Joining Casey and Jarrod on this episode is none other than Kevin Rhoton, a highly acclaimed CPA and MBA. Together, they delve into the intricate world of entity structure, taxes, and how these vital elements interconnect to either bolster or burden your financial standing. Get ready to uncover the secrets that can make a significant impact on your wallet.
Announcer:
Hello, everyone. Welcome to the Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.
Casey Hiers:
Hello and welcome. This is Casey Hiers back at the Millionaire Dentist Podcast, in studio with co-host Jarrod Bridgeman.
Jarrod Bridgeman:
Yo, Casey, how are you?
Casey Hiers:
Great to see you.
Jarrod Bridgeman:
I guess we have a guest today, don't we?
Casey Hiers:
A guest? Absolutely we have a guest. In studio with us, the one and only Kevin Rotan.
Kevin Rhoton:
How's it going?
Casey Hiers:
Kevin is a real show-off.
Jarrod Bridgeman:
Yeah.
Casey Hiers:
Kevin's one of our lead CPAs here at the firm, also has his MBA. I think that's six extra letters after your name that, just a diva.
Kevin Rhoton:
A little bit, I guess.
Jarrod Bridgeman:
You want to keep getting success and keep pushing yourself. I get it. I have no letters.
Casey Hiers:
Kevin's a big teddy bear. He's the opposite of a diva, but we wanted to bring him in today to get some of his expertise, really on entity structure. That's the topic for the day: entity structure. Jarrod, what do you know about that?
Jarrod Bridgeman:
My knowledge of entities would be like watching Ghost Adventures and seeing spooks and specters and all kinds of stuff.
Casey Hiers:
Yes.
Jarrod Bridgeman:
But for real though, I know it has something to do with how you structure your company and taxes and stuff?
Casey Hiers:
I love that high pitch.
Jarrod Bridgeman:
Yeah.
Casey Hiers:
"Taxes and stuff?"
Jarrod Bridgeman:
Valley girl.
Casey Hiers:
Well, and let's back up. Again, we talk to dozens and dozens and dozens and hundreds and hundreds of practice owners. We look at a lot of data. We see good, bad and ugly. Entity structure is one of those things. We get to have court-side seats to some entity structures that might work, some that are terrible, and others that make zero sense and expose you to more tax liability and more liability in general. Yet most practice owners feel like they have the best tax entity ever and they are really kind of clueless about it. Not a shot at you, the listener, the dentist. You just don't know.
Jarrod Bridgeman:
Just a little shot.
Casey Hiers:
Yeah, just like a veiled shot. But you trust your CPA to help you with the right thing and you say, "Hey, I want to be aggressive" or "I want to be sophisticated" and they go, "Okay, let's try this." And then we look at it and go, too often, "Yikes."
Kevin Rhoton:
Yeah, and I've heard you say many times how dentists, they go to school, they're experts in dentistry, and they rely on CPAs, their advisors, to be experts in tax.
Casey Hiers:
I mean, back to your MBA and CPA, you're a smart guy, but you're not trying to do dentistry.
Kevin Rhoton:
You don't want me putting my hands in your mouth, dude.
Casey Hiers:
So there you go. So if you have DDS or DMD after your name...
Jarrod Bridgeman:
What about ADD?
Casey Hiers:
You got that covered. Why are you trying to do the business side of dentistry, would be the analogy. But unfortunately a lot of people work with CPAs who, they're good at being a historian. They're good at doing a transaction of doing taxes, but there's no proactive, comprehensive advice. Therefore, let's get it into that today. Kevin, what type of entity should a dental practice be?
Kevin Rhoton:
It is a broad question, and I can say most of the time... I can't always... Never say never, never say always, when it comes to tax and accounting,
Casey Hiers:
I try to tell that to my wife, too. I say "Don't use absolutes," because she's like "You never..."
Jarrod Bridgeman:
"Pick up the trash."
Casey Hiers:
Well, I'm a good boy, I do a lot, but "Hey, you never cook a healthy meal." But yeah, when she says "You never cook a healthy meal," well, that negates your... Of course I have before, just not often. So yeah, good for you.
Kevin Rhoton:
Most of the time, an S corp entity structure is the best.
Casey Hiers:
Hold on. Is "corp" short for "corporation"?
Kevin Rhoton:
Corporation.
Casey Hiers:
Okay, smart guy.
Jarrod Bridgeman:
Not corporal?
Kevin Rhoton:
Corporation. Most of the time an S corp entity is the best structure for probably about 99% of practice owners that we talk to. Working with Casey, I know Casey talks to a lot of prospects, a lot of practice owners at a lot of his events, and when we talk to them through...
Casey Hiers:
Our vetting process.
Kevin Rhoton:
Our vetting process, yeah.
Casey Hiers:
Yeah, don't be shy, we vet the hell out of people. We don't let anybody in.
Kevin Rhoton:
And we've seen an uptick in non-S corp practices, whether it's, C corps, sole proprietors, things like that. And there's just a lot of pitfalls and problems with having a practice that's organized as a C corp or a sole proprietor.
Casey Hiers:
So from what I've overheard from, say, you and some of our other accountants in our office, one of the major problems with C corps is something that's, I don't know if it's the actual correct term for it, double taxation?
Kevin Rhoton:
Double taxation is a well-known phrase that is linked with C corps. And what that is, C corps are taxed at the federal level. Right now, the federal corporate tax rate is 21%. So any money, any income, you're taxed at the federal level and also at the state level. 45 states have a corporate tax rate also. Then what happens, what causes that double taxation, is those corporate profits are taxed anytime the owner wants to withdraw any of those earnings that they've worked hard to make in the practice. When they pull those out, you're now going to get taxed an additional 15 to 20% federal tax rate on those dividend distributions.
Jarrod Bridgeman:
So if someone's making a million a year, they're losing roughly 200,000 just on the federal level before they've even paid themselves.
Kevin Rhoton:
Yeah. Yep.
Casey Hiers:
Look at you doing math.
Jarrod Bridgeman:
Yeah.
Kevin Rhoton:
Wow. Okay, put your shoes back on.
But then the distribution's taxed also at the state, and dividend distributions are usually taxed at the state income tax rate. So you have federal and state tax on practice income, federal and state tax on dividend distribution. So it's taxed heavily in the C corp. There's also a lot of other... There's actually a lot of other, I guess, a laundry list of administrative requirements for C corp. You have to have annual meetings, file annual reports, financial disclosures, and financial statements.
Casey Hiers:
A lot of extra work.
Kevin Rhoton:
A lot of extra work.
Jarrod Bridgeman:
For less money.
Kevin Rhoton:
For less money.
Jarrod Bridgeman:
Wow. So what would be... I don't want us digging too deep into about, but what would be the reason... Who would use a C corp?
Kevin Rhoton:
Most of your bigger types of companies, your publicly traded companies. Now, I don't want to get too much into the weeds, but S corps, you're only allowed 100 shareholders. And they have to be domestic, meaning US citizens, they can't be other...
Jarrod Bridgeman:
They have to be at home cooking dinner and stuff.
Kevin Rhoton:
Yeah.
Jarrod Bridgeman:
Domestic.
Casey Hiers:
Now, I've heard you say something like this before, like sometimes lawyers and accountants, they will "help a practice owner set up multiple entities" to create intercompany relationships that ultimately lead to a lot of extra legal accounting, tax prep, and it's almost like... I'm going to get in trouble for this. It's almost like the government. Like, "Let's have a whole bunch of new layers and red tape and instead of two forms, fill out 200 forms," and then we're all busy, and it seems like there's some of these entity structures where there's just a lot of extra work.
Jarrod Bridgeman:
A lot of extra work, and then you're paying someone else to do all that extra work too.
Casey Hiers:
Yeah, it's not free.
Jarrod Bridgeman:
Yeah.
Casey Hiers:
And then what's the gain?
Kevin Rhoton:
They try to advise the business owner on how to avoid that double taxation. "Let's set up multiple entities, intercompany relationships, to pass off that income to another."
Casey Hiers:
And that's fun for practice owners to talk about at a cocktail party, about all their different LLCs and entities and corporations and this, that and the others. And it sounds really cool, but what are they doing? It's just overly complicated. We've had to unwind people from some overly complicated entity structures.
And on the front end, it's "Well, yeah, this is great, and this is such the best way," and we don't render an opinion until we spend a lot of time. But ultimately, I'd say nine out of 10 times, and that's low-balling it, when we get into all the entity structure and all the taxes and all the complexities, when we clean it up, it's very common for us to save people anywhere between $9,000 and $35,000 a year in less tax liability simply by structuring.
Some of this is proprietary that I won't share completely, but the way we structure things, and entity structure is part of that... Ultimately it's simple for us, and their tax liability is less, and a lot of times they can even save more and make more, but yet they get so mired in this complex, incorrect entity structure.
Kevin Rhoton:
Yeah, that's the deal right there, is just spending so much time trying to move income from one taxable entity to a lesser taxable entity, cover up with expenses, get this tax liability down and...
Casey Hiers:
Now, was there a time a couple decades ago? One of these was more popular, right? Was it C corp? There was some reasons why from a tax perspective, but that's literally a couple decades back. That tax code changes.
Kevin Rhoton:
For sure.
Casey Hiers:
Things change. That's why, again, for the most part, an S corp is ideal and can comprehensively and universally lead to much more benefit.
Kevin Rhoton:
Right. The way the IRS tax code has set up S corps, it's perfect pretty much for most, like I said, 99% of practices.
Casey Hiers:
What about sole props? We hear a lot of sole proprietorships.
Kevin Rhoton:
Yeah, that's another one that we have seen quite a bit with practice owners, is just set up as a basic sole prop. I talked a little bit about how C corps are for those massive companies with hundreds and hundreds of shareholders that are traded on the stock market.
On the other side of things is the sole proprietorship, and that is where there's no additional tax forms, you just file all of your information on a schedule C on your individual tax return. And that would be more for the very, very small business owner, maybe someone running a business out of their home, side businesses.
Jarrod Bridgeman:
Yeah, my experience of sole props has been, yeah, it would be side businesses or side gigs.
Kevin Rhoton:
Yeah. Yeah, that's perfect for that, because it is very simple.
Jarrod Bridgeman:
It's not your full-time job, usually.
Casey Hiers:
So a side hustle out of a house versus a 2000-square-foot, million-dollar production dental practice with 16 employees.
Kevin Rhoton:
Absolutely. Yeah, that is too big.
Casey Hiers:
Okay.
Kevin Rhoton:
And with being a sole proprietor, the huge pitfalls is there's no distinction between private and practice assets and liabilities.
Casey Hiers:
So size does matter.
Kevin Rhoton:
Yes.
Casey Hiers:
Okay. So when you say there's no distinction between the private practice asset and liabilities... So would that be in term... From my understanding is if, let's say someone falls and hurts themselves on your sidewalk, whatever, and they sue your practice, they're also suing you, so they can get money from both?
Kevin Rhoton:
Yeah, there's no separation. From a legal-liability standpoint, you are your practice. So if something happens, an accident or whatever. Unfortunately we live in a little bit of a litigious society, and they can come after. So yeah, that unlimited liability. There's also, from the tax standpoint, is unlimited self-employment taxes on all practice income as a sole proprietor.
Casey Hiers:
What does that mean?
Kevin Rhoton:
So 100% of your net income is subject to self-employment tax.
Casey Hiers:
Oh, got it. Okay.
Kevin Rhoton:
And we're seeing also a lot of sole proprietors, they'll be set up that way thinking, "Yeah, that's the simple way, the easiest way to do it, I don't have to file any other tax returns. I don't have to set up an entity," so to speak. But by doing that, they're then missing out on taking advantage of self-employed retirement savings options. I won't get into the weeds on it but there's SEP, IRAs, simple IRAs, things like that.
Casey Hiers:
Backdoor IRAs. No, I just talked to somebody yesterday, and they kept going on and on and on and on about "I want to set up a backdoor IRA". And it's like, why don't you save $150,000 for retirement and stop trying to be cute, right? I mean, the backdoor IRA, what are they going to do with their income? Save what, 6,500 bucks?
Kevin Rhoton:
Yeah.
Casey Hiers:
Ish?
Kevin Rhoton:
Yes.
Casey Hiers:
And so I guess part of this, and this might be me having too many of these in-depth conversations, me hearing how cocksure some of these prospects are about their entity structure and all of their investment strategies to find out, when we look at their data, it's a mess. It's not good, none of it, except your dentistry. And then we help them, and in year two they're like "Oh my gosh, this is so much better. This is so much cleaner. Why didn't I do this before?" But the people I talk to, they have all these big ideas, and it's like they're tripping over nickels to get to dollars. All their entities, all their cute little investment strategies. Anyway, sorry, I'll get off my soapbox.
Kevin Rhoton:
No, that's exactly right, because...
Casey Hiers:
I love hearing that from a smart guy like you. Thanks, pal.
Kevin Rhoton:
So if you are a C corp or a sole proprietorship thinking, "All right, what about an S corp?" So we're talking about the size of the entity, the sole proprietor being for that small side hustle, C corp for those huge multi-shareholder multimillion dollar businesses, corporations that trade on the stock market.
Casey Hiers:
Like Pepsi.
Kevin Rhoton:
Like Pepsi, yeah. But for that middle size, for that practice owner, for someone in dentistry, by forming an S corp, the practice owner can enjoy the benefits of the limited liability aspect of corporations but then bypassing the double taxation that the sole prop enjoys. You get that corporate veil separation between a corporation and the owner. There is a liability and a tax distinction now between the practice and the doctor. It also allows you, I mentioned about the retirement structures. It allows you, by being an S corp, to pay yourself a W-2, which will limit that self-employment tax exposure, and it opens up some additional retirement planning options.
Casey Hiers:
Yeah, a lot of these, you look at the pros and the cons, right? So people that maybe their entity structure is not ideal, there's a couple positives to it. They focus on those positives and don't look at the negatives. It would be like, "Gosh, I get a lot of exercise because I walked to and from work. That's a real big positive." The negative would be if somebody stole my car. I don't have a car, so therefore I have to walk to work. Does that make sense? It's kind of a goofy analogy, but I'll hear one or two benefits or positives to the wacky structures that people have and they just hang their hat on that, and that's what they've been told from their CPA.
Jarrod Bridgeman:
And to be honest, Casey, you probably could use the steps.
Casey Hiers:
No doubt. I mean, that is a positive. "Hey, I walk to work."
Jarrod Bridgeman:
Sometimes with things like this, it takes you getting burned on something like a tax to be like, "Oh shoot, the advice I've been getting or the way my buddy who's an accountant set it up is not correct."
Kevin Rhoton:
And a lot of these prospects that we talk to through the vetting process, they don't realize that, "Hey, I'm getting taxed. I'm getting excessive self-employment tax."
Casey Hiers:
When they see how we do it, they go, "Wait, what?"
Jarrod Bridgeman:
Because to be fair, if you're not a tax person or good with that kind of stuff, you really don't know.
Kevin Rhoton:
No.
Casey Hiers:
You're trusting the professionals, right? I trusted a dentist in my 20s out in Southern California to also do a root canal on me. Old boy had no business doing a root canal, missed a canal. Now I've got an implant. I trusted said dentist. Said dentist was not good. A lot of practice owners trust CPA. They don't know CPA's not good until they get burnt with an implant.
Kevin Rhoton:
Yeah.
Casey Hiers:
Sorry, I'm not bitter. It was, that's all right, like 18 years ago.
Kevin Rhoton:
And I hate to say it because it's almost like picking on my brother or something, but there are CPAs out there that multiple times I've been like, "I cannot believe..."
Casey Hiers:
What you're seeing.
Kevin Rhoton:
What I'm seeing on these practice owners' tax returns. It's just crazy.
Jarrod Bridgeman:
Well, would you say part of that comes from the fact that all day every day you are working with dentists and dental practice owners and specialists, versus?
Casey Hiers:
He's mastering...
Jarrod Bridgeman:
Mastering.
Casey Hiers:
Dental accounting for our clients, versus being a historian, the CPA going, "Well, give me your information." Well, if all your cute QuickBooks and all your stuff's inaccurate and not good, they don't care. They're not looking at it comprehensively and universally for you to retire sooner with millions more. They're doing a transaction.
Jarrod Bridgeman:
Casey, you told me a story the other day about a prospect or a newer client or whatever, whoever it was, that they had spoken to their CPA about some kind of tax thing and they said, "Oh yeah, you should look into that."
Casey Hiers:
"You should look into that."
Jarrod Bridgeman:
That was their advice.
Casey Hiers:
Yeah, that's the proactive advice. That's really lights-out, right? "Hey, I spent a lot of time looking over your practice data. Your overhead's too high. You need to look into that." That's the extent of where a lot of practice owners get advice. No kidding, it's high. What we do is come and implement solutions to fix it. But that's another podcast.
Jarrod Bridgeman:
So we have an entire accounting team here, and do they all spend time looking at each and every client?
Casey Hiers:
Universally and comprehensively, right?
Kevin Rhoton:
Absolutely. And that's...
Casey Hiers:
The smart guy agreed with us. High-five.
Jarrod Bridgeman:
Yeah.
Kevin Rhoton:
And that's the great thing is, there'll be times where we talk together about the client's financial picture and how to structure something and bat around ideas. I've gotten ideas from the other CPAs. "How should we?" The best way to do this.
Jarrod Bridgeman:
And not only that, then your team works with the financial planning team.
Kevin Rhoton:
Yeah.
Jarrod Bridgeman:
All in one house under one roof.
Kevin Rhoton:
Yeah. We have a client coming in tomorrow where the planning team and the accounting team today are getting together to discuss, make sure everybody's on the same page.
Jarrod Bridgeman:
All the Ts are dotted and all the Is are crossed?
Kevin Rhoton:
Yes.
Jarrod Bridgeman:
So if anybody out there has any questions about entity structure and things like that, feel free to give us a call. Our number is listed on the website, and you can always shoot us an email on our Contact Us page on our website, which is fourquadrantsadvisory.com.
Kevin, I want to thank you so much for being on here. Was there anything else you wanted to finish up with today?
Kevin Rhoton:
No.
Jarrod Bridgeman:
No? Casey, thank you so much for being on here as well. Folks, visit fourquadrantsadvisory.com/events. We're going to be in Chicago in October, and we're going to be in Orlando as well, so check us out.
Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year they retain over 95% of their clients. Thank you again for joining us, and we'll. See you next time.
