Transitions Roundtable

We ask two experts the same question to give you two different answers on a complex issue

QUESTION

"I am forming a partnership this summer with my associate. Currently I operate as a sole proprietor, but I realize that we must form a new business entity. Can you tell me the main differences between a PC and a LLC?"

Peter Ackerman

The rules and regulations for corporations and limited liabilities companies are state specific. I would therefore highly recommend that you seek the assistance of a local CPA and an attorney who specialize in dentistry to advise you regarding the preferred entity. C corporations would most likely not be a preferred entity; therefore all references will assume the PC makes a subchapter S election.

As a general rule, LLCs tend to be a less complex form of entity than a corporation, requiring less formal records, filings, and meetings with less governmental regulation. These also tend to offer greater flexibility as to distributions. Corporations are required to distribute profit and losses strictly based upon the pro-rata share of ownership, while LLCs may allocate disproportionately among owners.

Often dentists will choose an S Corporation to save on taxes, however, most tax professionals believe the added cost of compliance and annual document preparations offset any of the tax savings.

To complicate matters, once a legal entity has been established, it is possible for a LLC to elect to be treated as a corporation for tax purposes.

The entity you choose will have an impact on the transition structure available to bring your current associate in as an equity owner. There are many different structures available depending on the history of the practice and goals of the soon-to-be co-owners.

It is important that you have knowledgeable professionals who specialize in dentistry helping you navigate your structure choice in combination with your entity choice when forming your new entity. This will not only have implications on how you get into business together, but also on how you will operate together, and just as important, how each one of you will eventually exit the entity.

Peter Ackerman is a principal of The Dental Marketplace and past president of American Dental Sales. He can be reached at 312 240-9595 or [email protected].

Tom Snyder, DMD, MBA

There are some differences between a LLC and a PC that you should be aware of that may influence your decision on which one you choose for your partnership. A Professional Corporation, or PC, is a double taxed entity unless you choose the Subchapter S election, which is what the majority of practitioners who incorporate choose. The Sub-S Corporation allows for any net profits, after officer's salary, to flow through directly to the shareholders, thus avoiding the double taxation trap of a PC. However, one characteristic of a Sub-S that might be an issue is that you are not allowed to share profits disproportionally. Profits must be shared exactly the same as the ownership interest. Another point to consider is how the sale of the partnership interest is treated. Ideally, you want to receive capital gains for the sale of your interest. Therefore, you'd like to sell your new partner stock. However, if you do that, the stock is not deductible to the purchaser, so oftentimes alternative buy-in strategies are considered.

The Limited Liability Company (LLC) has become an increasingly popular partnership business entity among dental practitioners. One nice feature is that you can continue to pay your taxes on a quarterly basis. So if practice cash flow has been a problem in the past, when electing a corporate entity you must receive a salary and consequently make more frequent deposits for tax purposes. Also in a LLC, you have the same protection of your personal assets as in a PC, whereby only the LLC assets are at risk. Unlike a PC, you are able to share profits unequally, even though you may be 50% partners.

When you sell a membership interest in a LLC, the purchaser does not buy stock; rather he or she purchases an ownership interest that is classified as goodwill. This can be written off over a 15-year period.

Finally, there is another difference between the two entities that may be substantial and that relates to the business entity borrowing money. The LLC has an advantage in that regard as you can get sizable deductibles in the year of purchasing equipment, whereas that is not always the case with a Sub S.

Tom Snyder, DMD, MBA, is the director of transition services for The Snyder Group, a division of Henry Schein. He can be reached at 800-988-5674 or [email protected].