Choosing the right type of business entity can be a crucial first step for physicians when designing their asset protection strategy from malpractice claims. Choosing the right type of business entity becomes even more important for medical practices that grow and evolve separate practice areas and functions. In addition, as you start your own medical practice and watch it evolve, so do the opportunities to separate the various business areas and functions using separate legal entities. This is a common asset protection strategy used by many physician practices to address malpractice claims.

Let’s take a look at some of the business entity choices:

Choice of entity options for malpractice claims:

Proprietorship. As a general rule, proprietorships are not regarded as separate legal entities. As such, the owner/proprietor is personally liable for all claims that arise out of the business such as medical malpractice claims.

Partnership. A partnership is created as a matter of law whenever two or more people or entities come together to conduct business for profit. Partnerships may be created through oral or by formal written agreements. A partnership is considered a separate legal entity for tax purposes, but the partners of the partnership are all considered “general partners” and, therefore, all partners have unlimited personal liability for malpractice claims (or other claims) that arise out of the partnership business.

S-Corporation. A C-Corporation is the standard corporation owned by its shareholders and subject to corporate income tax. In addition, dividends received by C-Corporation shareholders are taxed at the shareholder’s individual income tax rates. An S-Corporation is a corporation that has elected a special tax status with the IRS, which provides that all of the S-Corporation profit and loss is reported on the shareholder’s individual income tax return, and there is no tax imposed at the S-Corporation level.

The law treats a corporation as an entirely separate entity from its stockholders, even where only one person owns all of the corporation’s stock. However, if the S-corporation was created merely to subvert justice or creditor claims, the courts may ignore the S-Corporation entity status and “pierce the corporate veil” in order to protect a corporation’s creditors where the stockholders have used the corporate structure in an attempt to avoid legal obligations, as with a malpractice claim, or commit a fraud or wrong.

Limited Liability Company. Unlike a partnership, a limited liability company (“LLC”) does not have any general partners. Rather, the LLC members have liability limited up to the amount they invested in the LLC. It’s important to note that LLCs are governed by state law, which may vary from state to state. Therefore, choice of entity includes choosing an appropriate state in which to organize. In many ways, members of LLCs enjoy flexibilities not offered by S-Corporations. For example, there is a limit to the number and type of shareholders in an S-Corporation. In addition, LLC members can provide for allocation of profits and losses that differ from the member’s capital account and the formalities for establishing an LLC are fewer and considered less burdensome than that of an S-Corporation.

With malpractice claims, separate functions

Often, owners of a company will organize all of their various business functions under one entity. Sometimes there is a practical legal or tax requirement demanding that companies hold all of their business functions in the same entity. However, where possible, it’s often advisable to separate some or all of the business functions into several different entities. This can usually be completed without triggering any taxes. The problem with having all of the various business functions organized under one entity is that if a medical malpractice claim is made against the company, then each and every asset of the business (including the various business functions) will be subject to the malpractice claim.

If instead each separate business function were owned and titled in a separate business entity, then each separate business function would be liable for only the malpractice claims brought against that separate company.

Owning assets in a sole proprietorship or in a general partnership will provide little, if any, protection against medical malpractice claims and is not a very good asset protection strategy because, as stated above, sole proprietors and general partners have unlimited personal liability for activities carried on in their business.

There is also a risk that even if an entity is created, creditors may be able to pierce the corporate veil if the owners of the entity do not adhere to corporate formalities or if it can be proved that the sole purpose of creating the entity was to subvert creditor claims, such as a malpractice claim. The rules for piercing the corporate veil vary state by state. Therefore, please consult with your legal advisor to establish an appropriate asset protection strategy to ward off medical malpractice claims.

More on medical malpractice and asset protection

Next> DAPTs: Learn more about forming a Domestic Asset Protection Trust

More> FAPTs: The ins and outs of Foreign Asset Protection Trusts

More> Understanding voluntary disclosure and offshore bank accounts as you protect your foreign assets

More> Medical Malpractice Insurance: A simple primer to answer the question of whether to insure or not insure

Back> Protecting Your Medical Practice: There is not one single asset protection strategy that will protect all your assets from medical malpractice -- ranging from your medical practice to your most beloved possessions

About the Author: Steven Nofar is licensed in Michigan as an Attorney and Certified Public Accountant. Mr. Nofar practices primarily in the areas of estate and tax planning, business succession planning, asset protection, charitable gift planning and tax controversies with federal, state and local taxing authorities. Mr. Nofar’s clients range from small to large business owners and span across the U.S., Europe, Asia, and the Middle East. If you need additional information or clarification related to this article, please contact him at 248-335-5000 or at  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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