Do you know the different between an LLC and a PLLC? Or whether a PLLC or a professional corporation offers more tax flexibility and asset protection?
What use does it do to run a practice as a corporation or Limited Liability Company (LLC)? After all, it “doesn’t protect a doctor.”
It’s true. A professional can’t use a corporation or an LLC to protect themselves from their own malpractice. However, that doesn’t mean that a practice should ever be run as a sole proprietorship or partnership. Absolutely not!
A doctor will have to establish either a professional corporation or a professional LLC (PLLC). The only difference is that in a “regular” corporation or LLC the “professional” isn’t protected in the practice of their profession. Each state statute has a long list of professionals that have to establish a professional corporation or a PLLC.
I can’t really think of a situation where a doctor wouldn’t use a professional corporation or a PLLC. Generally, a PLLC will give you a lot more tax flexibility and asset protection than a professional corporation, so for the rest of the article I will assume you will use a PLLC.
Using a PLLC
The PLLC will give you all of the asset protection any other LLC would offer, but it won’t insulate you from the professional malpractice issues. The fact is that most of the lawsuits and liability issues will involve issues other than professional malpractice. An employee will sue over an HR problem. A patient will slip and fall in the parking lot. Your “partner” or bookkeeper will embezzle money. The list can go on forever.
Establishing a PLLC is the same procedure as establishing any other LLC, except you basically check the “professional” box on the state filing forms. The operating agreement will read a little different. The PLLC operating agreement should be about 20 pages long. If it is only a five-page PLLC operating agreement, the issues that need to be addressed weren’t addressed.
If an issue isn’t addressed in a PLLC operating agreement, the issue will “default” to whatever the state statute says about the issue. I would rather write my own rule book than have the state default position apply. What most people don’t understand about an operating agreement is that you get to write it.
Your PLLC operating agreement shouldn’t just be a form document. It is the rule book you have to live by. It, to a large degree, determines what asset protection you get, what charging order protection you get, and how much money you’ll take home. The funny thing is, the law says if you write it down and it doesn’t violate the law or public policy, then, basically, the courts will uphold what you write down.
Certainly, you don’t want to take a law class on PLLCs, but you need to know the basics of what can and can’t be done, how the asset protection works, how charging order protection works, and how the PLLC can cut your tax bill. It’s easy to get an audio tutorial on operating agreements and an example of a more complete PLLC operating agreement.
You need to be the director
The analogy in medicine comes from my wife’s C6-C7 fusion last week. The neurosurgeon said he would put a synthetic spacer between the vertebrae. When he got in to the operation, he figured out that the synthetic spacer was too big, and he switched to cadaver bone that he could easily cut down to size. He could have shoved the too big spacer in and called it good, but he took the extra time to fix the problem.
The advantage you have with your PLLC is you’re not “asleep” during the “surgery,” and you can direct your attorney and CPA. The fact is that the attorney seldom takes the time to custom fit the provisions of a PLLC operating agreement to fit the client. If you are awake and can tell the attorney what you want in the custom fit, you are a lot more likely to get good results.
In your operating agreement, you can write that the shares (membership interests) can’t be transferred or assigned. That means that if you are sued for malpractice and lose, your creditors can’t come and get the assets of the PLLC as easily. Courts will generally uphold what you have written into your PLLC operating agreement. In fact, with good charging order protection, the PLLC should protect all of the assets of your practice if there is a malpractice suit, divorce, auto accident on the street or you lose your shirt in a bad real estate investment.
That’s an advantage of a PLLC over a professional corporation. In the professional corporation the assets of the practice will not be protected if you lose a major malpractice suit, get divorced, etc.
A PLLC offers “charging order” protection which a professional corporation can’t offer. I’ll define that in more detail in a future article, because it is something that your attorney has probably never talked about, even though it is just as important as the “corporate shield.”
Lee R. Phillips is a United States Supreme Court Counselor who for the past 30 years has helped high income individuals control their taxes and protect their assets. Call (800) 806-1998 or visit LegaLees.com.