Should Your Practice Be a Limited Liability Company?

By Burg, Brad | Medical Economics, December 12, 1994 | Go to article overview

Should Your Practice Be a Limited Liability Company?


Burg, Brad, Medical Economics


"I'm not one for hopping onto bandwagons, but for some medical practices, this is like the discovery of penicillin," says Avon, Conn., attorney Martin A. Goldberg.

Ultimately, these might make partnerships and even S corporations obsolete," says practice management consultant Michael J. Wiley of Bay Shore, N.Y.

"I'm using them for clients ranging from four-physician practices to 280-doctor multispecialty groups," says Ivan Wood, a lawyer in Houston.

What are these experts so enthusiastic about?

It's a newly available form of business organization called the limited liability company. An LLC can solve some major problems. Until now, choosing a business arrangement involved difficult trade-offs: Partnerships are simple, and they're generally not taxed, but they can leave you personally vulnerable to business lawsuits and obligations. So most doctors practice in corporations, but those are complex-and surrounded by restrictions and tricky tax rules.

With the LLC, the penicillin analogy seems apt: You can inoculate yourself against most liability, including malpractice suits against partners, yet avoid the complicated side effects of incorporation. True, ways already exist to combine such advantages--notably the S corporation--but as we'll see, the LLC promises to outdo all the rest.

Moreover, the swing to LLCs really is a bandwagon, rolling along nationally. In 1991, they were legal in only eight states; today they're allowed in all but four, and those holdouts (Hawaii, Massachusetts, Pennsylvania, and Vermont) will likely be signing up soon. So it will be the rare doctor who doesn't hear about the new legal structure from a lawyer or accountant. In fact, many of those business advisers are lining up to turn their own firms into LLCs.

But should doctors do the same? Some should--immediately, the experts say. For others, conversion is more problematical, yet certainly worth a look. And if you're planning a new practice or a merger, an LLC is definitely worth considering. It may also be the best way to own other assets.

Still, there are trade-offs here too. For one thing, this is mostly new territory. Many advisers don't know it well, and not all the issues have been clarified. "So far, the biggest drawback--and it's a major one--is the absence of case law," says William D. Bagley, a Cheyenne, Wyo., attorney who specializes in LLCs. Even in a state like Florida, one of the first to approve LLCs, "doctors have hardly used them yet," says Christopher L. Nuland of the Florida Medical Association's legal staff.

So let's take a look at this revolution and see whether you might want to join in.

How an LLC might cure a perennial business headache

Every form of business organization has limitations; often they involve choices between liability threats and tax dangers.

Let's start with liability. There's a certain amount you can't avoid, as owner of a medical practice: You're always open to malpractice claims concerning your cases or staffers you supervise. And you're on the financial hook for practice loans that you've personally guaranteed.

But if you run your practice as a partnership, you take on a lot more: You're also responsible for all the practice's business obligations, which really puts you in the line of fire. Besides ordinary business risks--debts, slip-and-fall suits--you're also indirectly liable for your partner's malpractice. "Even if you're not named in a suit against a partner, your practice usually will be," says Eric Michaels, a lawyer in Florham Park, N.J. "If there's an award beyond the insurance and the practice assets, suddenly your home may be at risk."

Then what are the advantages of partnerships? They're simple. More important, they're not subject to federal income tax. Income passes directly through them to the individual partners.

Incorporation can reverse those two main factors: It insulates you from the business's obligations, but it can raise a problem: double taxation. …

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