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The Key Features of the Corporate Practice of Dentistry in California
A dentist wishing to take advantage of the benefits of a corporate entity while practicing dentistry in California can do so by forming a professional dental corporation. Other corporate entities such as limited liability companies and limited liability partnerships are not available to California dentists due to the corporate practice of medicine doctrine. Outlined below are some of the keys features and reasons for forming a California professional dental corporation.
1. What is a Professional Dental Corporation?
In California, a professional dental corporation is a corporation created under state law that is designated to practice the profession of dentistry. California professional dental corporations are governed by the Moscone-Knox Professional Corporation Act (Corp C §§13400–13410), the general provisions of the California Corporations Code and regulators promogulated by the California Dental Board.
2. What are some advantages of a Professional Dental Corporation?
- Legal Protection – having your dental corporation separate from personal assets provides for protection against lawsuits. If your business is in legal trouble, your personal assets are not subject to the lawsuit. Note, a professional corporation cannot protect a dentist from malpractice claims (professional liability), but if formed and operated correctly, may protect the dentists’ personal assets from claims arising from the malpractice of colleagues, some commercial claims, or employee related lawsuits. This is especially important for a dentist running their own dental practice.
- Business Credit – building business credit under a professional dental corporation can be beneficial when it comes time to form a partnership or sell your business. It also may avoid the need for personal guarantees.
- Taxation – by electing your professional dental corporation as an S-Corp, profits and losses pass through to shareholders, which avoids double taxation. S-Corp election also reduces self-employment taxes on shareholders who draw distributions.
- Fringe Benefits – such as medical care and retirement plans are available under a professional dental corporation.
3. What is needed to form a Professional Dental Corporation?
Several steps must be taken to form a California professional dental corporation. The first is submitting articles of incorporation which comply with California law to the Secretary of State. The current filing fee for articles of incorporation is $100.
Corporate bylaws, which identify the structure of the corporation and the rules by which it will function, must be adopted.
Other steps include:
- Conducting initial corporate meetings to issue shares and elect officers and directors
- Obtaining an EIN number (federal tax id) from the IRS
- Opening a corporate bank account
- Filing an S-Corp Election with the IRS (If applicable)
- Filing a statement of information with the Secretary of State
- Applying for a business license
The costs of improperly forming include:
- Forming an entity that doesn’t offer the protections or benefits you need
- Missing the timeframe to file an S Corp election
- Falling out of compliance and losing the protection you formed the corporation to ensure
- Monetary Penalties
4. What are the restrictions of a Professional Dental Corporation?
A California professional dental corporation may only render services in dentistry. Generally, the professionals must be licensed in the practice of dentistry to be a shareholder of the California professional dental corporation.
However, other licensed professionals are eligible to be shareholders, officers, directors, or professional employees of a California dental corporation provided:
- The shares owned by these other members of similar professions do not hold shares totaling more than 49% of the total stock of the California professional dental corporation;
- The licensed dentist shareholders outnumber the non-dentist shareholders.
The following are permissible shareholders and directors of California Professional Dental Corporations (California Corporations Code §§ 13401(b), (d), 13401.5):
- Licensed physicians and surgeons
- Dental assistants
- Registered dental assistants
- Registered dental assistants in extended functions
- Registered dental hygienists
- Registered dental hygienists in extended functions
- Registered dental hygienists in alternative practice
California professional dental corporations that have only one shareholder must have only one director, (who must be that shareholder). That shareholder is required to also serve as the president and treasurer of the corporation. Corp C § 13403.
A California professional dental corporation with only two shareholders must have only two directors (who must be those shareholders). The two shareholders are required to fill the offices of president, vice president, secretary, and treasurer. Corp C § 13403.
5. Taxation of Professional Dental Corporations
There are two ways for California professional dental corporations to get taxed, as a C-corp or as an S-corp. All California professional dental corporations are C-corp by default unless they elect as an S-corp.
- C-Corp –The net income of a California professional dental corporation is taxable by the federal and state governments’ corporation tax rates. If any dividends are distributed to shareholders, the shareholders must report the dividends, which will be subject to income taxes. Taxation of dividends is commonly referred to as “double taxation” because the income is taxed once at a corporate level and then again when the profits are distributed to shareholders.
- S-Corp – A professional dental corporation that elects as an S-Corp becomes a pass-through entity for income tax purposes. Business income, deductions, loss and tax credits, are passed through to the shareholders, rather than being taxed at the corporate level, thus avoiding double taxation.
Forming a professional dental corporation in California can seem like a complicated process, but the result can bring many advantages over other corporate entities. Pacific Health Law Group is focused on making the process as stress free as possible. Our clients don’t have to worry about the implications from improperly forming a professional corporation. We’ll ensure all corporate documents are in compliance and filed properly so that you can enjoy the excitement that comes from starting your own professional dental corporation.