How to Structure Your Dental Practice for Maximum Tax Efficiency

Your dental practice entity structure can save you thousands in taxes every year. The wrong structure costs you money. The right one protects your assets, cuts your tax bill, and positions your practice for profitable growth.

The average general dentist in private practice earns $207,980 annually according to the American Dental Association’s 2024 Survey. With strategic entity structuring, you can keep significantly more of what you earn while building a more valuable practice. Your entity choice affects everything from daily tax obligations to your eventual practice sale or succession plan.

Understanding Your Entity Options

You have several choices for structuring your dental practice, each with different tax and business benefits. The key is matching your entity to your practice goals and growth plans.

Why Most Dentists Avoid Sole Proprietorship Running your practice as a sole proprietorship means you and your business are legally the same entity. Every dollar of practice income hits you with 15.3% self-employment tax. Plus, your personal assets remain exposed to practice liabilities. Most successful dental practices outgrow this structure quickly.

Limited Liability Company Benefits An LLC protects your personal assets from practice liabilities while keeping your tax and operational flexibility. In New York, dental practices must form as Professional LLCs (PLLCs) to maintain professional licensing compliance.

The real power comes when you elect S-Corporation tax treatment for your LLC. This combination gives you:

• Asset protection from the LLC structure
• Self-employment tax savings from S-Corp taxation
• Operational flexibility without corporate formalities
• Easy accommodation for multiple locations or partners

Professional Corporation Advantages New York requires dental practices choosing corporate structures to form Professional Corporations under Education Law Article 133. This works well for larger practices planning significant expansion or those wanting formal governance structures for multiple dentist partnerships.

Professional corporations excel at employee benefit programs and succession planning. They also provide clear frameworks for adding partners and managing complex ownership arrangements.

LLC vs Professional Corporation: Which Saves More Money?

The choice between a Professional Corporation and LLC with S-Corporation election often comes down to your practice size, growth plans, and tax situation. Both protect your assets, but they handle taxes very differently.

LLC with S-Corporation Election: The Tax Savings Champion This structure delivers the biggest tax savings for most dental practices. Here’s how it works: you pay yourself a reasonable salary that’s subject to payroll taxes. Additional practice profits flow through as distributions that avoid self-employment tax.

Real example: Your practice nets $400,000 annually. With S-Corp election, you might take a $150,000 salary (subject to 15.3% payroll taxes) and $250,000 in distributions (no self-employment tax). This saves approximately $38,250 in taxes compared to full self-employment tax on the entire amount.

The strategy requires careful salary setting. The IRS expects “reasonable compensation” comparable to what you’d pay another dentist for similar work. But the tax savings are substantial for profitable practices.

When Professional Corporations Make Sense Professional corporations work best for larger practices with multiple dentists or ambitious expansion plans. They offer:

• Enhanced retirement plan contribution limits
• Pre-tax employee benefit programs
• Clear partnership structures through stock ownership
• Built-in succession planning through stock transfers

The formal structure requires regular board meetings and corporate resolutions. But for practices ready for that level of sophistication, the benefits justify the complexity.

Strategic Tax Planning Through Entity Structure

Your entity structure creates tax planning opportunities that compound over time. The right setup doesn’t just save money today—it builds wealth for your retirement and creates a more valuable practice for eventual sale.

Maximizing Self-Employment Tax Savings S-Corporation elections provide the most immediate tax relief for profitable dental practices. The structure splits your practice income between salary (subject to payroll taxes) and distributions (free from self-employment tax).

For 2025, self-employment tax rates remain at 15.3% on income up to $176,100, plus 2.9% Medicare tax on all income above that threshold. High-earning dentists also face an additional 0.9% Medicare surtax on income exceeding $200,000 (single) or $250,000 (married filing jointly).

Strategic salary setting becomes crucial. Pay yourself too little, and the IRS may challenge your arrangement. Pay too much, and you miss tax savings opportunities. Most dental practices benefit from salaries between $120,000-$180,000, depending on practice size and local market conditions.

Leveraging Pass-Through Tax Benefits
Both LLCs and S-Corporations qualify for pass-through taxation, avoiding the double taxation that affects regular corporations. Under current tax law, many dental practices also qualify for Section 199A deductions allowing up to 20% of qualified business income deduction.

Tax Savings by Practice Income Level

*Based on $150,000 reasonable salary; remaining income taken as distributions exempt from self-employment tax

For high-earning dental practices, this deduction phases out at $190,750 (single) or $381,500 (married filing jointly). Strategic income timing and entity structuring can help optimize these benefits, especially for practices near the phase-out thresholds.

Building Long-Term Wealth Your entity structure affects retirement planning opportunities. S-Corporations and Professional Corporations can establish more sophisticated retirement plans with higher contribution limits than sole proprietorships.

Consider a SEP-IRA allowing contributions up to 25% of compensation, or a defined benefit plan that might allow contributions exceeding $300,000 annually for profitable practices. Your entity choice determines which options are available and how much you can save tax-deferred for retirement.

Multi-Location and Partnership Structures

Growing dental practices need entity structures that accommodate expansion while maintaining tax efficiency and asset protection. The right setup positions your practice for profitable growth across multiple locations.

Separating Practice Operations from Real Estate Smart dental practice owners separate their practice operations from real estate ownership. This strategy provides liability protection and tax benefits:

• Hold real estate in a separate LLC or corporation
• Lease property to your practice entity at market rates
• Protect valuable real estate from practice liabilities
• Create additional tax deduction opportunities for the practice

This structure works especially well for multi-location practices where real estate appreciation becomes a significant wealth-building component.

Partnership Planning for Multiple Dentists Multi-dentist practices require careful entity structuring and partnership agreements. Key considerations include:

• Income allocation formulas based on production, collections, or fixed percentages
• Expense sharing arrangements for shared overhead and individual dentist costs
• Buy-sell provisions for partner departures, retirement, or death
• Decision-making authority for practice management and major expenditures

Planning for Practice Succession Your entity structure significantly impacts your practice’s sale value and tax treatment. Stock sales typically provide better tax treatment for sellers but may be less attractive to buyers. Asset sales offer buyers better depreciation opportunities but often result in higher taxes for sellers.

Smart succession planning starts with entity selection that provides flexibility for eventual sale structure. This becomes especially important as 72.5% of dentists currently remain practice owners, down from 84.7% in 2005, indicating increased practice consolidation and sale activity.

New York Compliance Made Simple

New York dental practices face specific compliance requirements that affect entity selection and ongoing operations. Understanding these requirements helps you choose the right structure and avoid costly compliance mistakes.

Professional Licensing Requirements Education Law Article 133 governs dental practice operations in New York. Key requirements include:

• Professional corporation shareholders must hold current NY dental licenses
• PLLC members must maintain professional licensing throughout membership
• Annual continuing education including infection control training
• Professional supervision requirements for auxiliary staff

Staying Compliant with OSHA Standards Federal OSHA requirements apply to all dental practices regardless of entity structure:

• Annual infection control training for all staff
• Bloodborne pathogen exposure control plans
• Hazard communication programs for chemical safety
• Comprehensive documentation and record keeping

Your entity structure should ensure proper insurance coverage and liability protection while meeting all regulatory obligations. Professional corporations and PLLCs both provide necessary liability separation when properly maintained.

Managing Annual Compliance Tasks Different entity structures create different annual compliance obligations:

• LLCs: Annual registration with NY Department of State
• Professional Corporations: Annual corporate filings and board meeting documentation
• S-Corporations: Federal and state tax returns plus payroll tax obligations
• All entities: Professional licensing renewals and continuing education compliance

Building compliance into your practice management systems prevents costly oversights and maintains your entity’s liability protection benefits.

Implementation Strategy and Timing

Smart entity structuring requires careful timing and implementation to maximize benefits while minimizing disruption to your practice operations. The right approach protects your practice during transition periods and sets you up for long-term success.

Starting Right from Day One New dental practices benefit from immediate entity formation. This protects personal assets from startup liabilities and creates tax planning opportunities from the beginning:

• Form your entity before signing practice leases or major contracts
• Ensure professional liability insurance covers your chosen entity structure
• Set up proper accounting systems to maintain corporate formalities
• Consider S-Corporation election timing to optimize first-year tax benefits

Converting Existing Practices Established practices considering entity conversions should evaluate timing for maximum tax efficiency:

• Year-end conversions simplify accounting transitions
• Consider equipment depreciation timing to optimize tax benefits
• Plan conversion around major practice changes or expansions
• Coordinate with professional licensing and patient notification requirements

Retirement and Exit Planning Your entity structure affects practice sale options and tax treatment. Starting retirement planning early provides more options:

• Stock sales vs asset sales have different tax implications
• Installment sales can spread tax liability over multiple years
• Estate planning integration protects wealth transfer to family
• Professional valuation becomes easier with proper entity structure and financial records

The average dental practice profit margin of 28% provides substantial opportunity for tax-advantaged retirement contributions. Your entity structure determines how much you can save and how efficiently you can build wealth for retirement.

Summary Table

Expert Partnership: Dental Practice Entity Structure

Getting your dental practice entity structure right saves money every year and builds long-term wealth. The wrong choice costs you thousands in unnecessary taxes and leaves your assets exposed to unnecessary risks.

Your practice deserves strategic planning that goes beyond basic compliance. SundackCPA provides comprehensive entity structuring specifically designed for Nassau County, Suffolk County, and New York City dental practices. We understand the unique challenges of dental practice operations and New York’s professional licensing requirements.

Most dental practices can save $15,000-$40,000 annually through strategic entity selection and tax planning. The savings compound over time, creating substantial wealth-building opportunities for practice owners who plan strategically.

The dental industry continues evolving with consolidation and new practice models changing the competitive landscape. Your entity structure should position your practice for profitability, growth, and eventual succession whether you plan to expand, sell, or transition to associates.

Schedule a consultation with SundackCPA to evaluate your current structure and explore opportunities for enhanced tax efficiency and strategic positioning. Our specialized knowledge of dental practice operations ensures your entity structure supports both immediate profitability and long-term wealth building in New York’s competitive dental market.