Dental Practice Entity Structure: The Professional Corporation, the S Election, and the Specified-Service Phase-Out the Retirement Plan Answers

Dentists decide their entity inside the state's professional practice rules and above the QBI threshold. The professional entity requirement: most states' dental practice acts require a dental practice to be owned by licensed dentists through a professional corporation, a professional association, or a professional LLC (the entity types available vary by state, and some states permit a general LLC owned by dentists) — the corporate practice of dentistry doctrine — and prohibit non-dentist ownership of the practice entity (which is why dental service organizations own the management company and the assets, not the practice — below); the entity is formed under the state's professional entity statute, registered with the dental board where required, and its shareholders or members are the licensed dentists; the tax election (S corporation, or partnership treatment for a professional LLC) sits on top. The liability floor: malpractice (the individual dentist's, insured — the professional entity does not shield a dentist from their own malpractice, only from a partner's and from the business's other liabilities), the employment claims of a twelve-person staff, the premises, the HIPAA breach, the equipment financing — the professional entity separates the business's liabilities from the dentist's personal assets, with malpractice, general liability, employment practices, cyber, and the umbrella as the first line. The tax structures: a solo dentist's professional corporation or PLLC electing S status (the standard — a reasonable salary through the payroll the staff already requires, distributions free of payroll tax, Form 1120-S); a multi-dentist professional corporation electing S status (salaries by production, distributions by ownership — the single-class-of-stock constraint) or a professional LLC taxed as a partnership (guaranteed payments by production, flexible allocations — the form many multi-doctor practices prefer for the compensation flexibility; the chiropractic entity guide's multi-doctor point); the C corporation (the historical form for professional corporations, now rare — double taxation on distributions, though a practice retaining earnings for a build-out or a second location sometimes revisits it). The payroll always exists: a dental practice has hygienists, assistants, and front-desk staff from the first day — the S election's incremental payroll cost is near zero, and its real costs are the 1120-S and basis tracking. The reasonable salary — the dentist's own market: an employed dentist's compensation is well documented (the associate market, the DSO compensation surveys, the industry's data — associates earn 28 to 35 percent of their collections, or a salary in the US$150,000-to-US$250,000 range for a general dentist, more for specialists), so the owner-dentist's reasonable salary is what the practice would pay an associate for the owner's own clinical production plus a management component — a figure that consumes a large share of a solo practice's profit and leaves the distribution portion as the practice's true owner return; documented against the owner's production and the associate market, and set honestly because a dentist's salary at a fraction of an associate's is the S corporation's most conspicuous audit issue. The saving: payroll tax avoided on the distribution portion — a solo dentist netting US$450,000 with a US$220,000 salary saves payroll tax on US$230,000 at the above-wage-base rates (the 2.9 percent Medicare tax on the self-employment base the distribution would have carried — about US$5,700, somewhat more where the 0.9 percent Additional Medicare Tax applies; the headline 15.3 percent applies only below the wage base, which the salary already exceeds) — a real but modest saving relative to the practice's profit, and the reason the S election's other benefits (below) carry the decision. The specified service phase-out — the dentist's tax problem: dentistry is in the "health" field, so the QBI deduction phases out over the taxable-income range and disappears above it (the SSTB guide) — and most practice owners' taxable income is above the range, so the QBI deduction is zero regardless of entity and the S election's salary has no QBI cost (nothing to lose); a dentist in the range (a young practice, a part-time owner) has the threshold strategy available. The retirement plan — the instrument that answers the phase-out: a practice's owner with high income and a staff has the full menu — a 401(k) with a safe-harbor design and profit sharing (covering the staff at 3 to 5 percent, and the owner at the annual additions limit), and a cash balance plan on top (an actuarially determined contribution of US$100,000 to US$300,000 a year for an owner in their fifties, deductible in full, with the staff's required share as the cost — the consulting retirement guide covers the mechanics) — the combination is the largest deduction a high-earning dentist has, it reduces taxable income dollar for dollar (pulling a dentist in the phase-out range below the threshold and restoring the QBI deduction — the double return), it is a staff benefit that reduces turnover, and it runs on the W-2 salary the S election requires (the cash balance contribution and the 401(k) employer contribution are computed on the owner's compensation — a higher salary supports a larger contribution, which pulls the salary decision upward against the payroll-tax saving that pulls it down; the two are one worksheet). The real estate: a dentist who owns the building holds it in a separate LLC leasing to the practice at market rent (the auto repair entity guide's structure) — the standard for dentists, because the practice will be sold and the building kept. The DSO sale — the exit that decides the structure: dental service organizations buy practices in a structure the corporate-practice rules dictate — the DSO buys the practice's assets and the management rights (the equipment, the goodwill, the staff, the lease, the systems) into its management company, while the professional entity (owned by a licensed dentist — often the seller for a transition period, or a DSO-affiliated dentist) continues to hold the clinical practice and pays the management company a fee; for the selling dentist, it is an asset sale by the professional entity (single-taxed through an S corporation or partnership; double-taxed through a C corporation — the reason to have converted years earlier), with personal goodwill (the consulting succession guide) as a component the seller may sell directly, the equipment's recapture as ordinary income, and the seller's post-sale employment agreement (ordinary income) separated from the purchase price; a practice preparing for a DSO sale keeps the pass-through structure, the books at collections, the compliance file clean, and the real estate separate. The models. The solo practice: the professional corporation or PLLC with the S election from the first profitable year (the payroll exists; the salary is the associate market plus management; the QBI deduction is likely zero above the range; the retirement plan is the instrument). The two-dentist partnership: the professional LLC taxed as a partnership for guaranteed payments by production and flexible allocations, or the S corporation with salaries by production and distributions by ownership — decided by whether the two produce equally; the retirement plan designed for both owners and the staff. The practice preparing to sell: the pass-through confirmed, the C corporation converted years ahead if it wasn't (the five-year built-in gains recognition period), personal goodwill preserved (no owner non-compete with the entity), the real estate separate, and the compliance and collections records the buyer's diligence rewards. The annual re-run: profit, the owner's production and the associate market, the retirement plan's contribution (the actuary's figure), the taxable income against the threshold, the DSO market, and the salary against updated data — revisited each January.

Key takeaways

• Most states require a professional corporation or PLLC owned by licensed dentists — the entity is formed under the professional statute, registered with the board, and the tax election sits on top; malpractice is the individual dentist's regardless.
• The payroll always exists, so the S election's cost is the 1120-S and basis tracking — and the reasonable salary is the associate market for the owner's own production plus management, which consumes a large share of a solo practice's profit.
• Dentistry is a specified service trade: above the range the QBI deduction is zero under any entity, so the salary has no QBI cost; the payroll-tax saving above the wage base is the 2.9 percent Medicare tax (3.8 percent with the Additional Medicare Tax) — real but modest.
• The retirement plan is the instrument: a safe-harbor 401(k) with profit sharing plus a cash balance plan — six figures deductible in full, computed on the W-2 salary, pulling a dentist in the range below the threshold — and the salary decision is one worksheet with it.
• Two-dentist practices choose partnership treatment for compensation flexibility or the S corporation with distributions by ownership; the building goes in a separate real estate LLC.
• The DSO sale is an asset sale by the professional entity — single-taxed through a pass-through, with personal goodwill preserved and the real estate kept.

The dental practice's entity worksheet

Professional entity type per the state's practice act; board registration. Coverage (malpractice per dentist with tail, GL, EPL, cyber, umbrella). Payroll in place. Owner's clinical production; associate-market compensation for it; management component. Taxable income against the QBI threshold and range. Retirement plan design (401(k) safe harbor + profit sharing + cash balance) — contribution on the salary; staff cost. Distribution portion; payroll tax saved (above-wage-base rates). Election or partnership treatment (multi-dentist compensation design). Real estate LLC. DSO exit readiness: pass-through, personal goodwill, records. Net result. Fifteen minutes each January, with the actuary's figure alongside.

Worked example

Three practices. One: a solo general dentist, 52, netting US$480,000 after her plan contributions with a staff of nine — a professional corporation with the S election since year two; salary US$240,000 (documented against the associate market for her US$800,000 of clinical production plus management); a US$240,000 distribution saving about US$5,900 at the above-wage-base rates; taxable income far above the QBI range (no deduction under any structure); a safe-harbor 401(k) with profit sharing and a cash balance plan — US$210,000 of combined owner contributions (the actuary's figure on her salary and age) deductible in full, with US$34,000 of required staff contributions — the plan's deduction worth more than a decade of the S election's payroll-tax saving. Two: two dentists who produce unequally (US$1.1 million and US$700,000) — a professional LLC taxed as a partnership: guaranteed payments at 32 percent of each's collections plus equal management payments, remaining profit allocated 60/40 by the operating agreement, a cash balance plan designed for both owners' ages, and the building in a separate LLC they own 50/50 — the S corporation's distributions-by-ownership constraint was the reason they chose the partnership. Three: a practice preparing for a DSO offer — an S corporation since 2012 (converted from the founder's 1998 C corporation, long past the built-in gains period), no owner non-compete with the entity (personal goodwill preserved for a direct sale), the building in the owner's real estate LLC (kept, and leased to the DSO's management company after the sale at market rent), collections-based books, and a compliance file the buyer's diligence read in an afternoon; the asset sale is single-taxed, the personal goodwill is capital gain, the equipment's recapture is ordinary, and the owner's three-year employment agreement is separated from the price. Three practices, one practice act, and the retirement plan did more for the first than the S election did.

Official sources

The IRS states: “Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.” — Internal Revenue Service, S corporations, https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

The IRS states: “On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit plans are often more complex and, thus, more costly to establish and maintain than other types of plans.” — Internal Revenue Service, Defined benefit plan, https://www.irs.gov/retirement-plans/defined-benefit-plan

Practitioner note

A dentist's entity decision is made inside the state's professional practice rules and above the QBI threshold — where the deduction is zero under any structure, the S election's payroll-tax saving is the 2.9 to 3.8 percent Medicare tax above the wage base, and the instrument that actually moves the tax is a cash balance plan on top of the 401(k), computed on the salary the election requires. Our dental worksheets set that salary from the associate market for the owner's own production, run the actuary's figure in the same computation, keep the building in a separate LLC, and preserve personal goodwill for the DSO sale — because the buyer's structure is dictated by the practice act, and the seller's tax is dictated by whether the entity was a pass-through years before.

See also: For related guidance, see dental practice deductions; and browse every small business tax guide, by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles dental practice entity planning — professional entity formation under state practice acts, the S election or partnership treatment with associate-market compensation, retirement plan design integrated with the salary decision, real estate LLC structuring, and DSO sale readiness with personal goodwill preservation. See pricing or book a call.