In volume 58 of The Professional Advisory I wrote about non-dentist ownership of dental practices. The primary questions are: What can non-dentists purchase or own? Aside from actually working at a dental practice, how can non-dentists profit from a dental practice? This is Part 2 of the article and will continue to explore answers to these questions.
From a legal perspective the starting point is to understand what only a dentist or a dentistry professional corporation (PC) can own; and that is the professional dental goodwill of a dental practice. That goodwill includes custody and control of all patient records and files (including patient billing records and treatment plans), patient charts, x-rays and models, patient lists, and use of any dental practice names. A dentist or PC are the only ones who can own the goodwill.
The other fundamentals to understand are:
1. a dentist can not engage in any form of fee or income sharing except with other dentists at the practice and with dental hygienists who practice dental hygiene in and at the dentist’s practice;
2. a dentist can only practice dentistry with other dentists. A dentist can not work for non-dentists whether as an associate, employee, partner or otherwise when engaging in the practice of dentistry; and
3. only a dentist can prescribe dental radiographs and only a dentist can be a radiation protection officer.
Part 1 of this article described how certain specified family members of a dentist can be non-voting shareholders of the dentist’s PC. Those family members are restricted to a dentist’s spouse, children and parents.
As stated above, only a dentist or PC can own theprofessional dental goodwill of a dental practice. However, non-dentists can own the other assets of the practice. This creates opportunities for dentists to dramatically expand the scope of family members who can participate in direct or, more typically, indirect ownership of the practice.
One option is to create a technical services corporation (TSC). A TSC is a separate corporate entity that provides those services to patients and the practice that are not required to be performed by a dentist. Net after tax profits generated by the TSC can be distributed to the TSC’s shareholders. The shareholders of a TSC are not restricted to a dentist or prescribed family members. Non-dentists can be the shareholders of a TSC.
A family trust can be created to be the TSC shareholder. A trust is a rather strange hybrid entity (neither a person nor a corporation), administered by one or more people known as trustees. The family trust agreement can list numerous people as beneficiaries who may receive income from the trust each year. Typically the family trust agreement provides it is a discretionary trust, meaning the trustees determine which of the named beneficiaries may receive some or all of the Trust income. That decision is wholly discretionary and may vary each year.
One beneficiary might receive Trust income in one year but a different beneficiary or beneficiaries receive such income in another year. Or the trustees may determine not to distribute any Trust income to any beneficiaries in a particular year.
Therefore, by creating a TSC with a family trust as the TSC shareholder, a dentist can provide for a much broader group of beneficiaries who can receive profits from the dental practice. In a PC only the dentist’s spouse, child or parent can be shareholders. But the dentist’s parents-in law, brothers and sisters, and other relatives whether by blood or marriage can all be named as beneficiaries in a family trust agreement.
If structured properly so that the two companies are not associated, your PC and TSC may each enjoy the low corporate income tax rate. And with a family trust as the TSC shareholder, the ability to sprinkle profits among a much broader range of extended family members is created. Lastly, the beneficiaries of the family trust might even be able to take advantage of the capital gains exemption on the sale of the TSC shares.
Depending on the size of your dental practice, having a TSC with a family trust shareholder could result in significant tax savings far and above the amount realized when using only a PC. This structure is an excellent way in which non-dentists can be involved in ownership of a dental practice.
Each situation and dental practice is different. Careful planning is required to ensure the best results for you, the dentist, and your extended family members. In creating a TSC with a family trust as the TSC shareholder, it is critical to retain professional advisors who are very familiar with such structures and who specialize in advising dentists on such matters. PA