Editor’s Note: We could give you Mark Levine’s resume but we don’t have enough space. Mark is a dental tax accountant and has worked with MSOs and DSOs on transactions, structure and entity formation, and finance and taxes. In short, he has seen it all. We caught up with Mark, now a Principal at CLA – Dallas, over coffee and asked him what our clients – single and small multi-group practices – needed to know about today’s market. Here’s what he had to say.
What is integration?
Integration – which generally refers to the months after a partnership agreement has been signed with a DSO – poses opportunities and challenges. For dentists, the integration period will fulfill their desire to partner with a DSO in the first place. An outside expert will take over management systems and other headaches that come with running a business on one’s own.
However, integration also presents challenges if the doctor isn’t aware of the potential changes or how they can help. In this article, we spoke with Mark Levine, CPA, a dental tax accountant and principal with CLA about what to expect during integration. He advises to partner with the DSO to expedite the transition and to know as much as possible ahead of time.
Do You Know Your Practice’s Legal Structure?
DSOs come to me a lot to help them understand from a tax perspective what structure is suitable for their entity. Even if you’re a single-location practice, you’ve probably asked yourself the same thing, and likely considering an S-Corp or C-Corp structure.
If you’re a hands-on owner, you know your historical tax status and why it’s structured the way that it is, perhaps for a tax benefit that’s important to you. But if you lean heavily on your dental tax accountant, generalist CPA, or bookkeeper to make those decisions, you may not know if you’re registered as LLC, S corp., or both, or why.
Either way, it’s worth setting expectations ahead of a partnership with a DSO because your tax structure could change whether for regulatory reasons or other factors the DSO views relevant to their situation.
In some cases, a doctor won’t know to ask these questions in the due diligence phase of the acquisition because they assume the DSO will handle these matters. But that may not be the case. Their focus during due diligence is to verify the economics of your practice, the fit within their structure, and ensure their investment is in the best interest of the group as a whole.
So, while in some cases language is included within the deal documents that note a practice will need to change its tax structure, it may just as easily be overlooked by the doctor or unintentionally left out. In some cases, the DSO will partner with the practice first, then turn to its tax team or CPA after the transaction to communicate the desired changes with the new practice.
In that case, the dental tax accountant or CPA representing the DSO may be tasked with going to the new doctor(s) directly or working with internal members of the DSO organization to get the signatures on the documents needed to change the tax structure.
That could certainly come as a surprise to a doctor when an accounting team you’ve never met requests to change your tax structure. However, the request for these signatures can be required. For example, if the DSO is requesting that your practice become an S corp., the election has to be signed by everybody. And, if you’re living in a community property state, it may also need to be signed by your spouse. In some cases, even when spouses have no ownership in the business, specific states require their signatures when electing S corp. status.
Collecting these signatures can often leave CPAs scrambling to meet filing deadlines. In addition, DSO CPAs may be processing 12-15 S corporation elections annually for any single client. Coordinating gathering the signatures and filing the elections when they are due can be challenging.
How to Prepare for a Change in Legal Structure During Integration (or Before)
Keeping all of this context in mind, here are Mark’s top recommendations to prepare for a possible change in tax structure during integration:
- Know your business. If you don’t know your practice’s tax structure, find out! Schedule time with your dental tax accountant or CPA and get copies of the documents. Ask questions to understand why that structure was chosen and what the benefits of it are. Find out if you live in a community property state.
- Ask questions during the deal process. Don’t assume the DSO is a mind reader. If you have a question – write it down and ask it during due diligence. You might ask, Do you typically change the tax structure of new acquisitions? If so, what benefits does that entail? Who on your team will handle that process?
- Expect a change. A lot of changes will be made during integration, one of which may be your tax structure. Understanding your structure before you ever sell, and educating yourself during the process, will help you understand what is changing, and what it means, and feel confident about your practice’s future as it integrates with the DSO.
- Work with the DSO. Joining a DSO is beneficial to both you and them, so work with them to ensure a smooth transition. No one knows your business better than you. Bringing your knowledge to the table and working with the DSO’s team can be in everyone’s best interest.
