CHAPTER 3
Practice Ownership
My son is now an “entrepreneur.” That’s what you’re called when you don’t have a job.
Ted Turner
Owning a dental practice is the dream of most dental school graduates. However, that ownership comes with both costs and advantages. A dentist will spend additional time managing the business of the practice. Most dentists get into the profession because they want to treat patients, not realizing the time and emotional energy they must devote to running a successful business. However, the upside of ownership is the pride, happiness, and financial return that come from running a successful practice.
In the past, the only type of practice ownership was the independent individual practitioner in a cottage industry business. Now there are large and small groups, franchises, and network practices that open many more possibilities to new graduates than were available previously.
CHARACTERISTICS OF PRACTICE OWNERSHIP
Doing dental services does not require owning a dental practice. Likewise, dentists can own a dental practice and not personally do any dental services by hiring another dentist to do them instead. If dentists separate, in their minds, owning a practice from doing dentistry, they can better understand the characteristics of practice ownership.
INCIDENTS OF OWNERSHIP
Business owners have certain rights in the business that non‐owners, such as employees, do not. These incidents or rights of ownership result from someone putting their capital (money) at risk in the business (Box 3.1). Because they have taken on the risk associated with ownership that workers have not, then owners have the benefits that result, whereas workers do not. Dentists can profit (or incur a loss) from business activities, whether they do dentistry or not. This is the basis of network practice entities. Dentists may choose (through a profit‐sharing plan) to share those profits with workers, but it is unnecessary. If the business shows a loss, workers will not accept paying for a loss; they will go elsewhere to work or not work at all. The person who owns the business can decide how it will operate and whom they will hire to do the various functions. They have the responsibility for ensuring that the business is operated effectively. They also have liability if the business (or someone working there) injures someone or if the dentist directly injures someone through their negligence. Because they own the business’s assets, they can pledge them as collateral for a loan or other purposes. If the business gains or loses value because of their management abilities, the dentist (as the owner) will enjoy the gain or suffer the loss in value. Workers do not share in this gain or loss. Associate dentists may not understand this difference clearly. They often feel that they have contributed to the growth in the value of a practice and should not, therefore, pay for that growth when they purchase (or buy into) the practice.
MAKING MONEY IN DENTISTRY
There are two ways to make money in dentistry. The first is to do dentistry, and the second is to have an ownership interest. People who own the practice and see patients make money both ways.
COMPENSATION FOR DOING DENTISTRY
Whether a dentist is a practice owner or an employee, they can earn money for dentistry. If they are a proprietor or a partner, they are an owner. They draw on the practice’s assets (one of which is the office checking account), estimate their income tax liability, and prepay it quarterly to the Internal Revenue Service (IRS). Suppose they are an employee of an organization (such as a health center) or a practice corporation (even if they are the sole stockholder and provider). In that case, the corporation will pay them as an employee. The corporation will estimate its tax liability (based on IRS tables), withhold that amount, and send it to the government as prepaid taxes. The dentist receives the amount left after the corporation has paid estimated income taxes for them.
If someone practices in a corporate structure, they will earn pay for dentistry like any other employee. The corporation may pay them a commission (based on production or collections), salary, wage, or a combination method. If someone is a proprietor or a partner in a partnership, they pay themselves by drawing on the practice’s assets. Some dentists take any money left over in the checking account at the end of the month as a draw. Others take a fixed amount (like a salary) for budgeting purposes and to ensure there is enough cash in the practice to pay regular bills. These people do not pay tax on how much money they take out of the practice (as a draw), but on how much profit the practice generates. Whether the person took any of it for personal expenses is irrelevant.
COMPENSATION FOR OWNERSHIP INTEREST
If a dentist is an owner, they may have a profit left in the business (practice) after paying all expenses (including paying dentists to do dentistry on patients). This is called entrepreneurial profit. If the dentist is an excellent manager, their entrepreneurial profit will be larger than if they are a mediocre or poor manager. They may distribute that profit to employees (as a bonus) or the practice owners as a reward for their investment in the practice. They may also combine these methods.
Business owners may distribute any profits to the owners of the business to compensate them for their ownership. If a practice is a corporation, the distribution is based on the number of shares owned. Dividends are from the corporation’s profits. If the practice is a C corporation, the corporation must pay taxes on the profits first and then distribute them as dividends (where they are taxed again as personal income). To avoid this double taxation, C corporate practices usually pay out profit as bonuses, so this money is solely taxed once. Often these bonuses go only to the owner(s). S corporations (or “pass‐through” entities) do not have this problem. They pass dividends through to the owners without paying taxes at the corporate level. Because these dividends are unearned income, the individual does not pay Social Security, Medicare, or selfemployment taxes. Box 3.2 shows how a hypothetical practice might divide income and profit.
The owner may distribute any profit to any employee as a bonus, and the IRS considers this to be taxable income. They can distribute it by shares, based on production, or any other means the owners(s) choose. For example, someone may distribute profits only to certain dentists (owner or non‐owner). It is entirely up to the owners what they do with the profits from the business.
INDIVIDUAL PRACTICE OWNERSHIP
An individual practice involves the most significant investment of someone’s time and emotional energy and provides the greatest personal rewards when successful.
OWNERSHIP
One person owns an individual practice, which means the owner has complete control of and responsibility for the business. There are several forms that the business may take. From a management perspective, a business entity is not essential. (These forms are detailed in the chapter on business entities.) Briefly, the choices in the form of ownership for a solo practice are as follows.
Individual Proprietorship
In this form of ownership, there is only one owner regardless of how many employee dentists they may have hired. They take all profits to their personal taxes through Schedule C (Profit or Loss from a Business). The owner must apply for tax identification numbers through federal, state, and local taxing agencies. Individual states may have rules for registering the business.
Single‐Owner LLC
As the name implies, this is a Limited Liability Company with a single owner. From a tax perspective, the IRS treats this practice as a sole proprietorship, and the owner–dentist gains some business liability protection in this form of business.
Corporation
A corporation is a business entity that is formed under state laws. States may call them an Association, Limited, Incorporated, or Company, depending upon the state. The ownership of a corporation is decided by who owns the corporation’s stock. A solo dentist often owns all (100%) of the stock in their incorporated practice. Some states allow non‐dentists to own stock in dental practice corporations, and others do not. The dentist is an employee of the corporation. They may also retain all management control by electing themselves as the President and Chief Executive Officer of the company. The IRS taxes corporations in several different ways.
COMPENSATION
The owner takes all profit from the business as compensation. This may be as compensation for dentistry or as business profit. The difference in the proprietorship or LLC practice is not meaningful because the owner is the business. In an individually owned corporate practice, the owner can characterize some profits from the business as dividends, which the IRS taxes differently than earned income.
ADVANTAGES
In the individual practice, the owner exercises complete control over the operational and strategic direction of the practice. It is their practice, and they can do what they want without compromising with other owners. If the practice increases in value, they enjoy the gain.
DISADVANTAGES
As an individual practitioner, the dentist has additional time commitments to manage the business, which typically amounts to several hours per week. Often, they may want another trusted practitioner to discuss clinical or management problems with. (Study clubs and mentors help to solve this problem.) They are responsible for the financial health of the practice. If they want to borrow money for a practice purchase or expansion, they have their credit rating and borrowing power to use.
The individual practitioner may find it more challenging to take time from the office for vacations or personal reasons. If they are not there seeing patients, their income decreases. Suppose they find a substitute for themselves when they are away. In that case, they pay the substitute most of what the owner would have taken as compensation for doing the dentistry, leaving only the entrepreneurial profit for the owner. Patients still want to be seen when the owner is gone, and employees still want to be paid. Without a large cash cushion, cash‐flow problems can occur with time away from the office.
SOLO GROUP PRACTICES
This arrangement consists of independent practices physically located under one roof. Each dentist practices as a single practitioner (proprietorship or corporate). They may share ordinary overhead expenses, such as rent, business office, laboratory, or radiographic facilities. This form of practice is also called space‐sharing, time‐sharing, a cluster group, or a condominium arrangement. Individual autonomy is high. One dentist may own and rent the office space to another (time‐share), or the participating dentists may jointly own the property (real estate partnership). The general purpose is to increase net income by reducing overhead and using facilities, equipment, and possibly staff more efficiently than the traditional individual practitioner. This occurs while maintaining the nature of a separate practice that many dentists cherish. For these reasons, this has become a popular method for established dentists to merge their existing practices.
The essential nature of an individual group is that the practices remain separate. Each practice has separate patient pools, (clinical) staff, billing, decision‐making authority, and responsibility. This practice requires strict cost and income accounting because there is little sharing of authority or responsibility, only division of costs.
OWNERSHIP
There are many possible arrangements for individual group ownership based primarily on the control of the facilities:
- The facilities may be owned or rented by one dentist, who then sublets space to another during their off‐hours (time‐sharing).
- The facilities may be owned or leased by one dentist who rents space to another dentist during the same office hours (space‐sharing).
- The facilities may be jointly owned or leased by two or more dentists who have separate treatment areas yet share the business office and reception areas and the costs associated with each (condo arrangement or real estate partnership).
Some or all practice participants may own the facilities as a management company, which provides, for a fixed or percentage fee, common management services such as scheduling, billing, and collections. They may jointly own the equipment through a leasing consortium of members who lease equipment to the practices. These umbrella organizations allow practitioners to enter or leave the group more easily. They also allow dentists who dislike management functions to concentrate on clinical patient care. They are usually formed as a pass‐through entity so that expenses (e.g. depreciation) may pass through to the individuals.
COMPENSATION
Because each dentist operates a separate practice, compensation is based on collecting fees for individual services. Practices generally use separate accounting systems, so calculating compensation is straightforward. The individual dentist then pays the group’s practice costs and any shared costs.
If standard business personnel and billing are used through a management company, the management group collects fees and allocates them to the individual practitioner. The group then deducts expenses, and the practitioner receives compensation directly from the management company. Suppose a percentage of the production compensation system is used instead of a collection‐based system. In that case, the group either applies a standard collection ratio or charges back bad debts to the individual dentist’s account. This prevents members of the individual group from sharing in the bad debt.
Owners of the management company receive a proportional share of any profits generated by the group based on the percentage equity interest of each partner.
COSTS
Efficiency in the individual group practice comes from sharing expenses for everyday concerns. These may include rent, utilities, supplies, waiting room, receptionist, business personnel, or other mutually agreed ordinary expenses. The more expenses shared, the more the savings. The individual dentist is responsible for any other costs associated with their practice, such as production (clinical) staff, associated lab bills, or professional education costs. The common costs are allocated among participants on several bases, including the following.
Fixed‐Fee Basis
On a fixed‐fee basis, the owner or owner organization rents the office and other agreed services for a fixed dollar monthly fee. This method is simple to administer and easily understood. However, this method charges the lower‐producing members of the group more (i.e. a higher percentage) and typically benefits the higher producers.
Percentage of Production
In this method, the contract specifies the percentage of total monthly production that the renter pays for using the owner’s office and supplies. Often dentists include a minimum or maximum dollar amount to protect parties from unexpected production levels.
Cost Ratios
Here, the individual’s production is related to the entire group’s production. The group assesses costs proportionally to everyone according to the production ratio. For example, if a dentist is responsible for 32% of the entire group’s production, that dentist would be responsible for 32% of the costs for the month. This allocation assumes that supplies and other common expenses vary in concert with the production.
Combination Methods
Some dental groups combine the preceding methods. Fixed costs may be allocated on a straight percentage with the addition of variable costs based on production or a ratio of fixed costs.
ADVANTAGES
An individual group arrangement has several advantages over a “true” group practice or individual, freestanding practice. Because these practices are separate, there are fewer management disputes. The arrangement may be easy to administer because each practice maintains separate dental and financial records. Professional consultation and companionship are available, leading to improved emergency coverage shared between the patients. Patients may even perceive the group as a more modern practice. Finally, the common costs, such as rent or a business manager, may decrease, increasing the individual practitioner’s net income.
DISADVANTAGES
An individual group arrangement also has several disadvantages. Competition among the practices may arise for patients and staff, particularly for new practitioners who participate in this type of group. The solution is a transparent allocation system for walk‐in emergency or non‐referral patients.
Because the public may perceive the practitioner as practicing with another dentist, their reputation may be either enhanced or tarnished by the acts of the other dentist. The courts may even hold someone to the liability requirements of a partnership if they offer themselves as a group practice. Disagreements over common areas and staff may develop. One dentist, for example, may feel that they should reprimand a receptionist for job deficiencies, but another does not. Similar problems may arise regarding the purchase of new equipment or costs associated with the redecoration of the reception room.
If one of the solo group members wants to sell their practice, there may be further problems. The existing practitioner may find it challenging to find someone who wants to come into a situation with other competing established practitioners. Patients may decide to leave the existing practitioner for the remaining one. The exiting dentist may not find someone the remaining practitioners want in the practice, but they may have no say.
The individual group generally does not benefit from the advantages of partnerships and true groups, such as shared treatment areas and clinical staff. Actual savings typically come at the expense of autonomy and independent decision‐making ability. Individual groups do not increase efficiency unless the dentists share space or offset hours.
TRUE GROUP PRACTICES
True group practices are two or more dentists with a legal arrangement in which they share a common space, patient records, income, expenses and personnel in patient treatment, and business management of a standard dental practice. The true group may be either a partnership or a corporation, and a proprietorship is incompatible with a true group practice. The individual’s autonomy and control are low, in deference to group control. True groups share expenses and compensate dentists based on a previously agreed formula. The essential nature of the true group is that the individual subordinates their managerial authority and decision‐making to the group. Clinical decisions are affected to a lesser degree. True groups may consist of either one or multiple specialties.
The true group is a single practice entity, with the group controlling staff, patients, and expenses. (Many groups assign patients to doctors for continuity of care.) The critical point is that the group is the primary entity rather than the individual practitioner, as in the individual group. The practitioners share responsibilities, equipment, records, and often even patients. The group then compensates the dentists for doing dental or other practice‐related services based on production, collections, or even hours worked. There may be different degrees of ownership – associate non‐owner, management, equipment, or real estate umbrella partnerships – as in the individual group.
From the patients’ perspective, true groups differ from traditional individual practices:
- Patients may identify more with the group than with the dentist. This eases or eliminates the direct monetary relationship between provider and patient in individual practice.
- Patients can usually use emergency and non‐traditional hours more efficiently.
- There may be fewer choices regarding specialist referral, but the patient can get care in one office. If the group is multidisciplinary, the group’s policies may dictate that practitioners conduct specialty referrals internally.
- The patient also perceives a greater continuity of care in case of death or disability of the practitioner, and can get comfort from a consultation that may occur within the group or complex care.
OWNERSHIP
True groups show many different forms of business organization. The practice, the management of the practice, the equipment, real estate, or the laboratory may each have distinct organizations that are a part of or separate from the practice. They may act as umbrella organizations or subcontractors for the practice itself. Each separate unit may be a profit center and charge the other units reasonable fees for the services provided.
The practice itself is either a corporation, LLC, or partnership. All the participating dentists are not necessarily owners of the practice, nor are they necessarily equal owners. They also may be simply employees compensated for doing dentistry but not sharing in the risks associated with ownership.
COMPENSATION
Compensation involves accounting for income from doing dentistry, specific costs associated with producing that dentistry, and specific costs for the individual dentist. Any money left over is entrepreneurial profit allocated among the owners, usually on a pro‐rata ownership basis.
Compensation for Doing Dentistry
Total compensation for doing dentistry is a combination of income determination methods and a cost method.
Methods of Income Determination
There are several common methods of establishing income from dentistry.
Salary
One method is to pay either a monthly salary or an hourly wage. This provides easy bookkeeping and gives income security, but lacks any production incentive. The group may lose money if an individual is not self‐motivated or feels unjustly compensated. If, for example, all members receive the same salary but have significantly different production levels, the higher producers may become upset and feel inadequately compensated. Compensation by a salary encourages non‐patient activities such as management duties, community activities, or part‐time teaching in a university. Some groups structure a salary drawn against an average or minimum production level. This forces the participants to produce enough to at least “make their salary.” For example, a dentist in the group may draw a salary of $10 000 per month. If the overhead averages 66.7%, they must produce $30 000 monthly to “make salary.” If they only produced $20 000 one month, the salary would remain the same, but they would need to produce an additional $10 000 in a subsequent month to offset the underproduction.
Payment for Production
Payment can be based on a percentage of production or collections. This is probably the most common method. Bookkeeping is more complex in this arrangement. However, computerized management systems simplify this activity. The non‐owner practitioner has little incentive to spend time in non‐production endeavors. If production is the income basis, then the practice uses a standard collection ratio (e.g. 96% of all charges collected) to estimate collections or charge bad debts back to the individual practitioner.
Salary with Commission
Another common system is a salary base with a commission tied to production. Often a practice establishes a minimum for bonus compensation, which gives the participants the security of a fixed‐base income but encourages and rewards production by the individual. This case presents an example of salary or commission compensation.
Relative Value Units
A final variation is to set relative value units for each procedure. Relative value units assign values to procedures other than the traditional dollar amounts associated with individual services. These units may be based on the expected time required to complete a procedure, a dollar figure based on costs, specific practice incentives, or some combination. The practitioner is rewarded for this relatively established value. Relative value units encourage participants to do procedures that may be less profitable or more time‐consuming, such as a simple alloy instead of a cast restoration. The practice then takes any efficiencies as profit. For example, a typical three‐surface alloy may take 30 minutes of chair time and generate $150 of income. A casting for the same tooth may take 60 minutes of chair time but generate $1000 of revenue. A pure dollar relationship is 6.6 : 1 (1000 : 150), whereas the pure time ratio is 2 : 1 (60 : 30). A relative ratio may be arbitrarily set at two units for the alloy and seven units for the casting. Their relative value ratio is then 7 : 2. If the unit is defined as $50, then the dentist would be compensated $350 for the crown procedure (7 units × $50/unit) or $100 for the alloy procedure (2 units × $50/unit). This makes the casting somewhat less valuable for the provider (from a remuneration standpoint) and the alloy more valuable.
Methods of Production Cost Allocation
The primary methods for cost allocation involve deciding how two broad classes of expenses will be charged to each practitioner. These are the fixed office costs and variable costs of production. The importance is evident in a practice where the practitioners’ production numbers are significantly different. If Dr. A has a large production relative to Dr. B, then Dr. A would prefer to divide costs equally; Dr. B would prefer to divide costs according to the production ratios because this would lead to a lower cost (and higher profit) for Dr. B.
There are standard methods of allocating costs.
Equal Shares
Sharing expenses equally makes all costs fixed for the practitioners. The more costs they share equally, the more the higher‐producing group members are helped financially.
Based on Production
Sharing expenses based on a pro‐rata share of production assumes that different practitioners use supplies and common services equally. Strict productionbased cost accounting favors the lower‐producing members of the group. Some procedures, for example periodontal therapy, use fewer lab charges and supplies than others, such as crown and bridge procedures. Practices often charge laboratory costs to the individual provider as a specific charge.
Individual Expense Accounting
This method shares fixed expenses based on equal shares, with costs of production (variable expenses) based on production.
Specific Cost Allocation
This method charges specific costs for a practitioner to that individual practitioner. These are costs that the individual might take as income, but instead decides to take as a business expense. Examples include retirement plan contributions, personal insurance benefits, automobile expenses, professional dues and publications, continuing professional education, and meeting expenses. Exceptions may include costs that all practitioners share equally. Examples might be dental association dues or standard malpractice insurance policy premiums.
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