner then will typically have to pay quarterly estimated taxes on that money.
The take away here is you need to incorporate. It’s like wearing a belt and suspenders: You will never be caught with your pants down. This is how you Summit.
Michael Abernathy, DDS