Should I Incorporate My Business?
By Ken Rubin, CPA, PFS
Many factors go into determining whether or not you should operate your dental practice as a corporation. If the right factors are present, it could be a very wise decision for you to incorporate.
Dentists owners often tell me, I heard its no longer advantageous to be incorporated. They hear this because of three changes that occurred back in the 1980s:
- Corporate tax rates were raised and are no longer dramatically lower than individual tax rates.
- Corporate retirement plan contribution limits were dropped so they are no longer significantly higher than for other plans.
- State taxes have increased (e.g. in California the annual corporate minimum tax of $200 was increased to $800 per year.)
These changes make incorporating no longer as beneficial as it used to be. However, it still may be very beneficial for you to be a corporation and many factors need to be considered.
LIMITED LIABILITY You cannot try to hide behind a corporate veil for protection from professional malpractice. This means if you make a mistake while performing dentistry, being incorporated wont help. However, you will be able to shelter your personal assets from most business-related lawsuits and liabilities if you incorporate. For example if one of your employees if driving negligently (talking on a cell phone, texting, putting on makeup, speeding, etc.) while running an office errand and kills someone all of your personal assets are at risk if youre not incorporated. Given todays litigious society, asset protection strategies are essential. An attorney recently informed me that, although our country only makes up 5% of the worlds population, we are involved in 90% of the worlds lawsuits!
REDUCED I.R.S. AUDIT RISK Most dentists (and even many CPAs) dont realize how incorporating will dramatically reduce your audit risk. Suppose your gross income (revenues collected) are $600,000 per year and youre operating as a sole proprietorship. At the I.R.S., your tax return goes into the same pool for audit selection as all the other sole proprietorships. The vast majority of sole proprietorships (filing a schedule C on their 1040 form) are small part-time and full-time businesses like small home based businesses, flower stands, hair dressers, janitors, etc. Naturally, youll stick out like a big target for audit selection in this pool.
If you incorporate, youll get thrown into a different pool: with Microsoft, Ford, Exxon, AT&T, etc. In this pool, youll be such a little target youll hardly be noticed.
IRS audits can be extremely expensive and stressful even if the final end result is no increase in taxes. Several years ago I represented (and successfully defended) about 30 dentists across the nation that were being audited by the IRS for claiming a tax credit (better than a deduction) for their intra-oral camera purchases. Guess what—- none of the dentists that got audited were incorporated!
These two factors above cannot be quantified in terms of dollar amounts. However, the potential benefits from either one of these could easily greatly outweigh the costs of incorporating your dental practice.
OTHER CORPORATE FRINGE BENEFITS C Corporations can establish a medical expense reimbursement plan to pay medical bills not covered by medical insurance. Group term and split dollar life insurance also is available. C Corporations are less popular nowadays because of the extra planning involved to avoid the annual double tax, and the potential double tax upon practice sale.
PAYROLL TAX SAVINGS– Alternatively, it may be beneficial to operate as an S Corporation, and generate thousands of dollars every year by reducing your self-employment and owners payroll taxes by setting a minimal IRS, but acceptable and reasonable salary for yourself. The IRS has been very seriously threatening to close this loophole for a long time. They came closer than ever in 2010, but the proposed regulation was not passed.
In analyzing whether to be a corporation today, many factors must be addressed and as always be sure to seek competent profession help.
Ken Rubin has been helping dentists since 1984. He owns and operates both Ken Rubin & Company, Dental CPAs and Ken Rubin Dental Practice Sales. He is a frequent author, lecturer and the co-founder of the Academy of Dental CPAs (“ADCPA”). He can be reached at (619) 299-6161. Websites are www.CaliforniaDentalCPAs.com andwww.krpracticesales.com.