Why your practice might want to retain earnings

Your budgeting discussions are likely to uncover certain practice goals. You might want, for example, to open one or more satellite offices. When such goals emerge, it's time to think seriously about retained earnings, a topic practices tend to avoid.

It should only be done to fund a particular goal, however. First ask yourself, "What do I need cash for?" If you foresee a specific opportunity or threat requiring cash, consider funding it yourself, but don't just put it away merely to create a "rainy day" fund. In fact, never retain earnings "just in case." The corporate taxes on retained earnings almost always exceed the personal income taxes paid on the money distributed as an additional bonus. Even worse, when you don't use the rainy day fund and pay out the money later, it's taxed a second time as personal income.

The question then becomes, "How much earnings a doctor or group should leave in the practice?" There is no single, simple answer. Each practice must make its own judgment based on its profitability and its expected future needs.