After part I of this topic, we now have a foundation regarding entities. In this section we will talk about the pros and cons and current trends.
Generally speaking, one of the pros of forming an entity (LLC, S-corp or C-corp) is for legal protection. The legal protection is designed to protect your personal assets if there is a lawsuit brought against a doctor for things relating to their business. But it would also try to protect business assets if there was a suit brought against the doctor personally. This is known as outside-in and inside-out protection.
In addition, there can be some tax advantages to forming an S-corporation or a C-corporation. However, most of the tax advantages of the C-corporation have gone away and there can be some challenges at the end of a C-corporation when a dentist goes to sell their practice. As a result, we are not seeing many dentists form C-corporations these days.
The current trend is typically for LLCs and S-corporations. Although the LLC does not provide any extra tax savings like the S-corporation can, it is generally a little cheaper to start and maintain and it is also easier when there are multiple owners. The LLC allows ease and flexibility of adding partners and allocating profits.
The S-corporation does not always do as well with multiple partners, but it has the potential to create some tax savings. The tax savings comes in the form of reduced FICA tax when the shareholder of the S-corp receives S-corp income and distributions; these items are not subject to FICA tax. Care needs to be taken to ensure you are also drawing a fair salary as an employee, but assuming you are, then you can gain some tax savings by taking out S-distributions or dividends.
To decide on an entity you can certainly do some reading and research. However, no amount of research and reading can beat the value of sitting down with a knowledgeable professional who can walk you through your options, help you evaluate your need and match you up with the best entity for you and your practice.
Feel free to contact us if you are interested in evaluating your needs and options.