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

A recent article titled “What are the Business Structure Options for Solo Dentists in California?” discussed the business structure options available to solo dentists starting a solo dental practice, however, for two or more dentists starting a group dental practice together in California, there are different options available.

This article provides an overview of the various business structure options available to dentists starting a group dental practice in California, helping 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 General Partnership

The primary benefit of a California General Partnership for dentists is its simplicity. There are few legal formalities to establish a California General Partnership and tax reporting is equally straightforward. However, a California General Partnership is not a separate legal entity, which means that dentist partners are jointly and severally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability) and the lack of a separate legal entity also means there is no distinction between personal and professional business assets for dentist partners, meaning the debts, liabilities, and legal judgments for which dentist partners are liable are satisfied from the personal assets of those dentist partners.

Summary of Practicing with a California Professional Corporation

While slightly more complex than California General Partnerships, 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 owners, and owners are not personally liable for acts of malpractice by their co-owners, but they do remain personally liable for their own acts of malpractice.

Choosing Between a California General Partnership and a California Professional Dental Corporation

For most dentists, the California Professional Dental Corporation is the right choice 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 California General Partnership.

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 California General Partnership

Practicing dentistry as a California General Partnership is the simplest and most straightforward business structure for two or more dentists practicing together in California. A California General Partnership 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 a California General Partnership as the business structure for their dental practice.

Administrative Requirements of Practicing Dentistry as a California General Partnership

One of the primary benefits of a California General Partnership for practicing dentistry is the simplicity of establishing a California General Partnership and the continued simplicity of operating as a California General Partnership.

California General Partnerships require minimal effort to establish, but there are legal formalities involved. Typically, the initial steps of setting up a California General Partnership include optionally filing a Certificate of Partnership with the California Secretary of State, entering into a Partnership Agreement between all partners, 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).

Taxation of California General Partnerships for the Practice of Dentistry

Tax considerations are a critical aspect to be examined when planning to practice dentistry as a California General Partnership. California General Partnerships file informational tax returns and partners 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 California General Partnership

California General Partnerships report their business income and expenses on informational tax returns, namely IRS Form 1065 and California Franchise Tax Board Form 565, however a California General Partnership does not pay California or federal income tax on its own net profit. Instead, each partner receives a Schedule K-1 from the IRS Form 1065 tax return reporting their distributive share of profits and losses of the California General Partnership, and each partner in turn reports this on their personal income tax return using Internal Revenue Service Form 1040 and California Franchise Tax Board Form 540 to pay taxes on the net income of the California General Partnership on their personal income tax return at their household personal income tax rate.

Self-Employment Tax When Practicing Dentistry as a California General Partnership

Taxation of the partners of a California General Partnership is not tax efficient. One significant consideration for dentist partners of a California General Partnership is self-employment tax. Since partners of a California General Partnership do not receive a salary from their dental practice, 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 partner of a California General Partnership can deduct half of the self-employment tax paid as an adjustment on their personal tax return, which provides some financial relief.

Additional Medicare Tax When Practicing Dentistry as a California General Partnership

High earning dentist partners of California General Partnerships 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 partners of a California General Partnership filing as single, the threshold is $200,000, while it is $250,000 for dentist partners 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. Partners of California General Partnerships 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 Partners of California General Partnerships

Understanding the tax implications of a California General Partnership 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 California General Partnership

Practicing dentistry as a California General Partnership also comes with challenges regarding personal liability protection and asset protection for partners because a California General Partnership is not a separate legal entity, and thus does not offer a legal distinction between the dentists and the dental practice.

Personal Liability for Dentists When Practicing Dentistry as California General Partnerships

One of the primary risks faced by dentist partners of a California General Partnership is personal liability. The lack of distinction between the dentist partners and the dental California General Partnership professional practice means that each of the dentist partners are jointly and severally 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 California General Partnerships

The lack of distinction between the dentist and the dental practice that makes personal liability a primary risk to dentist partners of a California General Partnership also means that all assets of the dentist partners, 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 dentists (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Dentist Partners of California General Partnerships

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 California General Partnership

When deciding whether to establish a group dental practice as a California General Partnership, it is essential to weigh the benefits and drawbacks of this business structure. While California General Partnerships offer some simplicity to dentist partners, California General Partnerships come with significant risks and limitations. The advantages and disadvantages of operating a California General Partnership are compared below together with a recommendation for when a California General Partnership is the best legal structure for practicing dentistry.

Advantages of California General Partnerships for Dentists

The primary benefit of a California General Partnership is its simplicity. There are relatively few legal formalities to establish a California General Partnership for a group dental practice.

Disadvantages of California General Partnerships for Dentists

While California General Partnerships are simple to establish, they carry significant risks and are not tax efficient for most dentists.

A California General Partnership is not a separate legal entity, which means that dentist partners 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 partners, meaning the debts, liabilities, and legal judgments for which an individual dentist partner of a California General Partnership is liable are satisfied from the personal assets of that dentist partner.

When is a California General Partnership the Right Business Structure for Practicing Dentistry?

A California General Partnership can be an ideal option for two or more dentists joining together to organize a small-scale dental practice with the expectation of low net profit and low liability risks. However, before choosing to practice dentistry as a California General Partnership, it is essential for the dentist partners to weigh the benefits of simplicity against the risks of personal liability and the future growth of the dental practice. Dentist partners in high-risk practice areas or those who anticipate rapid growth may want to avoid practicing dentistry as a California General Partnership 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 California General Partnerships and California Professional Dental Corporations and when a California General Partnership is the best choice of business structure for a professional practice, see “When Not to Use a California Professional Dental Corporation” and “What are the Disadvantages of General Partnerships in California?” 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 California General Partnership, 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 California General Partnerships 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 California General Partnership. 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, and 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, the experienced attorneys at 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 California General Partnership, the right 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 California General Partnerships, 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 at the shareholder level (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, so 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 shareholders who report 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 California General Partnerships, which require the dentist partners to pay self-employment tax on their distributive share of the net profit of the professional practice, the dentist-shareholders of a California Professional Dental Corporation are 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 dentists. 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 salaries of the dentists only and not the net profit of the California Professional Dental Corporation, which may result in significant annual tax savings.

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

As discussed above for dentist California General Partnerships, 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 dentists exceed those 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 California General Partnerships do not pay an annual franchise tax. 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 partners of a California General Partnership, but pales in comparison to the self-employment taxes and the Additional Medicare Taxes paid by dentist partners in California General Partnerships.

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 for two or more professional to practice together 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 California General Partnership, overcomes many of the personal liability protection and asset protection shortcomings of dentist California General Partnerships. A California Professional Dental Corporation is a separate legal entity distinct from the dentists, thus offering a legal distinction between the dentists and the dental practice as well as personal and business assets of the dentists.

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 partners of California General Partnerships for personal liability. California Professional Dental Corporations provide a separate legal entity distinct from the dentist owners, meaning the dentists are 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 those dentists committing acts of malpractice and liability is not shielded by the existence of the California Professional Dental Corporation. California Professional Corporations do shield dentists from the malpractice liabilities created by the other dentists in their dental practice; dentists are only personally liable for their own acts of malpractice. Malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the dentist from this risk of their own acts of malpractice.

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

The separate legal entity and distinction between dentists and the dental practice provided by a California Professional Dental Corporation means that, unlike California General Partnerships, a California Professional Dental Corporation separates the personal assets of the dentists 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 dentists.

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 a 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 California General Partnership. 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 in a group dental practice.

Advantages of California Professional Dental Corporations

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

A California Professional Dental Corporation is a separate legal entity, which means the dentists are generally shielded from personally liable for debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability for the errors and omission of each of the dentists for their own, individual acts of malpractice). 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 business debts, liabilities, and legal judgments against their dental practice are not generally satisfied from the personal assets of the dentists (other than for their own acts of malpractice).

Disadvantages of California Professional Dental Corporations

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 California General Partnership.

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 group dental practices based upon factors such as 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, separation of personal assets from professional business assets of a California Dental Corporation, and for dentists to avoid malpractice liability for the errors and omissions of the other dentists in their group dental practice regardless of revenue or profitability.

For a more detailed understanding of the differences between dentist California General Partnerships and California Professional Dental Corporations, and when a California Professional Dental Corporation is the best choice of business structure for a professional practice, see “When to Use a California Professional Dental Corporation” 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 will be briefly discussed here.

California law explicitly prohibits dentists business operations 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.”

This restriction applies to all licensed professionals for which a California Professional Corporation may be formed. 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 group 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.