In the world of business formation, the term Dental PLLC, or Dental Professional Limited Liability Company, refers to a special legal business entity that is designed for licensed dentists for rendering professional services. However, navigating the specifics of using a Dental PLLC can be a challenge, particularly as business structure regulations vary from state to state. This article discusses the permissibility of utilizing Dental PLLCs in California, and the alternatives for dental practice owners.

Spoiler Alert: Dentistry Cannot Be Practiced Using Any LLC in California

If you are already practicing dentistry in California as a California LLC or an LLC or PLLC from a state other than California, you should also read this article which includes information about how to get into compliance with California law for your dental practice.

The California Revised Uniform Limited Liability Company Act of the California Corporations Code Prohibits the Use of LLCs for the Provision of Professional Dental Services by Licensed Dentists in California

Use of a California LLC to Render Professional Dental Services in California

Neither a foreign nor a California limited liability company (LLC) may be used to render professional dental services in California. This comes as a surprise to many licensed dentists, as Dental Professional Limited Liability Companies are commonly used to render professional dental services in other states. However, California Corporations Code Section 17701.04(e) answers the question clearly regarding the use of a foreign or California LLC as a business entity for licensed dentists in California:

“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.”

Thus, licensed dentists may not use or form limited liability companies for the provision of professional dental services in California.

Use of a California PLLC to Render Professional Dental Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC to render professional dental services, because nothing in the California Corporations Code differentiates the idea of a California Dental PLLC from the California LLC, there is nothing in California law regarding LLC formation for the provision of professional dental services, and nothing establishes a California Dental PLLC as a business entity that may be formed under California law.

In short, there is no California Dental PLLC as the law currently stands at the time of this writing in 2024, and thus licensed dentists are unable to form a California Dental PLLC for their professional dental services. This is a significant departure from the norm in many other states, where Dental PLLCs are a commonly used business entities for licensed dentists.

Use of a Foreign Dental PLLC to Render Professional Dental Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC by licensed dentists to render professional dental services, and because the California Corporations Code does not differentiate between a between a foreign LLC or foreign PLLC for purposes of California Corporations Code Section 17701.04(e), neither a foreign LLC nor a foreign PLLC may be used by licensed dentists to render professional dental services in California.

Professional practices that are structured as Dental PLLCs in other states need to exercise extreme caution when offering professional dental services in California. The prohibition set forth in California Corporations Code Section 17701.04(e) means that out-of-state dental practices operating as Dental PLLCs in their home state may encounter legal restrictions if they wish to offer their professional dental services in California. Therefore, the licensed dentists practicing under these Dental PLLCs in their home states must not use their Dental PLLCs when rendering professional dental services in California and must do so either as a California Sole Proprietorship or California General Partnership by default, or by establishing a https://sdcorporatelaw.com/business-entity/professional-corporation/professional-dental-corporation/, as will be discussed below.

What Business Structure Options Do Dentists Have in California?

As California does not allow the use of California LLCs, foreign LLCs, or foreign Dental PLLCs (and there is no such thing as a California PLLC!) for the provision of professional dental services in the State of California, California licensed dentists seeking to practice dentistry in California must explore choose one of the permissible business structures, as discussed below.

Selecting the best permissible business structure option will depend on the specific professional dental services to be offered and the regulations governing those dental services. In the following subsections, we will introduce the various business entities that are permitted to render professional dental services in California, including Sole Proprietorships, General Partnerships, and Professional Dental Corporations, each of which comes with its own set of advantages and limitations.

A California Licensed Dentist May Practice as a Sole Proprietorship in California

A Sole Proprietorship is a straightforward and uncomplicated business structure that may be utilized by licensed dentists in California. In a Sole Proprietorship, the individual dentist is the sole owner and operator of the dental practice.

Liability Protection for Licensed Dentist Sole Proprietors in California

Sole Proprietorships do not provide their owners with liability protection in California. In this type of business structure, the licensed dentist is personally responsible for all business debts, liabilities, obligations, and all legal judgments against the dental practice. This means that if the dental practice incurs a debt or is sued, the personal assets of the licensed dentist, such as their home, car, and personal bank accounts, can be used to settle these obligations.

The lack of liability protection is a significant disadvantage of operating a dental practice as a Sole Proprietorship and is a critical factor that a licensed dentist should consider when deciding on the most appropriate business structure for their dental practice in California.

Taxation of Licensed Dentist Sole Proprietors in California

In California, Dentist Sole Proprietorships are subject to pass-through taxation, meaning the business itself is not separately taxed. Instead, the income or loss of the business is passed through to the licensed dentist. The licensed dentist reports business income and expenses on Schedule C of their personal federal income tax return (Form 1040). The net profit or loss is then reported on the personal tax return of the licensed dentist and taxed at individual income tax rates.

In addition to income taxes, a licensed dentist practicing as a Sole Proprietorship in California is also subject to self-employment taxes, which cover Social Security and Medicare taxes. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

At the state level, California has one of the highest state income tax rates in the country, and these rates apply to business income that passes through to the personal tax returns of the licensed dentist practicing as a Sole Proprietorship.

When Should a California Licensed Dentist Practice as a Sole Proprietorship in California?

A California licensed dentist should only consider practicing as a Sole Proprietorship in California when they are starting their dental practice and have limited financial resources, will not have employees, do not expect to grow their practice beyond just a few patients, and have substantial insurance coverage for the liabilities and risks associated with their dental practice.

However, as the dental practice grows, the licensed dentist should reconsider the use of a Sole Proprietorship for their dental practice as revenue increases, before hiring employees, or as professional liabilities increase. Upon the first to occur of increasing revenue, hiring employees, or increases in professional liability, it will be advantageous for the licensed dentist to explore other business structures that offer tax benefits and liability protection.

Two or More California Licensed Dentists Professionals May Practice as a General Partnership in California

A California General Partnership used for a dental practice is a business entity in which two or more licensed dentists join together to provide professional dental services in California. In such a setup, all dentist partners share equal rights and responsibilities in managing the business of the dental practice.

Liability Protection for Dentist General Partners in a California General Partnership

General Partnerships in California do not provide dentist partners with liability protection. This means each dentist partner has joint and several personal liability for all business debts, liabilities, obligations, and all legal judgments against the dental practice, including those incurred by other dentist partners which includes acts of malpractice by the other dentist partners. If the California General Partnership providing professional dental services is sued or incurs debt, the personal assets of each dentist partner, such as their home, vehicles, and personal savings, could be at risk, even if they are not found personally at fault for incurring the debt or committing the act of malpractice.

This lack of liability protection is a considerable drawback for California General Partnerships rendering professional dental services and something California licensed dentists should seriously factor into their decision when considering a California General Partnership for their dental practice in California.

Taxation of General Partnership Dental Practices in California

In California, dental practices structured as General Partnerships are taxed under the pass-through taxation system. This means the California General Partnership itself does not pay income taxes. Instead, the share of the profits or losses of the California General Partnership allocated to each dentist partner passes through to their personal income tax return. The individual dentist partners are responsible for paying federal and state income taxes on their allocated share of the profits of the California General Partnership at their individual income tax rates.

Each dentist partner is also required to pay self-employment taxes, which are Social Security and Medicare taxes for self-employed individuals. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

California General Partnership earnings are also subject to the California state income tax. The state has a progressive income tax system with rates ranging from 1% to 13.3%, depending on the income of the taxpayer. These rates apply to the allocated share of the California General Partnership income allocated to each dentist partner and passed through to their personal tax returns.

When Should California Licensed Dentists Practice as a General Partnership in California?

Based upon the unlimited liability and tax structure of a California General Partnership, a California General Partnership should probably not be considered by licensed dentists practicing dental in California, as there are superior options for a professional practice in California that provide more personal liability protection than a California General Partnership for dental practices.

One or More California Licensed Dentists May Practice Dentistry as a California Professional Dental Corporation in California

California Professional Dental Corporations are specialized forms of professional corporations formed pursuant to the Moscone-Knox Professional Corporation Act of the California Corporations Code and the rules and regulations of the Dental Board of California designed specifically for licensed dentists who seek personal liability protection and tax benefits for their dental practice. A California Professional Dental Corporation is a separate legal entity distinct from its licensed dentists owner(s) and permitted non-dentist owner(s) who are other licensed professionals such as registered dental assistants or licensed dental hygienists, referred to collectively as licensed shareholders, which distinguishes it from a California Sole Proprietorship (which is an individual licensed dentist personally practicing dentistry) or a California General Partnership or California LLP (which is a group of licensed dentists practicing dentistry together).

Liability Protection from a Professional Dental Corporation in California

In a California Professional Dental Corporation, the personal assets of the licensed shareholders are generally protected from business debts, liabilities, obligations, and legal judgments against the California Professional Dental Corporation. This means that in most instances, if the California Dental Corporation is sued or incurs debt, the personal assets of the licensed dentist owner(s) and other licensed shareholders (such as their home, vehicles, and personal savings) are shielded from creditors.

It is essential to note that this liability protection does not extend to professional malpractice claims against a licensed dentist. The personal asset protection applies only to debts and obligations incurred by the California Professional Dental Corporation, not to the individual actions of a licensed dentist. However, when two or more licensed dentists are practicing dentistry in a California Professional Dental Corporation, a malpractice claim against one licensed dentist is not a malpractice claim against all the other licensed dentists and other licensed shareholders, which is a significant increase in personal liability protection for professional malpractice compared to a California General Partnership.

While the use of a California Professional Dental Corporation provides liability protection, it does not eliminate the requirement for individual professionals to maintain adequate malpractice insurance coverage or for the California Professional Dental Corporation to otherwise secure liability insurance for indemnification of its liabilities.

Taxation of Professional Dental Corporations in California

Professional Dental Corporations in California can opt to be taxed as personal service corporations subject to double taxation or S Corporations, which alters the tax landscape for these entities. As the vast majority of California Professional Dental Corporations elect S Corporation taxation, this article will focus on S Corporation taxation of California Dental Corporations.

With S Corporation status, the California Professional Dental Corporation itself does not pay income tax. Instead, the income and losses of the California Professional Dental Corporation pass through to the personal income tax returns of the licensed shareholders.

To qualify for S Corporation status, the California Professional Dental Corporation must meet certain requirements including having no more than 100 shareholders, all of whom must be U.S. citizens or residents, and having only one class of stock.

One of the key advantages of S Corporation status for a California Professional Dental Corporation lies in the area of self-employment taxes. Salaries and wages paid to licensed shareholder-employees are subject to payroll taxes (Social Security and Medicare). However, any additional profits distributed to licensed shareholders are not subject to either payroll taxes or self-employment taxes. This can result in significant tax savings.

In terms of state taxes, California taxes S Corporations at a rate of 1.5% of their net income, with a minimum tax of $800 paid annually to the California Franchise Tax Board. Licensed shareholders in a California Professional Dental Corporation taxed as an S Corporation are also required to pay state income tax on their allocated share of the income of the California Professional Dental Corporation.

When Should California Licensed Dentists Practice Using a Professional Dental Corporation in California?

A California licensed dentist should consider practicing as a Professional Dental Corporation in California when seeking personal liability protection and tax benefits for their dental practice. This structure is particularly advantageous if the dentist wishes to shield their personal assets from business debts, liabilities, and obligations while also shielding themselves from legal judgments against the California Professional Dental Corporation, with the exception of individual professional malpractice claims against the licensed dentist personally.

If the licensed dentist can meet the requirements necessary to qualify for S Corporation status, they can enjoy significant tax advantages. This includes the potential for tax savings through the having no self-employment tax liability on profits distributed to licensed shareholders, and only payroll tax liabilities on a reasonable salary paid to them as an employee of the California Professional Dental Corporation.

Based upon the availability of both limited liability and tax benefits for the licensed dentist, the California Professional Dental Corporation should be the go-to business entity for California licensed dentists.

Secure Your Future with Legal Services from Experts in California Professional Business Structures: Let San Diego Corporate Law Guide Your Business Structure Selection

Choosing the right business structure for your dental practice in California is a critical step for every California licensed dentist. It can significantly influence your tax obligations, personal liability, and the overall success of your dental practice. At San Diego Corporate Law, our experienced legal team is well-versed in California business laws and can help you navigate the complexities of professional corporation and other business entity formation documents and California Secretary of State filings. Whether you are considering a California Professional Dental Corporation or other structure for your dental practice, we can provide the guidance necessary to make an informed decision. Contact us today to schedule a consultation and ensure your dental practice starts in California on solid legal footing.