The case for private practice

Owning a private practice is the ultimate career goal of many dentists. But as dental school and residency costs continue to rise and corporate dentistry attracts more young dentists, this goal is becoming increasingly difficult to achieve.

The rise in student loan debt is a significant challenge for a new doctor; it is not uncommon for new graduates to have loans that exceed $500,000 and interest rates above 7%. The natural goal for any recent graduate is to work for several years to pay down the burdensome debt and bring down the high interest rate. Most people do not see how this strategy can ultimately have a negative impact on their financial future and, consequently, on owning their own practice. It is vital that new doctors understand how their decisions can affect their future; the wrong postgraduate choices can cost them millions of dollars in the long run.

If dentistry is not careful, it will see an impact from corporate dentistry that is similar to what has already occurred in the medical and pharmaceutical industries. Our clients are experiencing increased competition in their area from corporate’s continued growth and marketing efforts. At state, national, and certainly American Student Dental Association dental meetings, we are seeing increased corporate sponsorship.

Corporate dentistry’s message focuses on taking the stress of running a business off new doctors’ shoulders, relieving them of student debt with signing bonuses, and promising a predictable schedule. It all sounds very appealing. But they do not mention the benefits of owning a practice. To make an informed decision, these young leaders need to know the 5 significant benefits to owning their own practice.

Five reasons for ownership

  • 1.

    Lifetime compensation. In my opinion, a dentist will typically make twice as much money as the owner of a practice vs simply being an associate the same practice or in a corporate structure. Simply take a 30-year career of making $200,000 vs $400,000 for doing the same amount of dentistry and checking the same hygiene. Multiply that difference by 30 and you get $6,000,000 of lost income by choosing not to own. That alone should be convincing enough.

  • 2.

    Build equity. Dentists need to think that the business they own is worth something. In the above example, an owner making $400,000 annually is typically running a $1,000,000 business. For example, if the business is worth about 75% of collections, that is approximately $750,000. Working as an associate is much like paying rent, your work is not going toward a larger investment down the road. Work hard and get the payoff later: that is the goal.

  • 3.

    Better tax planning. Tax planning is an area that corporate will typically not focus on, but as a certified public accounting firm, we know that it is where many financial benefits lie. Based on the 2016 tax code, if you are married, your federal tax rate is 33% for all your income over $231,450, plus any applicable state income tax. As an associate, it is unlikely that you have many tax-planning options to assist in reducing this income; therefore, your rate will likely not change. But, as a small business owner, you can deduct qualified expenses that you were already paying (eg, car expenses, travel, continuing education, interest on the practice you purchased, depreciation, cell phones, meals and entertainment, pension plan, and so on) as practice expenses—meaning that you are paying these with pre-tax money rather than after-tax money. It is easy to have at least $70,000 of deductions in the $1,000,000 practice. If you add up the estimated $70,000 of practice expenses over a 30-year career as an owner, that is another $2,100,000 of tax deduction benefits.

  • 4.

    Retirement planning. The pension plan benefit is one of the best tax deductions/savings vehicles that you can put in place as a small business owner. First, you can deduct your contribution into the 401(k) and profit sharing plan. For 2016, a practice owner and spouse can deduct approximately $71,000 by contributing into a tax-deferred pension plan. As an associate, you are most likely limited to $18,000 in salary deferrals per year. As detailed above in point 3, deductions allow you to reduce your taxes. But the second part of that equation is that if you invest $71,000 a year into a pension plan, over that same 30 years you will essentially have invested or deducted $2,130,000. Although tax savings are huge, the real reason that you are investing the money into the pension plan is the compounding interest effect in the tax-deferred environment and your eventual goal of retirement: “you only have so many crowns” and need a plan for the day you are done with dentistry. With a target rate of return of 8% annually over the 30 years of investing the $71,000 annually, your investment will grow to $8,686,000. That growth represents another $6,000,000 and a rather big incentive to own and invest in a pension plan. If you do not like the growth rate of 8%, then plug in 7% or 6% into the equation, and you still wake up with $7,176,000 or $5,949,000, respectively. The point is that the difference between savings of $71,000 a year as an owner vs $18,000 as an employee can impact you significantly in retirement.

  • 5.

    Control your destiny. To save the best for last, owning your practice puts you in control of your own destiny. When you work for a corporation, you are an employee, and it will decide who gets hired, who gets fired, what supplies and technology are used, what raises are given, what time off is allowed, what dentists and specialists come and go, what treatment plans, what schedule you work, and so on. Corporations will tout that these are the “hassles” of ownership, but we work with established doctors daily who tell us that the flexibility and control they obtain with owning their practice made it the best decision for them.

So, how do you navigate from where you are as a young doctor to ownership?

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Apr 4, 2017 | Posted by in Orthodontics | Comments Off on The case for private practice
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