By Dan Schulte, J.D.
MDA Legal Counsel
From the June 2012 issue of the Journal
Question: At a recent society meeting, several of my colleagues were discussing incorporation. Is it best for dentists to be incorporated? Would the same reasoning apply to a solo practitioner?
Answer: Practicing in a professional corporation or a limited liability company is generally preferable to practicing in a partnership or sole proprietorship. Although there are subtle differences, the primary benefits of operating as a professional corporation or a professional limited liability company are essentially the same.
A professional corporation provides protection against vicarious liability with respect to malpractice claims. That is, a dentist is not personally liable for the malpractice of another dentist practicing in the same professional corporation. In addition, dentists are not personally liable for non-malpractice actions, such as accounts payable, lease obligations, or other debts, breach of contract claims, etc. Only the professional corporation or professional limited liability company would be liable for these non-malpractice obligations. Practicing in a partnership or sole proprietorship does not provide any such insulation from these non-malpractice obligations.
A professional corporation provides more flexibility with respect to retirement plans and other fringe benefit opportunities. Health insurance premiums are fully deductible. Through the use of pension plans, profit sharing plans, and/or 401(k) plans, significant amounts each year (approximately $50,000 — consult your tax adviser) may be deferred from tax until retirement. A corporate retirement plan may also contain loan provisions and provide for matching contributions in a 401(k) program. Unincorporated dentists are limited to SEP plans and IRAs, which do not provide as much opportunity or flexibility as is available in the corporate setting.
A professional corporation may be taxed either as a “C” corporation, with its own corporate level tax, or as an “S” corporation, with flow-through tax treatment to the shareholder dentist(s). Whether a professional corporation elects to be taxed as a “C” corporation or an “S” corporation should be determined by the professional corporation’s tax adviser. A professional corporation files its own tax return and the dentist shareholders receive wages that are reported to them on a W-2 form. The dentist-shareholders’ individual income tax returns only show the wage income. In a sole proprietorship, all practice income and expenses must be shown on Schedule C of the dentist’s individual income tax return and it is generally thought by tax practitioners that individual tax returns that contain Schedule C are the most highly audited income tax returns.
The costs associated with incorporating along with the ongoing costs for professional fees and filing reports and tax returns are not significant, and the liability protection and other benefits of practicing in a professional corporation or a professional limited liability company greatly outweigh these costs.
The liability protection available by practicing in a professional corporation is the same that is applicable to a sole practitioner, with one exception: There is no elimination of vicarious liability. However, this is a meaningless distinction since a sole practitioner by definition has no associates and therefore can have no vicarious liability. Personal liability protection in non-malpractice actions does not exist, and the tax, retirement, and fringe benefit attributes of a professional corporation may not apply equally to a sole practitioner.