Wednesday, January 01, 1997
by Richard D. Weber, J.D.
MDA Legal Counsel
Published in the January 1997 issue of the Journal
Question: At a recent component 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. The "Dentistry and the Law" article in the September 1993 MDA Journal discussed limited liability companies, which were authorized by legislation effective June 1, 1993. Although there are subtle differences, the primary benefits of operating as a professional corporation or a 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 debts or breach of contract claims, against the corporation. Practicing in a partnership or sole proprietorship does not provide such insulation from personal liability.
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, approximately $30,000 per year may be sheltered and deferred until retirement. A corporate retirement plan may also contain loan provisions and provide for matching contributions in a 401(k) program. Unincorporated dentists may only deduct a portion of their insurance premiums and are limited to Keogh 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. 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 advisor.
A professional corporation files its own tax return and the dentist shareholders receive wages which 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. It is generally thought by tax practitioners that individual tax returns that contain Schedule C are the most highly audited income tax returns.
A possible detriment to practicing in a professional corporation structure would be costs associated with incorporating, along with professional fees and filing additional reports and tax returns. In general, these costs are not significant and the benefits of practicing in a professional corporation or a limited liability company outweigh the additional costs.
The benefits of practicing in a professional corporation structure are applicable to a sole practitioner, except the elimination of vicarious liability, which is a meaningless distinction. Since a sole practitioner has no associates, there can be no vicarious liability. Personal liability protection in non-malpractice actions still exists, and the tax, retirement, and fringe benefit attributes of a professional corporation apply equally to a sole practitioner.