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S Corp VS C Corp: How Entity Impacts Taxes & Practice Profits · The Millionaire Dentist™

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  Hello, everyone, Welcome to the Millionaire Dentnis Podcast, brought to you by
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  Four Quadrants Advisory. On this podcast, we break down the world of dentistry,
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  finances and business practices to help you become the millionaire dentist you deserve to
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  be. Please be advised we do speak with an honest tongue and may not
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  be safe for work. Hello and welcome. This is Casey Hires back at
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  the Millionaire Dentist Podcast in studio with co host Jared Bridgeman. Yo, Casey,
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  how are you great to see you? I guess so. Yeah.
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  We have a guest today, don't we a guest? Absolutely? We have
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  a guest in studio with us, the one and only Kevin Rotten. How's
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  it going? Kevin is a real show off. Yeah. Kevin's one of
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  our lead CPAs here at the firm. Also has his NBA. I think
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  that's six extra letters after your name that you know, just a diva a
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  little bit. I guess yeah. You just want to keep getting success and
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  keep pushing herself. I get it, Kevin, I have no letters.
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  Evan's a big teddy bear's He's the opposite of a diva. But we wanted
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  to bring him in to day to get some of his expertise really on entity
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  structure. That's the topic for the day, Entity structure, Jared, what
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  do you know about that? My knowledge of entities would be like watching ghost
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  adventures and seeing spooks and specters and all kinds of stuff. But for real,
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  though, I know it has something to do with how you structure your
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  company and taxes and stuff. I love that high pitch. Yeah, taxes
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  and stuff, Valley girl. Well, and let's let's back up again.
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  We talked to dozens and dozens and dozens and hundreds and hundreds of practice owners.
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  We look at a lot of data. We see good, bad,
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  and ugly. Entity structure is one of those things we get to have court
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  side seats to some entity structures that might work, some of that are terrible,
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  and others that make zero sense and expose you to more tax liability and
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  more liability and general Yet most practice owners feel like they have the best tax
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  entity ever and they are really kind of clueless about it. Not a shot
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  at you, the listener, the dentist, You just don't. Yeah,
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  just like a veiled shot, but like you trust your your CPA to help
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  you with the right thing. And you say, hey, I want to
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  be aggressive, I want to be sophisticated, and they go, okay,
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  let's try this, and then we look at it and go too often yikes.
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  Yeah, And I've I've heard you say many times how dentists they go
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  to school, they're experts in dentistry, and they rely on CPAs their advisors
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  to be experts in tax I mean, back to your NBA and CPA.
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  You're a smart guy, but you're not trying to do dentistry. You shouldn't
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  want me putting my hands in your mouth. So there you go. And
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  so if you have DDS or d m D after your name, you know
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  why why you've got that covered? You know? Why are you trying to
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  do the business side of dentistry? Would be the analogy. But unfortunately a
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  lot of people work with CPA's who they're good at being a historian, they're
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  good at doing a transaction of doing taxes, but there's no proactive, comprehensive
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  advice. Therefore, let's get it into that today, Kevin, What type
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  of entity should a dental practice be? It is a broad question, and
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  I can say most of the time, I can't always never say never,
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  never say always when it comes to tax and accounting. You know. I
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  try to tell that to my wife too. I say, don't use absolutes,
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  you know, because she's like you, you know, you never pick
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  up the trash. Well, I'm a good boy. I do a lot.
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  But you know, hey, you you never cook a healthy meal.
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  But yeah, when she says you never cook a healthy meal, why that
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  negates your come. Of course I have before, just not often. So
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  yeah, good for you. You know, most of the time, an
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  S corp entity structure is the best hold on corps short for corporation corporation Okay,
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  smart guy, not corporal corporation most of the time. And S CORP
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  entity is the best structure for probably about ninety nine percent of practice owners that
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  we talked to with working with Casey. I know Casey talks to a lot
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  of prospects, a lot of practice owners at a lot of his events,
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  and when when we talk to them through the our vetting process, don't be
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  shy. We vet the hell out of people. We don't let anybody in.
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  And we've seen an uptick in non S CORP practices, whether it's S
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  corps sole proprietors, things like that, and uh, there's just a lot
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  of pitfalls and problems with having practice that's organized as a C corp or a
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  SOL proprietor. So from what I've I've overheard from say you and some of
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  our other accountants in the in our in our office, one of the major
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  problems with sea corps is something that's I don't know if it's the actual correct
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  term for like double taxation. Double taxation as a well known phrase that is
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  linked with sea corps and what that is. It's sea corps are taxed at
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  the federal level. Right now, the federal corporate tax rate is twenty one
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  percent, So any money, any income, your tax at the federal level,
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  and also at the state level. Forty five states have a corporate tax
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  rate also. Then, so what happens what causes that double taxation is okay,
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  those corporate profits are tax anytime the owner wants to withdraw any of those
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  earnings that they've worked hard to make in the practice, when they pull those
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  out, you're now going to get tax in additional fifteen to twenty percent federal
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  tax rate on those dividend distributions. So if someone's making up a million a
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  year, they're losing roughly two hundred thousand just on the federal level before they
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  even paid themselves. Yeah. Yeah, look at the look what you doing
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  math? Wow? Okay, for your shoes back on. But then the
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  yeah, distributions taxed. Uh, the also at the state and dividend distributions
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  are usually taxed at the state income tax rates. So you have federal and
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  state tax on practice income, federal and state tax on dividend distributions. So
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  it's it's taxed heavily in the SEA Corp. There's also a lot of other
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  there's actually a lot of other I guess a laundry list of administrative requirements for
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  SEA Corp. You have to have annual meetings, file annual reports, financial
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  disclosures, and financial statements. So very very lot of extra work, a
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  lot of extra work for less money, for less money. Wow. So
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  what would be and all this they can too deep into what would be the
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  reason? Who would use a C corps? Most of your bigger, bigger
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  types of companies, your publicly traded companies. Now I don't want to get
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  too much into the weeds, but as corps you're only allowed one hundred shareholders
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  and they have to be domestic, meaning US citizens. They can't be others,
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  not to be at home cooking dinner and stuff domestic. Now I've heard
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  you say something like this before. Like sometimes lawyers and accountants they will air
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  quote help a practice owner set up multiple entities to create inter company relationships that
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  ultimately lead to a lot of extra legal accounting, tax prep and and it's
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  almost like I'm gonna get in trouble for this. It's almost like the you
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  know, the government, like let's have a whole bunch of new layers and
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  red tape and all these you know, instead of two forms, fill out
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  two hundred forms. And then we're all busy. And it seems like there's
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  some of these entity structures where there's just a lot of extra work, a
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  lot of extra work, and then you're paying someone else to do all that
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  extra work too, that's not free. And then what's the game. It's
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  they try to advise the business owner on how to avoid that double taxation.
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  Let's set up multiple entities inner company relationships to pass off that income to another.
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  And that's fun for practice owners to talk about at a cocktail party,
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  about all their all their different you know Llcason. It these in corporations and
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  this, that and the others, and it sounds really cool, but what
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  are they what are they doing? It's just overly complicated. We've had to
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  unwind people for some from some overly complicated entity structures. And you know,
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  on the front end, it's well, yeah, this is great and this
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  is such the best way, and we don't render an opinion until we spend
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  a lot of time. But ultimately, I'd say nine out of ten times,
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  and that's low balling it. When we get into all the entity structure
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  and all the taxes and all the complexities. When we clean it up,
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  it's very common for us to save people anywhere between nine thousand and thirty five
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  thousand dollars a year and less tax liability simply by structuring a lot of It's
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  some of this is proprietary that I won't share completely, but the way we
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  structure things and entity structure is part of that. Ultimately there, it's it's
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  simple for us, and their tax liability is less, and a lot of
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  times they can even save more and make more. But yet they get so
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  mired in this complex, incorrect entity structure. Yeah, that's that's the deal,
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  right. There is just spending so much time just trying to move income
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  from one one taxable entity to a lesser taxable entity, cover up with expenses,
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  get this tax liability down, and now there's Was there a time a
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  couple of decades ago one of these was more popular, right, was it?
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  C corp was like, there was some reasons why from a tax perspective,
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  but that's literally a couple of decades back. Yeah, that tax code
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  changes. Things change. That's why again, for the most part, an
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  s corp is ideal and can comprehensively and universally lead to much more benefit.
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  Right the way the IRS tax code is set up as corpse, Uh,
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  it's perfect pretty much for uh most Like I said, so, how about
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  soul props. We hear a lot of soul proprietorships. What's uh, Yeah,
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  that's that's another one that we have seen quite a bit with practice owners
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  is set up as a basic soul prop and talked a little bit about how
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  C corps are for those massive companies with hundreds and hundreds of shareholders that are
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  traded on the stock market. On the other side of things is the sole
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  proprietorship, and that is where there's no additional tax forms. You just file
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  all of your information on the schedule see on your individual tax return, and
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  that would be more I for the very very small business owner, maybe someone
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  running a business out of their home. Yeah, my experience PROPS has been
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  yeah, would be side business. Yeah, yeah, that's perfect for that
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  because it's it is very simple. You don't your full time job usually with
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  so a side hustle lot of a house versus a two thousand square foot million
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  dollars production dental practice with sixteen employees. Absolutely, yeah, that's that is
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  too big, okay. And with being a sole proprietor. The huge pitfalls
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  is there's no distinction between private and practice assets and liability, so size does
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  matter, yes, okay, So when you say there's no distinction between the
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  private and practice asset and liabilities, so would that be in term like I
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  from my understanding is if if let's say someone falls and hurts themselves on your
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  sidewalk whatever, and they sue your practice, they're also suing you su they
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  can get money from from both. Yeah. Yeah, there's no separation from
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  a legal liability standpoint. You are your practice, so you know, if
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  something happens accident or whatever. Unfortunately, live in a little bit of a
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  litigious society and and they can come after so uh yeah, that unlimited liability.
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  There's also from the back standpoint, is unlimited self employment taxes on all
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  practice income as a sole proprietor. What does that mean? So of your
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  net income is subject to self employment tax? And we're seeing also a lot
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  of soul proprietors. You know, they'll they'll be set up that way thinking
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  yeah, that's that's the simple way, the easiest way to do it.
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  I don't have to file any other tax returns. I don't have to set
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  up an entity, so to speak. But by doing that, they're then
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  missing out on taking advantage of self employed retirement savings options. I won't get
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  into the weeds on it, but there's set iras, simple iras, things
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  like that backdoor iras. No I just I just talked to somebody yesterday and
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  they kept going on and on and on and on about I want to set
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  up the backdoor IRA. And it's like, why don't you save one hundred
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  and fifty thousand dollars for retirement and stop trying to be cute, right,
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  I mean, the backdoor IRA. What are they going to do? With
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  their income save what sixty five bucks? Yeah, yeah ish yes, yeah
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  yes. And so I guess you know part of this and this might be
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  me having too many you know, these in depth conversations us, you know,
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  me hearing how cock sure some of these prospects are about their entity structure
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  and all of their investment strategies. To find out when we look at their
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  data, uh, it's a mess. It's not good. Uh, none
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  of it except your dentistry, right, And then we help them and then
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  year two they're like, oh my gosh, this is so much better,
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  this is so much cleaner. I'm why didn't do this before? And it's
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  but the people I talk to, they have all these big ideas and it's
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  like they're tripping over nickels to get the dollars, all their entities, all
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  their all their cute little investment strategies. I mean, anyway, sorry,
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  I'll get off my stock. That's exactly right because of hearing that from a
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  smart guy like you, thanks pal. So if you are a C corp
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  or sole proprietorship, thinking, all right, what about an S corps?
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  So we're talking about the size of the entity a soul proprietor being for that
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  small side hustle ce corp. For those huge multi shareholder a multimillion dollar businesses
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  corporations that are traded on the stock markets like PEPSI. Yeah, but for
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  that middle side, for that practice owner, for a someone in dentistry.
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  By forming an s corp, a practice owner can enjoy the benefits of the
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  limited liability aspect of corporations. But then by passing the double taxation that the
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  soul prop enjoys, you get that corporate veil separation between a corporation and the
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  owner. There is a liability and a tax distinction now between the practice and
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  the doctor. It also allows you, I mentioned about the retirement structures.
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  It allows you, by being in scorp to pay yourself a W two which
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  will limit that self employment tax exposure and it opens up some additional retirement planning
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  options. Yeah, a lot of these. You know, you look at
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  the pros and the cons right, and so people that maybe their entity structure
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  is not ideal. There's a couple positives to it. They focus on those
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  positives and don't look at the negatives. Right. It would be like,
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  Gosh, I get a lot of exercise because I walk to and from work,
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  that's really that's a real big positive. The negative would be if somebody
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  stole my car. I don't have a car, so therefore I have to
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  walk to work. Does that make sense? And it's kind of a goofy
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  analogy, but like I'll hear one or two benefits or positives to the wacky
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  structures that people have, and they like they just hang their hat on that
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  and that's what the that's what they've been told from their CPA. So right,
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  and to be honest case he probably could use the steps, no doubt.
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  I mean that is a positive. Hey I walk to work. You
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  know, sometimes with things like this, you it takes you getting burned on
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  something like a tax to be like, oh, shoot, the advice I've
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  been getting or the way my buddy who's an account and set it up is
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  not correct. Right. In a lot of these prospects that we talked to
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  through the vetting process, they don't realize that, hey, I'm getting tax,
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  I'm getting excessive self employment tax. When they see how we do it,
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  they go, wait, what, Because to be fair, if you're
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  not a tax person or good with that kind of stuff, you really don't
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  know. No, I mean, it's it's you're you're trusting right, the
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  professionals. Right. I trusted a dentist in my twenties out in southern California
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  to also do a root canal on me. Oh boy, had no business
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  doing a root canal mystic canal. I now I've got an implant. I
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  trusted said dentist. Said dentist was not good. A lot of practice owners
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  trust CPA. They don't know CPA is not good until they get burnt with
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  an implant. Yeah, and it's sorry. I'm not bitter. It was
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  you know, that's like eighteen years ago. And I hate to say it
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  because it's almost like picking on my brother or something. But there are CPAs
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  out there that multiple times I've been like, I cannot believe what you're seeing.
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  What I'm seeing on these practice owners tax returns just crazy, But would
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  you say it? Part of that becomes from the fact that all day,
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  every day, you are working with dentists and dental practice owners and specialist versus
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  he's he's mastering dental accounting for our clients, versus being a historian. The
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  CPA going, well, give me your information. Well, if all your
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  quick books and all your stuff inaccurate and not good. They don't care.
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  They're not looking at it comprehensively and universally for you to retire sooner with millions
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  more. They're doing a transaction Casey, you told me a story the other
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  day about a prospect or a newer client or whatever whoever was that they had
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  spoken to their CPA about some kind of tax thing and they said, oh,
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  yeah, you should look into that. You should look into that.
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  That was their advice. Yeah, that's the proactive advice. That's really lights
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  out. Right, Hey, I spend a lot of time looking over your
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  practice data. Your overhead's too high, you need to look into that.
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  That's like the extent of where a lot of practice owners get advice. No
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  kidding, it's high. What we do is come and implement solutions to fix
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  it. But that's another podcast. So we have an entire accounting team here,
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  and do they all spend time looking at each and every client universally and
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  comprehensively. Right, absolutely, And that's the smart guy agreed with us high
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  five. Yeah. And that's the great eight thing is there'll be times where
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  we talk together about the client's financial picture and how to structure something and bat
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  around ideas. I've gotten ideas from the other CPAs, you know, how
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  should we the best way to do this? And not only that, then
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  your team works with the financial planning team all in one house under one roof.
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  Yeah, we have a client coming in tomorrow where planning team and the
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  accounting team today are getting together and to discuss you know, make sure every
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  everybody's on the same page, all the teas are dotted and all the eyes
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  are crossed. Yes, yes, So if anybody out there has any questions
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  about entity structure and things like that, feel free to give us a call.
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  Our numbers listened on the website and you can always shoot us an email
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  on our contact us page on our website, which is four quadrants Advisory dot
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  com. Kevin, I want to thank you so much for being on here.
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  Was our anything else you wanted to finish up with today? No,
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  no, thank you, Thank you so much for being on here as well.
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  Folks visit four quadrants advisor dot com slash events. We're gonna be in
• 21:08
  Chicago in October and we're gonna be in Orlando as well, so check us
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  out. That's all the time we have today. Thank you to our guests.
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  For their insight and for sharing some really great information. And thank you
• 21:22
  to you the listener for tuning in. The Millionaire Dednis podcast is brought to
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  you by four Quadrants Advisory to see if they might be a good fit for
• 21:29
  you and your practice. Going over to four Quadrants Advisory dot com and see
• 21:33
  why year after year they retain over ninety five percent other clients. Thank you
• 21:37
  again for joining us and we'll see you next time.