Choosing the right business structure is a crucial decision for solo dentists in California. The choice of business entity determines how the dental practice is taxed, the extent of personal liability protection and personal asset protection available to the dentist, and the administrative requirements the dentist will need to manage in operating the dental practice.

A future article titled “What are the Business Structure Options for Two or More Dentists in California?” will discuss the additional options available when two or more dentists start practicing dentistry together, however, for dentists practicing dentistry solo in California, the options are limited to sole proprietorships and California Professional Dental Corporations.

This article provides an overview of the various business structure options available to dentists practicing dentistry solo in California, helping these dentists to make an informed choice that aligns with their professional goals and liability concerns in the most tax efficient format possible.

Executive Summary: Putting the Conclusion First for Busy Dentists

Summary of Practicing Dentistry as a Sole Proprietor

The primary benefit of a sole proprietorship for dentists is its simplicity. There are few legal formalities to establish a sole proprietorship and tax reporting is equally straightforward. However, a sole proprietorship is not a separate legal entity, which means that dentist sole proprietors are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability) against their dental practice. The lack of a separate legal entity also means there is no distinction between personal and professional business assets for dentist sole proprietors, so the debts, liabilities, and legal judgments for which the dentist sole proprietor is liable are satisfied from the personal assets of the dentist.

Summary of Practicing Dentistry with a California Professional Dental Corporation

While inherently more complex than dentist sole proprietorships, the complexity of a California Professional Dental Corporation may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. As a separate legal entity, California Professional Dental Corporations significantly reduce liability risks and are more tax efficient for most dentists. For dentists in high-liability practices, this reduction in risk can be substantial. The separate legal entity status of California Professional Dental Corporations also means there is a distinction between personal and professional business assets for the dentist, meaning the debts, liabilities, and legal judgments against the dental practice are not generally satisfied from the personal assets of the dentist.

Choosing Between a Sole Proprietorship and a California Professional Dental Corporation

For most dentists, the California Professional Dental Corporation is the right chose because the tax benefits coupled with limited liability protection and ability to separate personal assets from professional business assets far outweighs the increased administrative complexity compared to practicing dentistry as a sole proprietorship.

Contact San Diego Corporate Law for Assistance Selecting and Forming the Best Business Structure for Your Dental Practice

Take the next step toward securing the ideal business structure for your dental practice, whether that is a California Professional Dental Corporation or another business structure. Contact the experienced corporate attorneys at San Diego Corporate Law today to schedule a consultation and receive personalized, expert guidance tailored to your needs. Our team is here to help you make informed decisions with confidence.

Practicing Dentistry as a Sole Proprietor

Practicing dentistry as a sole proprietor is the simplest and most straightforward business structure for solo dentists in California. It requires minimal paperwork to set up compared to other business entity options and offers flexibility in managing the dental practice. However, along with these advantages come distinct disadvantages that dentists must consider carefully before considering sole proprietorship as the business structure for their dental practice.

Administrative Requirements of Practicing Dentistry as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing dentistry is the simplicity of establishing a sole proprietorship and the continued simplicity of operating as a sole proprietor.

Sole proprietorships require minimal effort to establish, with few legal formalities involved. Typically, the initial steps of setting up a sole proprietorship include obtaining a local business license to operate legally in the municipal jurisdiction in which the practice will operate and, if applicable, registering a fictitious business name (often referred to as a d/b/a).

Unlike other business structures, there is no need to file complex paperwork or create a formal business entity, which saves both time and money, but as discussed below, there are tradeoffs in exchange for this simplicity.

Taxation of Dentist Sole Proprietors

Tax considerations are a critical aspect to be examined when planning to practice dentistry as a sole proprietor. Sole proprietors are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to dental practices is essential for dentists when choosing a business structure in which to operate their dental practice.

Business Income Taxation When Practicing Dentistry as a Sole Proprietor

For dentist sole proprietors, business income taxation is both simple and straightforward compared to that of other business entities. Sole proprietors report their business income and expenses on Schedule C (Profit or Loss from Business) to their personal income tax return, using Internal Revenue Service Form 1040. This allows dentists to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Dentistry as a Sole Proprietor

While simple and straightforward, taxation of dentist sole proprietors is not tax efficient. One significant consideration for dentist sole proprietors is self-employment tax. Since a sole proprietor does not receive a salary from their business, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate at the time of this writing totaling 15.3% of net profit in addition to federal and state income taxes (however, a sole proprietor can deduct half of the self-employment tax paid as an adjustment on their tax return, which provides some financial relief).

Additional Medicare Tax When Practicing Dentistry as a Sole Proprietor

High-earning dentist sole proprietors may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For dentist sole proprietors filing as single, the threshold is $200,000, while it is $250,000 for dentist sole proprietors filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Sole proprietors must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high-earning dentists to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Dentist Sole Proprietors

Understanding the tax implications of a sole proprietorship is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

Personal Liability Protection and Personal Asset Protection When Practicing Dentistry as a Sole Proprietor

Practicing dentistry as a sole proprietor, while simple, also comes with challenges regarding personal liability protection and asset protection because a sole proprietorship is not a separate legal entity, and thus does not offer a legal distinction between the dentist and the dental practice.

Personal Liability for Dentists When Practicing Dentistry as a Sole Proprietor

One of the primary risks faced by dentist sole proprietors is personal liability. The lack of distinction between the dentist and the dental practice means that the dentist sole proprietor is personally liable for all debts, liabilities, obligations, and legal judgments incurred by the dental practice personally, including claims for professional negligence, better known as malpractice, for errors and omissions.

Personal Asset Protection for Dentists When Practicing Dentistry as Sole Proprietors

The lack of distinction between the dentist and the dental practice that makes personal liability a primary risk to dentist sole proprietors also means that all assets of the dentist, be they strictly personal assets or assets used in the dental practice, are subject to claims by creditors and legal claimants against the personal assets of the dentist (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Dentist Sole Proprietors

The exposure to personal liability for debts, liabilities, obligations, and legal judgments (including those for professional negligence) coupled with the inability to separate personal assets from professional business assets underscores the importance for dentists choosing a business structure for their dental practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Dentistry as a Sole Proprietor

When deciding whether to practice dentistry as a sole proprietor, it is essential to weigh the benefits and drawbacks of this business structure. While dentist sole proprietorships offer simplicity to dentists, dentist sole proprietorships come with significant risks and limitations. The advantages and disadvantages of practicing dentistry as a sole proprietor are compared below together with a recommendation for when a sole proprietorship is the best legal structure for practicing dentistry.

Advantages of Sole Proprietorship for Dentists

The primary benefit of a sole proprietorship for practicing dentistry is its simplicity. There are few legal formalities to establish a sole proprietorship and tax reporting is equally straightforward.

Disadvantages of Sole Proprietorship for Dentists

While sole proprietorships are simple to establish, they carry significant risks and are not tax efficient for most dentists.

A sole proprietorship is not a separate legal entity, which means that dentist sole proprietors are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability). For dentists in high-liability dental practices, this risk can be substantial.

The lack of a separate legal entity also means there is no distinction between personal and professional business assets for dentist sole proprietors, meaning the debts, liabilities, and legal judgments for which the dentist sole proprietor is liable are satisfied from the personal assets of the dentist.

When is a Sole Proprietorship the Right Business Structure for Practicing Dentistry?

A sole proprietorship can be an ideal option for dentists starting small-scale dental practices with the expectation of low net profit and low liability risks. However, before choosing to practice dentistry as a sole proprietor, it is essential to weigh the benefits of simplicity against the risks of personal liability and the future growth of the dental practice. For dentists in high-risk dental practice areas or those who anticipate growth in their dental practice may want to avoid practicing dentistry as a sole proprietorship in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.

For a more detailed understanding of the differences between professional sole proprietorships and California Professional Dental Corporations and when a sole proprietorship is the best choice of business structure for dental practices, see “When Not to Use a California Professional Dental Corporation” for more information.

Practicing Dentistry with a California Professional Dental Corporation

Practicing dentistry with a California Professional Dental Corporation is not as simple or straightforward as practicing dentistry as a sole proprietor, however, a California Professional Dental Corporation provides the tax efficiency, limited liability protection, and separation of personal assets of the dentist from the professional business assets of the dental practice that dentist sole proprietorships lack.

Administrative Requirements of Practicing Dentistry with a California Professional Dental Corporation

In order to enjoy the tax efficiency, limited liability protection, and separation of personal assets a California Professional Dental Corporation provides, dentists are faced with the complexity of establishing a California Professional Dental Corporation. While this formation process is complex, dentists may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for the California Professional Dental Corporation, leaving dentists with essentially the same tasks they would undertake to establish a sole proprietorship. It is also worth noting that legal fees and costs of forming a California Professional Dental Corporation are usually qualified business expenses that are tax deductible.

In addition to the initial formation of a California Professional Dental Corporation, every year after the initial formation of a California Professional Dental Corporation a Statement of Information must be filed with the California Secretary of State and a shareholder and board of directors meeting must be held. Just as with the formation of a California Professional Dental Corporation, San Diego Corporate Law can assist in the annual requirements of practicing dentistry with a California Professional Dental Corporation.

Despite the additional administrative requirements of practicing dentistry with a California Professional Dental Corporation compared to practicing dentistry as a sole proprietorship, an experienced corporate attorney can make the difference in requirements comparable.

For a more detailed understanding of the administrative requirements for forming and maintaining a California Corporation, see “The 7 Steps for Forming a California Professional Dental Corporation” for more information.

Taxation of California Professional Dental Corporations

As with dentist sole proprietorships, tax considerations are a critical aspect to be examined when planning to practice dentistry with a California Professional Dental Corporation. While dentists practicing dentistry with a California Professional Dental Corporation are subject to business income taxation, payroll taxes for wages, and franchise taxes paid to the California Franchise Tax Board, dentists practicing dentistry with a California Professional Dental Corporation are not subject to self-employment taxation or additional Medicare taxes. Understanding how these taxes apply to dental practices is essential for dentists choosing a business structure in which to operate their dental practices.

Business Income Taxation When Practicing Dentistry with a California Professional Dental Corporation

A California Professional Dental Corporation is by default taxed as a personal service corporation (sometimes referred to as a professional service corporation), which is essentially a C Corporation (commonly referred to as a C-Corp) wherein corporate taxes applied to corporate profits are taxed directly at the federal and state levels at the corporate income tax rate, and any distributed dividends are subject to taxation again against the individuals receiving the dividends (referred to as “double taxation”). However, a California Professional Dental Corporation may (and almost always should) elect to be treated as an S Corporation (commonly referred to as an S-Corp), which fundamentally changes how income is taxed. This article will focus on S Corporation taxation of California Professional Dental Corporations.

Electing S Corporation status alters the tax treatment by enabling pass-through taxation. This means the profits and losses of the California Professional Dental Corporation after payment of a reasonable salary to the dentist are passed directly to the dentist as the shareholder who in turn reports those profits on their personal income tax returns to pay federal income tax and state income tax on the net profit of the California Professional Dental Corporation to pay personal income tax of the net profits of the dental practice.

For more information about the election of S Corporation status for a California Professional Dental Corporation, see “Can a California Professional Dental Corporation Be an S-Corp?” for more information.

Self-Employment Tax When Practicing Dentistry with a California Professional Dental Corporation

Unlike dentist sole proprietorships, which require the dentist sole proprietor to pay self-employment tax on the entire net profit of the professional practice, the dentist-shareholder of a California Professional Dental Corporation is not subject to self-employment taxes.

Instead of self-employment taxes on the entire net profit of the dental practice, with a California Professional Dental Corporation employee and employer contributions to payroll tax are only paid on the reasonable salary of the dentist. While the sum of the employee and employer contributions total 15.3% (the same percentage as self-employment tax), the calculation of the tax is based upon the reasonable salary of the dentist only and not the net profit of the California Professional Dental Corporation, which may result in significant annual tax savings compared to a sole proprietorship.

Additional Medicare Tax When Practicing Dentistry with a California Professional Dental Corporation

As discussed above for dentist sole proprietorships, the Additional Medicare Tax is an extra 0.9% tax applied to earned income exceeding certain thresholds. However, because the Additional Medicare Tax is only applied to earned income and the net profit of a California Professional Dental Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to dentists practicing dentistry with a California Professional Dental Corporation if the reasonable salary of the dentist exceeded the thresholds, meaning for all intents and purposes, practicing dentistry with a California Professional Dental Corporation does not subject dentists to the Additional Medicare Tax.

Annual Franchise Tax for California Professional Dental Corporations

California Professional Dental Corporations must pay an annual franchise tax that dentist sole proprietorships do not pay. The franchise tax paid by a California Professional Dental Corporation taxed as an S Corporation is 1.5% of net profit with a minimum of $800 annually. While this is a tax not paid by dentist sole proprietorships, the annual franchise tax is very small in comparison to self-employment taxes and the Additional Medicare Taxes paid by dentist sole proprietors.

Conclusions About Taxation of California Professional Dental Corporations

Understanding the tax benefits of a California Professional Dental Corporation is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

For a more detailed understanding of the taxation of California Professional Dental Corporations, see “What Tax Benefits Does a California Professional Dental Corporation Provide?” for more information.

Personal Liability Protection and Personal Asset Protection When Practicing Dentistry with a California Professional Dental Corporation

Practicing dentistry with a California Professional Dental Corporation, while more complex than practicing dentistry as a sole proprietorship, overcomes many of the personal liability protection and asset protection shortcomings of dentist sole proprietorships. A California Professional Dental Corporation is a separate legal entity distinct from the dentist, thus offering a legal distinction between the dentist and the dental practice as well as personal and business assets of the dentist.

Personal Liability Protection for Dentists When Practicing Dentistry with a California Professional Dental Corporation

Practicing dentistry with a California Professional Dental Corporation resolves most of the risks faced by dentist sole proprietors for personal liability. California Professional Dental Corporations provide a separate legal entity distinct from the dentist, meaning the dentist is generally not personally liable for the debts, liabilities, obligations, and legal judgments incurred by the dental practice.

Under California law, claims for professional negligence, better known as malpractice, for errors and omissions of dentists are personal to the dentists and not shielded by the existence of the California Professional Dental Corporation, however, malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the dentist from this risk.

Personal Asset Protection for Dentists When Practicing Dentistry with a California Professional Dental Corporation

The separate legal entity and distinction between the dentist and the dental practice provided by a California Professional Dental Corporation means that, unlike a sole proprietorship, the California Professional Dental Corporation separates the personal assets of the dentist from professional business assets of the dental practice. Therefore, claims by creditors and legal claimants against the California Professional Dental Corporation are generally limited to the professional business assets of the California Professional Dental Corporation and are not satisfied against the personal assets (such as homes, bank accounts, investments, and other property) of the dentist.

Conclusions About Personal Liability and Asset Protection When Practicing Dentistry with a California Professional Dental Corporation

The limitation of personal liability for debts, liabilities, obligations, and legal judgments against the California Professional Dental Corporation coupled with the ability to separate personal assets from professional business assets makes the use of a California Professional Dental Corporation the choice for dentists who wish to limit their personal liability and protect their personal wealth and future earnings from most claims arising out of their dental practice.

For a more detailed understanding of the liability protection and asset protection of California Professional Dental Corporations, see “What Liability Protection Does a California Professional Dental Corporation Provide?” for more information.

Conclusions About Practicing Dentistry with a California Professional Dental Corporation

When deciding if practicing dentistry as a California Professional Dental Corporation is worth the additional cost and administrative requirements, it is essential to weigh the benefits and drawbacks of this business structure. While California Professional Dental Corporations are more complex, California Professional Dental Corporations resolve many of the significant risks and limitations inherent to practicing dentistry as a sole proprietorship. The advantages and disadvantages of operating with a California Professional Dental Corporation are compared below together with a recommendation for when a California Professional Dental Corporation is the best legal structure for practicing dentistry.

Advantages of California Professional Dental Corporations

While practicing dentistry as a sole proprietorship is simple to establish, doing so carries significant risks and is not tax efficient for most dentistry. California Professional Dental Corporations significantly reduce liability risks and are more tax efficient for most dentistry.

A California Professional Dental Corporation is a separate legal entity, which means the dentist is generally shielded from personally liable for debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability). For dentists in high-liability dental practices, this reduction in risk can be substantial.

The separate legal entity status also means there is a distinction between personal and professional business assets for dentists, meaning the debts, liabilities, and legal judgments against their dental practice are not generally satisfied from the personal assets of the dentist.

Disadvantages of California Professional Dental Corporations

The primary benefit of a sole proprietorship is its simplicity, and in turn the primary disadvantage of a California Professional Dental Corporation is the relative complexity of formation and operation. However, dentists may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for establishing and maintaining the California Professional Dental Corporation, leaving these dentists with essentially the same tasks they would undertake to establish and maintain a sole proprietorship.

When is a California Professional Dental Corporation the Right Business Structure for Practicing Dentistry?

A California Professional Dental Corporation can be an ideal option for dentists starting dental practices based upon the tax efficiency, limited liability protection, and separation of personal assets from professional business assets that California Professional Dental Corporations provide. Small-scale dental practices with the expectation of revenue growth can benefit from starting as a California Professional Dental Corporation to avoid the future need to reestablish the dental practice as revenue grows. Similarly, small-scale dental practices in high-risk practice areas may benefit from the limited liability protection and separation of personal assets from professional business assets provided by a California Professional Dental Corporation regardless of revenue or profitability.

For a more detailed understanding of the differences between dentist sole proprietorships and California Professional Dental Corporations, and when a California Professional Corporation is the best choice of business structure for a professional practice, see “When to Use a California Professional Dental Corporation” and “Sole Proprietorship vs Professional Dental Corporation in California” for more information.

Dentists in California May Not Practice Dentistry as a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)

A The experienced corporate attorneys at San Diego Corporate Law are frequently asked about limited liability companies and professional limited liability companies, so this topic will be briefly discussed here.

California law explicitly prohibits dentists from operating their practices as Limited Liability Companies (LLCs) or Professional Limited Liability Companies (PLLCs). This prohibition may be found in California Corporations Code Section 17701.04(e), which reads:

“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”

Instead, California requires dentists who wish to operate in corporate form to utilize other types of business entities, such as California Professional Dental Corporations.

For a more detailed understanding of the prohibition on the use of LLCs for dental practices in California, see “Can a Dentist Practice Dentistry Using a California LLC?” and “Can I Use a PLLC to Practice Dentistry in California?” and for more information.

If an LLC or PLLC is currently being used for a dental practice in California, see “10 Steps to Convert LLC to Professional Dental Corporation in California” and “Four Reasons Not to Convert LLC to Professional Dental Corporation in California” or “12 Steps to Convert a PLLC to a California Professional Dental Corporation” and “Four Reasons Not to Convert Foreign LLC or PLLC to a California Professional Dental Corporation” for more information about bringing the professional practice into compliance with California law.