Most dentists going into a DSO partnership don’t fully understand their own tax structure – and that becomes a problem during integration. DSOs often need to change the entity structure of practices they acquire, and those changes come with deadlines, signatures, and surprises that catch sellers off guard. Mark Levine, Principal at CLA in Dallas, works with MSOs and DSOs on transactions, structure, entity formation, and taxes. Here’s what he says sellers need to know.
What “Integration” Actually Means for Your Tax Structure
Integration refers to the period after signing a partnership agreement with a DSO – the months when the corporate partner takes over management systems and business operations. For most dentists, this is the primary motivation for partnering: getting an outside expert to handle the administrative side of the practice.
What many dentists don’t anticipate is that integration often includes changes to their practice’s tax structure. Whether your practice is registered as an LLC, an S-Corp, or a combination of both becomes material information during this period – not just a detail your accountant handles in the background.
What actually happens in the post-close period is broader than most sellers expect – and the tax piece is one of the least-discussed parts of it.
Why DSOs Change Your Tax Structure (and Why It Surprises Sellers)
Tax structure changes during DSO integration catch sellers off guard for consistent reasons. The DSO’s focus during due diligence is primarily on economics and strategic fit – not entity structure. By the time the structure conversation happens, the deal is often already in motion.
According to Mark Levine, sellers should expect: tax structure changes may not surface during initial due diligence; the DSO’s focus during evaluation is on economics and strategic fit, not entity mechanics; changes may require unexpected signatures – including from spouses in community property states; new tax elections carry strict filing deadlines; the DSO’s accounting team may be processing multiple elections simultaneously across several acquisitions; documentation requirements vary by state; and some changes require coordination between multiple professional parties.
The practical consequence: sellers who don’t know their current structure are asked to make fast decisions on unfamiliar ground, under deadline pressure, while also managing the operational side of integration.
How DSO deal structures work affects the tax picture too – understanding the full deal structure before signing is inseparable from understanding the tax implications.
What to Have Ready Before You Sign
Levine’s primary recommendation is straightforward: understand your structure before you reach the negotiation table.
Specifically: know whether your practice is structured as an LLC, S-Corp, or both; understand what elections are currently in place and who filed them; review your structure with your CPA specifically in the context of a potential DSO partnership; and document the details – entity type, filing dates, relevant elections, state-specific requirements.
This is not complex work if done in advance. It becomes complex when you’re doing it for the first time after the LOI is signed.
Questions to Ask Your DSO Partner During Due Diligence
Levine recommends raising entity structure questions during due diligence – before the partnership agreement is signed.
Does this platform typically require entity structure changes post-close? If so, who manages that process? Who on your team handles tax structure transitions for newly acquired practices? What is the timeline for any required elections after close? What documentation will you need from me, and by when?
Getting direct answers early avoids the scenario where you’re managing filing deadlines for unfamiliar tax elections during the same period you’re integrating a new management team into your practice.
FAQ
Will a DSO change my practice’s tax structure after acquisition?
It depends on the DSO and the specifics of the deal. Many DSOs need to change the entity structure of acquired practices for regulatory compliance or financial reporting reasons. It’s common enough that every seller should ask about it directly during due diligence – rather than assuming it won’t apply to their situation.
What’s the difference between an LLC and S-Corp in a DSO deal?
An LLC provides liability protection as an entity type. An S-Corp is a tax election that changes how income is reported and distributed. Your practice may operate as an LLC with an S-Corp election – both can be relevant in an acquisition. What matters in the deal context is which elections are in place, who holds them, and whether the buyer’s structure requires changes to either.
What should I ask my CPA before signing a DSO partnership agreement?
Ask your CPA to explain your current entity structure in plain terms: what you are, what elections are in place, and what would change under common DSO acquisition structures. Ask specifically whether a structure change would require action from your spouse if you’re in a community property state. Having that conversation before the LOI is signed puts you in a much stronger position than discovering it mid-integration.
What is a community property state, and why does it matter in a DSO deal?
In community property states – including Texas, California, and Arizona – assets acquired during a marriage are legally co-owned by both spouses. That means certain entity structure changes or new tax elections may require your spouse’s signature, even if they have no involvement in the practice. Sellers who aren’t aware of this requirement in advance get caught by it mid-integration.
Starting Prepared
If you’re in early conversations with a DSO, our team can connect you with advisors who have worked through DSO transactions from the seller’s side. Start with understanding your practice’s value – our dental practice valuation calculator gives you a baseline before any deal discussion begins.
