Entity choice is one of the first big decisions a practice owner faces, and the S-corporation question comes up constantly. Here’s a plain-English look at the trade-offs.
What’s the difference?
A sole proprietor (or single-member LLC taxed as one) reports business income directly and pays self-employment tax on the profit. An S-corporation lets the owner take part of the profit as a salary and part as a distribution, which can change how much is subject to certain payroll taxes.
When does an S-corp make sense for a dentist?
| Consideration | Sole proprietor / LLC | S-corporation |
|---|---|---|
| Complexity | Lower | Higher (payroll, separate return) |
| Payroll tax | On all profit | On reasonable wages only |
| Ongoing cost | Lower | Higher (payroll, accounting) |
| Best for | Lower profit, simplicity | Higher, stable profit |
What is “reasonable compensation”?
An S-corp owner must pay themselves a reasonable wage for the work they do before taking distributions. Setting it too low invites IRS scrutiny. This is a judgment call best made with your CPA, and it interacts with your retirement plan contributions.
Frequently asked questions
Many established owners do, but not all — it depends on income, state rules, and the numbers. Lower-profit or newer practices sometimes don’t benefit enough to justify the added cost.
Entity choice interacts with retirement-plan contributions and reasonable compensation, so it’s best decided alongside your plan design rather than in isolation.
Founder & Financial Planner · Investment Adviser Representative · Series 63 & 65
Ian McGinnis is a financial planner and founder of Dental Wealth Partners, a non-commission, fee-only financial planning firm for dentists. He is the author of The Wealthy Dentist: Smarter Money. Less Stress. More Life. and hosts the Smiles & Cents podcast.
Keep reading
- Tax planning strategies for dental practice ownersProactive, year-round tax strategies for dental practice owners — entity choice, retirement plans, income timing, and coordinating with your CPA.
- Retirement plans for dental practices, comparedA comparison of 401(k), safe harbor, profit sharing, SEP-IRA, and cash balance plans for dental practice owners — and how to choose.