Right Business Entity Choice

We’ve seen that a professional practice or the business you own is a Dangerous Asset. Every patient or customer represents a potential liability-threatening whatever savings you have accumulated.

A Limited Liability Company (LLC)-when permitted by state law-is generally the most convenient and flexible format. The LLC avoids many of the tax problems and the maintenance expenses associated with corporations. The law effectively insulates the owners of the company from any liability produced by the business. Personal assets are not subject to the risks of a business operated within the LLC.

In most states, physicians and some other licensed professionals cannot shield themselves from liability with either an LLC or a corporation. In order to protect the family home and savings, an alternative route is needed. If you can’t limit your personal exposure to claims, use a strategy such as a Family Limited Partnership (FLP), an LLC, or a trust, which will protect the assets themselves. That way, even though you can be sued-it won’t be worthwhile for the plaintiff to do so.

A professional practice that cannot be conducted as an LLC should be incorporated. Although the corporation does not offer protection from malpractice claims, it can insulate you from many other types of business risks. When you use a corporation, you are not responsible for corporate obligations unless you have given your personal guarantee. Also, you will be shielded from most types of claims from employees, suppliers, and landlords.

If you have other partners in your professional practice, you can limit your liability for claims arising from their negligence by separately incorporating your practice. Your corporation would be a partner with each of the other corporations and you would not be responsible for claims against the others.

Since a corporation is a taxpaying entity, you will have to plan for eliminating a potential double tax on corporate earnings. This can be accomplished by using an S Corporation or by zeroing out corporate income through salaries to officers. To ensure that the corporation will be respected for legal and tax purposes, the corporate formalities of minutes, bylaws, and stock certificates must be observed. All of your dealings with third parties should be conducted in the corporate name, and a separate corporate bank account must be used.