Entity structure mistakes can create a significant, unnecessary tax burden for expanding dental practices before even considering liability exposure. Yet most practice owners finalize their expansion plans without consulting professionals who understand both the legal requirements and financial implications.
The legal decisions you make during expansion, from entity structure to lease terms to employment agreements, create financial consequences that last for years. Some mistakes become apparent immediately. Others surface only when you try to sell the practice or face an IRS audit.
Dental practice consultant services exist precisely because these decisions require expertise at the intersection of dental industry knowledge, financial planning, and legal compliance. Practice owners focused on scaling multi-location dental practices must address legal structure early in the planning process. Understanding where practice owners commonly go wrong helps you avoid the same costly missteps.
Why Legal Structure Decisions Have Financial Consequences
Every legal decision during expansion carries a financial price tag. Entity structure affects how much you pay in taxes each year. Employment classifications determine whether you face IRS penalties. Lease terms can destroy your practice’s sale value or restrict future growth options.
The Cost of Getting Structure Wrong
Choosing the wrong entity type can result in excess taxes year after year. Misclassifying an associate as an independent contractor can trigger back taxes, penalties, and interest. According to Deel, unintentional misclassification penalties can include up to 40% of the FICA taxes that should have been withheld from the employee’s wages. A lease with restrictive assignment clauses can reduce your practice value significantly when you eventually sell.
These are not hypothetical scenarios. They happen regularly to practice owners who rely on general business advice instead of dental-specific expertise.
Why Dental Practices Face Unique Challenges
Most states prohibit the corporate practice of dentistry, meaning non-dentists cannot own or control dental practices. This restriction eliminates standard corporate structures available to other businesses and requires specialized entity planning.
Additionally, dental practices operate with unique revenue cycles, employment relationships, and facility requirements. General business attorneys and accountants may not understand these nuances. Practices that build financially strong foundations work with dentistry-specialized advisors.
Entity Structure Mistakes That Cost Expanding Practices
Entity structure is often the first major legal decision during expansion, and mistakes here compound over the life of your practice.
Corporate Practice of Dentistry Restrictions
According to Dental & Medical Counsel, the most common mistake dentists make when structuring their practice is forming a standard corporation or LLC that allows non-dentists to be listed as shareholders or members. This violates the corporate practice of dentistry rules in most states.
States handle these restrictions differently. Some require Professional Corporations (PCs), others permit Professional LLCs (PLLCs), and some have specific dental corporation statutes. Expanding across state lines adds another layer of complexity since each state has its own rules.
Operating an improperly structured entity can result in insurance reimbursement denials, regulatory citations, and personal liability exposure if someone attempts to pierce the corporate veil.
Choosing the Wrong Entity Type
Beyond regulatory compliance, your entity choice affects taxation. Many expanding practices benefit from S Corporation election, which can reduce self-employment taxes. However, S Corps have ownership restrictions and compliance requirements that do not fit every situation.
Multi-location groups often use holding company structures with separate entities for each location. This provides liability protection across locations and improves financials for future sales or partnership opportunities.
The right structure depends on your state, growth plans, partner considerations, and exit strategy. Dental practice consultant services help you model the financial impact of each option before you commit.
Planning a practice expansion? Our team helps dental practice owners evaluate structure options alongside their legal advisors. Schedule a consultation to discuss your growth plans.
Structure for Future Flexibility
Your entity structure should accommodate future changes. Can you easily add partners at specific locations? Will your structure support a future DSO partnership or private equity investment? Can you sell individual locations without restructuring the entire organization?
Practices that plan these scenarios early avoid expensive restructuring later. Tax-free reorganizations are possible within IRS parameters, but they require careful planning and execution.
Employment Classification Errors and Their Penalties
Employment relationships during expansion create significant legal and financial exposure. Misclassifying workers is one of the most expensive mistakes practice owners make.
When Associates Are Employees
Many practice owners want to classify associate dentists as independent contractors to avoid payroll taxes and benefit obligations. However, the IRS and state agencies apply strict tests to determine actual worker classification.
According to the IRS, worker classification depends on behavioral control, financial control, and the type of relationship between the worker and business. Suppose the practice controls how work gets done, sets specific hours, provides training, and requires workers to follow specific procedures. In that case, these factors point to an employment relationship, regardless of what the contract states.
The American Dental Association guides employment agreements, noting the importance of having contracts reviewed by attorneys familiar with state-specific employment law.
Financial Consequences of Misclassification
Worker misclassification results in back taxes, penalties, and interest. According to Playroll, if the IRS determines misclassification was unintentional, civil penalties include a $50 fine for each unfiled Form W-2, 1.5% of wages, and 40% of unpaid FICA taxes plus the employer’s full share of FICA taxes.
If the IRS suspects fraud or intentional misconduct, penalties increase substantially. States also aggressively pursue misclassification, adding additional penalties.
What Employment Agreements Must Include
Even properly classified employees need well-drafted agreements. Essential provisions include clear compensation structures, specific termination conditions, reasonable non-compete restrictions, and a defined scope of duties.
Many practices use template agreements without customizing them to their situation. This creates ambiguity, leading to disputes and litigation. Employment agreements should also address malpractice insurance coverage, continuing education requirements, and any path to partnership or ownership.
When planning forpractice growth, account for legal costs to draft proper agreements. The investment prevents far more expensive problems later.
Lease Terms That Limit Growth and Reduce Practice Value
Your facility lease may be the second-largest financial commitment after your practice. Yet many owners sign leases without understanding how specific clauses affect their business.
Clauses That Destroy Practice Value
A recapture clause allows landlords to cancel leases when asked to assign them to a practice buyer. This single provision can make your practice difficult to sell, as buyers cannot assume your favorable lease terms.
Subordination clauses without non-disturbance agreements put your tenancy at risk if your landlord’s financing changes. If the landlord defaults on their mortgage, the new lender could evict you regardless of your lease terms.
Restrictive assignment provisions that require landlord approval without standards for reasonableness give landlords significant control over your future sale. Personal guarantees that extend beyond the lease term expose you to liability even after you have sold.
A practice valuation considers lease terms because they directly affect what buyers are willing to pay. Practices with favorable, assumable leases command premium prices.
Negotiating for Future Flexibility
Many practice owners accept initial lease terms believing they are non-negotiable. In reality, most commercial lease provisions can be modified.
Essential negotiation points include renewal options at predetermined rates, assignment rights that permit transfer to future buyers without unreasonable landlord interference, expansion options or rights of first refusal on adjacent space, and caps on annual expense increases.
Dental-specific lease considerations include build-out allowances for specialized infrastructure, HVAC requirements for dental equipment, and signage rights that support patient visibility.
Work with commercial real estate professionals who understand dental practices and involve your attorney in lease review before signing.
A fractional CFO brings financial expertise to expansion decisions, helping you evaluate the business impact of legal structures before you commit.
Coordinating Consultants, Attorneys, and CPAs
Expansion requires expertise across multiple disciplines. Most practice owners need separate professionals for legal matters, tax planning, financial strategy, and real estate. The challenge is coordinating these specialists effectively.
The Consultant’s Role in Expansion Planning
Dental practice consultant services act as the quarterback for your advisory team. While attorneys handle legal drafting and CPAs manage tax compliance, consultants evaluate the financial implications of every decision and ensure nothing falls through the cracks between specialties.
Consultants help you understand how entity structure affects both tax liability and operational flexibility. They model the financial impact of different lease terms. They review employment cost structures and help you budget accurately for expansion.
This coordination role is especially valuable when professionals from different disciplines offer conflicting advice. A consultant with dental industry expertise can help you weigh trade-offs and make decisions aligned with your overall strategy.
Building Your Advisory Team
Assemble your team before you need them urgently. Identify an attorney with dental practice experience in your state. Work with a CPA who understands dental practice taxation and multi-entity structures. Engage a dental practice consultant to coordinate financial planning.
When evaluating advisors, ask about their specific experience with dental practice expansion. General business expertise is insufficient for the unique challenges dental practices face.
Frequently Asked Questions
What entity structure works best for multi-location dental practices?
The optimal structure depends on your state’s dental practice rules, tax situation, and growth plans. Many dental practices use a Professional Corporation (PC) or Professional LLC (PLLC), and some elect S-Corp status for tax efficiency. Multi-location groups often use holding-company structures with separate entities for each location to provide liability protection and cleaner financial statements. Work with a dental practice consultant alongside your attorney to model the financial implications of each option before you commit.
How do I know if my associate dentists should be employees or independent contractors?
Classification depends on the actual working relationship, not what you call it in contracts. The IRS examines behavioral control, financial control, and the type of relationship. If you control the associate’s schedule, require them to follow practice policies, provide their equipment, and subject them to non-compete provisions, they are likely employees regardless of paperwork. When in doubt, classify conservatively as employees and consult with an employment attorney.
What lease clauses most commonly hurt dental practice value?
Recapture clauses allow landlords to cancel leases when you try to assign them to a buyer, potentially undermining your practice’s sale value. Restrictive assignment provisions, inadequate renewal options, and subordination clauses without non-disturbance agreements all reduce practice value. Personal guarantees that extend beyond the lease term create ongoing liability. Have dental-specific legal counsel review any lease before signing, and negotiate these terms early.
When should I engage a dental practice consultant during expansion planning?
Engage consultant services early in the planning process, ideally before you have identified specific acquisition targets or signed any agreements. Consultants help you evaluate financial readiness, model expansion scenarios, and coordinate with attorneys and CPAs. Waiting until problems arise costs significantly more than proactive planning. The investment in upfront guidance typically saves multiples of the cost through avoided mistakes and better negotiated terms.
Can I use the same attorney for entity formation, employment agreements, and lease negotiation?
Possibly, but ensure your attorney has dental industry expertise in each area. Many practice owners work with different specialists for entity law, employment law, and commercial real estate. Some dental-focused law firms offer comprehensive services across all areas. A dental practice consultant can help coordinate these professionals and ensure nothing falls through the cracks between specialties. The key is verifying relevant experience, not assuming general business expertise transfers to dental-specific situations.
Moving Forward With Confidence
Legal mistakes during dental practice expansion can lead to financial consequences that persist for years. Entity structure affects your annual tax burden. Employment classifications determine IRS penalty exposure. Lease terms impact your practice value and sale flexibility.
The common thread across these mistakes is attempting to navigate complex decisions without dental-specific expertise. General business advisors may not understand corporate practice of dentistry restrictions, dental employment relationships, or facility requirements unique to dental practices.
Dental practice consultant services provide the coordination and industry expertise that protect your expansion investment. Working alongside your attorney and CPA, consultants ensure every legal decision aligns with your financial goals and growth strategy.
Ready to expand with confidence? Connect with our team to coordinate your financial and legal planning.
