How to Start a Business
I have focused my career to help medical professionals create partnerships, retire, or start a business. As an entrepreneur, I have had to figure out what is necessary to start a business. I had to learn how to do things the hard way. I made many mistakes, but have managed to run my business for six years.This year I decided to retool my process and document the journey from start up to an established business. To do this, I decided to start a business using what I know and researching what I still need to learn. My goal is to create a lean business that is easy to get up and running.The business that I chose to start has nothing to do with Valuation. For this series I am going to pretend that I’m starting a scratch dental practice as I speak with about 100 dentists a year on the subject.Please note: I am not an attorney nor a tax advisor. The process below documents my personal decisions in 2017, tax rules and regulations change often so please consult with an attorney or tax advisor when starting your business.
If you already have your business up and running you may want to skip through to some other sections. Here is a navigation menu:
Part 1: Entity Selection Process
Below is a chart highlighting the different entities that are available.
|Entity||Liability Protection||Tax Status||Benefit|
|Sole Proprietor||No||Pass Through||Easy to use|
|LLC||Yes||Pass Through||Limited Paperwork|
Possible to limit your Medicare taxes
|S-Corp||Yes||Pass Through||Possible to limit your Medicare taxes|
|C-Corp||Yes||Double Tax||Can have more than 100 owners|
|Partnership||No||Pass Through||Worse than Limited Partnership|
|Limited Partnership||Yes (for the limited partners)||Pass Through||Protection for some partners|
We are looking at starting a scratch dental practice, so we know that we can eliminate two options right away. Your odds of being the target of a malpractice suit are lower than 9% per year. Odds are at some point in your career you will face at least one case. Therefore, liability protection is a must. So, a sole prop and forming a simple partnership are out. Additionally, if there are two people in a Limited Partnership, odds are both would be considered general partners. Therefore, they wouldn’t get the needed liability protection anyway.
So that leaves us with three choices:
You can see that both the S-Corp and the LLC have pass through tax status. These are taxed once by the IRS.
Unfortunately, a C-Corp is taxed twice. The IRS requires payment for the C-Corp’s profit, and then taxes from the shareholders on their dividends from the company. So, unless you feel some duty to pay the government twice every year the C-Corp should be eliminated.
If you choose to file your LLC taxes on a 1120s form, the two companies will essentially be taxed the same. Both enjoy one level of pass through taxation and have a quirky tax advantage. This advantage is relatively complicated so bare with me as I lay out the framework and then I’ll provide an example.
- Social Security tax rate is 6.2% for you and 6.2% for your company (which you own), up to $127,200 in 2017.
- Medicare tax is 1.45% for you and 1.45% for your company with no limit.
As long as you believe that you will be able to collect SS when you retire, it is in your interest to pay yourself a W-2 wage of $127,200 this year. Let’s assume that your profits for this year are going to be $227,200. If you take a W-2 wage (you have to take a reasonable W-2 salary with a S-Corp) of $127,200 then that leaves a profit of $100,000. You pay 12.4% SS tax on the $127,200 and you pay 2.9% Medicare tax on the $127,200. The profit of $100,000 is not taxable for SS, and you found the tax advantage which allows you to take that $100,000 in profit without paying the 2.9% Medicare tax on it. This structure may have just saved you $2,900.
Both of these entities share a nice tax treatment perk, so we can’t use that to eliminate either one. A S-Corp has a limit of 100 shareholders, which shouldn’t be considered a huge drawback unless you are thinking about really expanding your business.
The only remaining difference is in the paperwork necessary to keep each entity running. To put this short, S-Corps have a lot of rules and regulations that need to be followed, whereas, LLCs have minimal paperwork requirements.
The logical thought is that if it is going to save us some time why not just pick the LLC? My thought is that the extra paperwork may protect the owner a bit more if they find themselves as the target of a malpractice suit. So, my ultimate selection would be a S-Corp. For medical practices, some states may require you to form a professional corporation, or a PC.
In part 1 we picked out our ideal entity structure. Now it is time to select a name and file for our company. This is a two step process and I’ll start with making sure that the name is available in your state. I live in Arizona so I need to go to the Arizona Corporation Commission’s website located at:
All states are different so you will need to search for your state’s commission if you don’t live in AZ. There is a search tool that allows the user to verify that the name that they picked isn’t currently being used. I’m going with Cool Family Dentistry, Inc. as it isn’t taken here in Arizona. By the way, you need to attach a corp, or inc, or ltd. to your name when you file.
The second step in the name picking process is getting a .com address that is close to the name/branding that you want to use. I’m going with coolfamilydentistry.com as it fits my corporation name and is available. So how do I know it is available? You need to go to a vendor of domain sites to figure out if your desired domain is available. I went to the following three companies to see how they were priced.
Each one is around $1-$10 so the decision on which one to go to isn’t really important at this stage. In theory you would like the place you register your domain to also be the place you use to host your website. We will cover setting up a website in part 6.
At this stage we have our:
- Ideal corporate structure
- Trade name available through our state
- Available .com name
If you are an attorney you can skip this section.
I pulled some coupon codes to Swift filings, BizFilings, and Corpnet. Each company can guide you through the paperwork needed to file for your entity.
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If you decide to do this stage without help, let me give one more piece of advice. You probably won’t find the option to start a C-Corp or a S-Corp. There is a minor catch here, all corporations start as C-Corps. You have to file additional paperwork with the IRS to become a S-Corp. You can find the form and the instructions on how to fill out the form on the link below.
You have about 75 days from the time you start your business to file this form. If you don’t file it in time, you will be a C-Corp for the tax year. As noted above that subjects you to double taxation for the year!
After a week or two you should receive approval from your state corporation commission. I paid an expedited fee, of $35, on 1/5/17 and received my approval on the 9th. My approval letter came with some other good news. Arizona now publishes new corporations for you if you live in the populated counties.
In the past, it was necessary to publish my articles of incorporation with a newspaper to inform the world of my new company. This saved me a little bit of hassle and about $50, so thanks Arizona. Your state may not have this time saving step.
This next step should be really easy, but the government give’s the irs.gov website office hours, because computers need to rest too??? Your business needs an employer identification number (EIN). Below is the link to obtaining your EIN, just be sure that you are on government hours before doing this step.
Depending on your state you may need to repeat this step to obtain a state identification number as well.
Depending on your state/city you will probably need a business license. Figure that this should cost around $20-$50 per year.
If you selected a corporation then you will need a shareholder’s agreement. I have searched a couple of sites and what I was looking for on the link below for $20.
For the first three steps of this process, if you have spent less than $500 you are doing great. Part 5-8 are going to cost a lot more so you are probably going to need to obtain financing to keep pushing forward to get your practice up and running.
Banks need a way of measuring how risky your business is so that they can determine the proper rate structure for the risk. They will assess your fico credit score, your profession, and seek to have their funds collateralized by your property, or equipment. They then find profitable niches and actively target those low risk pools. If you have a medical license and a fico score in the 700+ range they are going to be pleased to do business with you. If not things get a little more difficult. let’s start with the low risk high reward pool of loan seekers.
Low risk (700+ FICO, and a medical license)
This group of loan seekers is going to have a fast-track experience as long as they go to companies who are actively seeking your business. Some banks will have divisions set up to make the process as smooth as possible, while others may lump you into the SBA loan category. SBA loans take longer and have many government required rules to navigate. SBA loans should be avoided when possible (I’ll cover that more later in the series).
I know of a few places that will directly fund rather than making you jump the hoops required by a SBA loan, so contact me and I’ll get you directly to the division leaders at Wells Fargo’s healthcare division or Bank of America’s practice solutions division.
Full disclosure, these banks will probably compensate me for the referral. It may be a trip to a baseball game, or lunch, or even a check. I assure you that I am mentioning them as my client’s feedback from the process has always been positive.
Medium risk (Under 700 FICO, with a medical license)
This group will probably be rejected by the specialty units of Wells and BofA. Don’t stress too much, your medical license will still make you an attractive candidate for a loan, but now you either have to jump some hoops, or pay a higher rate. This group is likely headed for a combination of the two…
When I first started working for banks appraising businesses so that they could meet the guidelines, known as the SBA SOP, I had to read countless pages of rules to make sure that every appraisal that I do for a bank meets all of their criteria. My first SBA assignment blew my mind, here is a summary of what my client and I had to go through to get an SBA approval.
I had done a practice appraisal for both the buyer and seller. When working in the low risk category (not SBA) the buyer can submit my appraisal to the bank who then puts it in their file and the appraisal process is complete. Well, in the medium risk area my appraisal defines the doctors as my clients, so that didn’t meet the SBA’s SOP. So, the bank had to hire me, or another qualified appraiser, as defined by the SOP, to redo the analysis and write a new report with the bank as the client.
This may sound simple, couldn’t I just replace my client’s name with the banks name? If so, I would be violating rules of both the appraisal foundation (USPAP) and the SBA’s SOP. Long story short, I had to do another report using more updated data. The fees to do the additional work were then wrapped into the loan funding process.
Why take you through that example? To show that is just one of the extra hoops you will need to jump through to get SBA funding. There will be many more. So let’s talk about another way to obtain funding outside of the SBA.
About two months ago a client of mine fell into this category after being rejected by the low risk group for having a short sale on his record. I referred him to a boutique lending group that I had been working with for years and they gave him an auto decline. So, I can’t in good faith send people there as I wouldn’t want my clients to spend time on a likely declined application.
I decided to start the search to get him financing through other means. I ended up finding a company that was willing to take on the additional risk, but as expected with a higher rate. Fortunately, they didn’t have the SBA paperwork requirements so the end result worked for my client. They basically have two products that should fit the needs of people in this category.
- Unsecured Loans based on a percentage of the existing company’s revenue. So if you are looking to purchase some equipment or a smaller satellite office, this could be a quick way to obtain some funding.
- Traditional purchase loans.
Follow the link below to National Business Capital to learn more about their programs if you fall into this category.
This is going to be the most expensive step to start a business.
Contact a commercial real estate broker
Hopefully they will have experience in finding locations for medical practice locations. You need to decide if you want to buy or rent your office. I suggest that you start looking at both types of properties as you may miss out on the perfect location by restricting your search.
Your real estate broker will help guide you through the negotiation phase. Here are some of the most important things that will be negotiated were you to lease space.
- Term of the contract, it’s pretty standard to sign a 5 year lease with 2-3 options to extend by 5 more years
- Price per square foot
- Leasehold Improvement allowance. Expect to pay at least $100 per square foot to set up a dental practice. Many times you will be able to have the landlord cover a part of this cost.
If you end up buying the property, you can think of it as the same process of buying a home with a few different terms.
With a lease signed or a purchase contract in hand it is time to order the services, utilities, stationary, cards and set up a merchant banking account.
It is also time to purchase the equipment and software you will need to run your practice.
At this time you need to start thinking about which positions you need to hire day one and which positions can wait a few weeks or months. You will need pay your employees, and eventually yourself. The most common payroll reports that I see come from:
How many years in a row have you instantly thrown away the yellow pages that show up at your doorstep? I’m probably at around ten years now. Don’t bother to pay $100 per year for this. The first day you open your doors you probably won’t have a patient sit in the chair so you are going to need to do something to fill up your schedule.
The ultimate goal of a dental practice should be to operate fee for service model. Unfortunately, you may need to take some insurance plans during the start up phase. When your practice is profitable you can always choose to cut these plans.
You will need to set up a google account and a bing account to drive traffic to your location. Of course, they are going to ask for your web address so it is time to get that set up as well.
Many firms will host the website that you want to represent your practice. You should expect to pay a set up fee around $5,000, or more depending on the complexity of your site. You should also expect monthly fees in the $200-$1,000 range.
If you are a do-it-yourselfer you will see incredible savings, but it is going to drain a lot of time from your schedule. The following cater to this group:
The CRM software that you probably purchased with your computer system should contain all of the forms needed. Unfortunately, it probably doesn’t gather your data in a tax friendly way. For your bookkeeping you have two basic paths. First, you could hire a bookkeeper, and expect to pay around $1,000 per month for that service. Typically a CPA firm would offer that service. Your other option is the do-it-yourself route of using one of the three most known products in the industry for small businesses:
Both of those programs will allow you to do your invoicing and track your spending and income. At the end of the month, quarter, year you can provide all of the information to your accountant so that they can prepare your taxes. That is, unless you are really bold and want to take a crack at doing your own taxes for the business. You will need to spend about $250 each year to purchase the software necessary to do your taxes through TurboTax. It is hard to find an accounting firm that will file the 1120s return required for running a S-corp or an LLC for less than $2,500. So, if you trust in your skills with tax software and are willing to commit about 40 hours, you can save a bundle. Of course, if your business is doing well you could probably make up the difference by working.
Credit Card Servicing
Your bank will probably offer a credit card service and terminal. Expect to pay around 2%-3% of what you bill your client in fees to the credit card company. Your servicer will take a fee for the transaction (less than a dollar) and a monthly fee of around $30. If you expect to do less than $30,000 a year in credit card volume, then you may want to use the service provider that I use. I use Square for my credit card processing as they don’t have a monthly fee. However, they charge between 2.75%-3.5% of each transaction. So, as long as you do less than $30,000 in volume you will likely pay less than you would if you were paying your bank that $30 per month fee.
I just started accepting Bitcoin as more and more of my clients are also in the tech realm. It’s a bit of a conundrum to accept it. Do you view it as an investment or do you hurry and cash it out as quickly as you can?
If you are in the medical field you will probably want to offer your clients CareCredit services. Giving your patients an additional way to pay is probably worth the hassle of setting up the program for your practice.
Let’s make sure that you don’t lose everything in the process. Here are the types of insurance that you will likely need.
- Life/Buy-out insurance if you have business partners
- Office Overhead
- PUP (personal umbrella policy)
It will be necessary to hold an annual shareholder’s meeting. Notes from the meeting along with a small fee will go to your state corporation commission each year. It won’t be terribly expensive nor will it take up a lot of time, but it needs to be on the to do list.
Tax time will come, and when it does try to have all of your paperwork and bookkeeping information ready for your accountant in early February. This will give your accountant a chance to complete it by March 15th. That’s not a typo, companies need to file their returns a month before you send in your personal, 1040, return. So by 3/15/17 you will have to file your 1120s for your corporation or file an extension by that date. If the corporate deadline is missed, odds are you will also need to file an extension for your personal return. The IRS will require interest on unpaid takes after the deadline. You can pay an estimated amount of taxes before sending in your extended return to help lower interest costs.
I sincerely hope that this guide helps you start a business the right way.
Ross Landreth, MBA, ASA
A few people have asked me what business I started up on the side (for this article I was just going through the steps as if I started a dental practice). So I thought I would provide a couple of quick details. As an appraiser I am bound to be non-biased in all of my duties, so I basically live by that code. I have helped my wife start up a business called non-biased reviews as I am sick of seeing 5 star reviews for every product I research online. Clearly, some of those reviewers are getting paid, or maybe even work for the company that they are reviewing. Follow this link if you want to learn more.