Maintain the Dispensary as a Separate Legal Entity

     To keep the retail business separate from the professional services business, the practice's optical operations should be established as a legal entity distinct from the medical practice. This is necessary because accrual-basis accounting is appropriate in the retail sector.

     In contrast, medical practices use "cash basis" accounting, due to the large volume of receivables that most practices carry and the desire not to trigger taxation on income not yet received.

     When the volume of optical sales grows to a significant level within a medical practice, the existence of this retail component can jeopardize a medical practices' status as a cash-basis taxpayer. In the worst case, this could trigger income taxes on medical receivables. To avoid this, the recommended course of action is to: 1) keep the medical practice on its cash basis, and 2) operate the optical business as an accrual basis taxpayer under a separate legal form of ownership.

     A second advantage of separation is that it allows a more accurate accounting of the dispensary's performance. It is essential to know the cost of goods sold, product markup, cost of services, and income generated in order to determine whether the optical shop is operating profitably. Separate accounting ensures that dispensary figures are kept pristine and accessible.