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.Read More