Even though corporate DSOs (Dental Service Organizations) are growing at a rapid rate, the demise of the private practitioner is in no way imminent. According to the ADA, only 7.4 percent of US dentists are affiliated with a DSO. Many of those are young, recently graduated dentists who don’t believe they are in a financial position to start their own practice. There are also those dentists who simply don’t want the headache of managing the day to day operations of their own practice.
“Dentists go to school to study dental medicine not business,” says David Forbess, CPA and CWA financial advisor, “yet, they are expected to run a million-dollar plus business right out of the gate.”
When it’s put that way you can understand why more and more dentists are going the corporate route. However, the entrepreneurial spirit is alive and well in the dental industry. When we surveyed our CWA Digital News Monthly readers, almost 40 percent say they actually enjoy the business side of dentistry. Nearly 60 percent say they would not consider joining a corporate owned DSO. That said, new changes to the tax code have many considering a third option – creating their own DSO structure.
As David explains, “Code 199A states that a non-service business can exclude up to 20 percent of income from taxes. Since a DSO moves the management functions (HR, payroll, supplies, marketing and advertising) of a practice to a separate company, this part of the business qualifies as a non-service area. We’ll know definitively by this fall, but based on our understanding, this could be huge for a certain segment of dentists.”
Which segment of doctors are prime candidates? “Those who own three or more practice locations with a minimum of 3 to 5 million in revenue, as well as group practices that fit that criteria may want to consider starting their own DSO, and not just for tax purposes. There are multiple advantages to the DSO structure.”
Some advantages to starting a dental service organization are:
– Centralized management that eliminates redundancy and reduces costs
– Dentists can spend their time seeing patients vs running the business
– Non-dentists can indirectly own equity in the practice, for example a strong office manager can become the Director of Operations
– Greater purchasing power on everything from floss to equipment to health insurance
– Practice structure can reward doctors based on their degree of risk and create incentives for associate doctors to stick around
– Consistency in branding and marketing
– Protects assets and reduces malpractice exposure
Even with all their advantages, David is quick to point out that there are plenty of stumbling blocks to watch out for when setting up a DSO. This is where the expertise of a trusted financial advisor comes in.“There are legal implications that should not be glossed over. Services agreements need to be properly written, detailed and specific so everyone has a clear understanding of who’s doing what and how they will be compensated, especially if you plan to add new partners in the future.” Most important, according to David, “The form and structure of your DSO must pass IRS muster if you want to get the full tax advantage.”
David continued, “I’ve helped a few of my clients transition to this model and every time we start at the same place, weighing the pros and cons based on their unique situation. Then I help to navigate the process and create a structure that works for them. In the right situation, the opportunities can far outweigh the costs.” Don’t let misperceptions or inertia keep you from maximizing the potential of your practice.
CWA offers complimentary consultations. To find out if creating a DSO model for your practice makes sense, reach out to a member of our team.