Can an LLC Really Protect a Physician's Rental Property from Lawsuits?

A physician worries whether a limited liability company can protect his rental property in the event of a lawsuit. Here's a look at some of the benefits and limitations of shielding your personal assets with an LLC.

Q: If I form an LLC to own my rental property, does it really protect me and my personal assets from liability issues, lawsuits, etc.?

A: Limited liability company (LLC) laws were designed to protect owners from liability associated with running a business.

Shielding your assets with an LLC has three primary advantages: Unlike certain corporate entities, where shareholders and officers can be individually sued by plaintiffs for a business-related complaint, an LLC bars liability lawsuits against individual members of the entity. In essence, an LLC protects a business owner’s personal assets when his or her business is being sued.

The second advantage of an LLC is its streamlined tax structure -- any income and/or deductions from an LLC is considered personal income to the owner and is reported on as ordinary income on his or her individual tax return.

The third benefit of an LLC is its protection from creditors. Property or assets held in an LLC cannot be seized by creditors to satisfy judgments or claims against any individual member of the LLC. Creditors are only allowed to go after any income or distributions generated by asset held in the LLC.

For physicians, the consequences of not shielding your assets from personal liability can be dramatic. Most doctors will be sued over the course of their careers, a 2010 study by the American Medical Association found, and some specialties are more prone to lawsuits than others.

This eye-opening case study by the asset-protection planning attorney Robert Mintz in Fallbrook, Calif., illustrates what can happen to physicians who purchase medical office buildings and do not shield them with an LLC.

In addition to the increased vulnerability physicians have to lawsuits in general, state laws vary. There are also limits to the coverage of an LLC when it is used to protect a physician or dental practice. Many states set limits on the personal liability of individual members of an LLC within a practice, rather than limiting the liability of the entire practice under the LLC.

So it’s always a good idea to consult with an asset-protection planning attorney to ensure that your assets are protected from liability relating to your practice. You can search for one near you here.

HAVE A QUESTION FOR "ASK THE EXPERT"? Email Physician's Money Digest at tcullen@hcplive.com.