If you’re starting a dental practice or altering the framework of your existing one, be sure to choose the correct business structure and file the right income tax forms.
We don’t have to tell you how many decisions you have to make when you start a new business, or when your existing company changes in significant ways.
The most important issue you have to settle in terms of income taxes is your business structure, which provides answers to three basic questions:
- Who is the company owned by?
- How does the company distribute profits?
- How are management tasks distributed?
You’ve heard their names a lot in the past, but you may not have known what great significance they would have for you as a business owner. Each has its own set of attributes, and each requires a different set of IRS tax forms and schedules.
Here’s a look at these options.
Sole Proprietor: This is fairly self-explanatory. Do you own an unincorporated business by yourself?
Limited Liability Company (LLC): You can be considered an LLC even if you are the only person involved in the business, but there is no maximum number of “members.” Each state establishes its own regulations for LLCs, so you’ll need to do some research if this is the structure you choose. We can help with this.
You’ll be treated by the IRS as either a corporation or a partnership.
Partnership
If you and one or more other individuals contribute to the business (money, property, skills, etc.) and share in both profits and losses, the IRS considers you a partnership. Partners are not considered employees, and the corporation does not pay income tax, though it’s required to file an informational return outlining income, deductions, etc. Profits or losses get “passed through” to the partners, and they must include information about their share on their own tax returns.
Corporation
Rather than being called “partners,” the participating individuals in a corporation are called “shareholders,” individuals who exchange money or property or both for capital stock. There’s actually a double tax involved in this type of business entity. The corporation pays taxes on profits, and then the shareholders are taxed when they receive dividends.
S Corporation
S Corporations avoid double taxation by passing through income, losses, deductions and credits to their shareholders, who include this income and loss on their personal tax returns – at their individual income tax rates. S Corporations must:
- Be domestic corporations
- Consist of “allowable” shareholders (i.e., individuals and some trusts and estates, but not partnerships, corporations or non-resident alien shareholders)
- Have a maximum of 100 shareholders and only one class of stock
- Not be an ineligible corporation, like some financial institutions and insurance companies
These are very general descriptions of the most common business structure classifications. If you’re deciding for the first time which you should choose for your dental practice, or if your company is planning a major organizational shift that will necessitate changing your business structure, we’ll help you explore the options and help you determine the most appropriate entity type.