Are You Practicing Naked?

Lee R. Phillips, Counselor United States Supreme Court

Physicians who establish their business based on what gives them coverage for malpractice claims might be exposing themselves to the other 80% of claims they could face.

Some doctors run their practices as a sole proprietorship or partnership, but no matter what anyone else has told you, that’s wrong. DON’T DO IT.

The primary reason why you have been led to abandon the idea of practicing under a corporate shield or an LLC is the fact that the corporate shield can’t protect you from your own malpractice. That is true.

You will have to establish a “professional” corporation or LLC, and it will not give you any malpractice protection. There are many professions that have to establish themselves under the professional business structure rules, but that doesn’t mean that the corporate shield will not save your skin some day.

Many of the legal issues you’ll face in your practice won’t be malpractice suits. It is more likely that an employee will be injured or become disgruntled and sue. You may have a patient slip and fall on your clinic property. You or your nurse could hit someone in the crosswalk driving from the clinic to the hospital. There are dozens of problems you could face besides malpractice.

The corporate shield will protect you and your personal assets from all the claims except your malpractice claims. That’s a big deal. Why expose yourself to 80% of the claims that might be made against you, just because the corporate shield won’t protect you against malpractice?

By the way, the corporate shield or limited liability protection is nearly exactly the same in a corporation or an LLC. It doesn’t matter whether the corporation is a C or an S corporation — the asset protection is exactly the same. The only difference is the IRS Code used to tax the company. The tax choice you make for your LLC has nothing to do with the asset protection you get.

However, your biggest asset protection threat is the IRS. The IRS is your major impediment to financial success in your practice. You had better be protecting your assets from the IRS. You have a very limited ability to control your taxes as an individual. Your own business, using a corporate or LLC structure, is your best tax shelter.

Lots of doctors make stupid investments, because the investments are touted as being tax advantaged. You should control your taxes through the legal structures you create to do business under, not through the investments you make.

A corporation’s or LLC’s taxes are all calculated “above the line.” If you don’t know what I just said, you need to take a quick tax course, because you are leaving tens of thousands of dollars on the tax table each year. The calculations that are made “above the line” all come off your taxes before your adjusted gross income (AGI) is calculated.

Charitable contributions, home mortgage deductions and all of the other deductions you get come off your taxes “below the line.” The following is a comprehensive list of things you can do as an individual tax payer that will lower your AGI. Scan the list quickly, because you’ll notice nothing really applies to you, and certainly nothing will make a big dent in your taxes:

Classroom expenses for teachers and educators

Qualified performing artists and other professions

Traditional IRA deduction

Student loan interest deduction

Tuition and fees deduction

Health savings account deduction

Moving expenses

Self-employment tax deduction

Self-employment health insurance

SEP-IRA, SIMPLE IRA and 401(k) deductions for the self-employed

Early withdrawal penalty

Alimony paid

Domestic Production Activities Deduction for certain types of businesses

Ten Tax Tactics

To lower your AGI, you’ve got to use a business structure. Get a free list of my

to start cutting your taxes this year.

For a medical practice, an LLC taxed as an S corporation is probably your best business and tax structure. Use an LLC instead of a corporation, because the LLC will basically give you twice the asset protection you’ll get out of a corporation. Your attorney has never talked about the double asset protection your LLC will give you. (That’s a topic for another article or three.)

Note that you can establish an LLC (Limited Liability Company)

legal structure and then have it taxed as a sole proprietorship or “disregarded entity” (one member), a partnership (two or more members), an S corporation (one or more members), or a C corporation (one or more members). The asset protection of the LLC is the same no matter how it is taxed.

About the only reason you would use a tax structure other than an S corporation is to get benefit plans available under a C corporation that aren’t available under a partnership or S corporation structure. It would be very rare to ever put your entire practice under a C corporation structure. If that’s what you have now, you need to take a hard look at your accountant.

P.S. Your accountant’s job isn’t to save you taxes. Your accountant’s job is to prepare your taxes from the numbers you give him. He will not recommend the great tax loopholes available to you as a businessman. (Yes, as a doctor, you are a businessman.) He won’t take the legal risk of recommending tax tactics to you. He has learned to keep his mouth shut, because if anything goes wrong, even anything as simple as a law change, he might get yelled at or sued.

If you want the liability shield and all the tax advantages your LLC can offer, the operating agreement has to be written for the shielding and the tax laws. Few lawyers and none of the internet sites write the operating agreement to take advantage of the tax laws. Your operating agreement should be about 25 to 30 pages long.

Read your operating agreement against the free LLC Operating Agreement

I have created for you. The parts of your operating agreement won’t be in the same order, but they should all be there.

Read more:

Domestic Asset Protection: Using LLCs and FLPs

Protecting Assets from All Creditors

Lee R. Phillips is a United States Supreme Court Counselor and popular national lecturer on asset protection, business structuring, tax planning and estate planning. If you have a group of over 50 professionals you want him to speak at or you have questions about this article, please call him at (801) 802-9020.