Do you run your own practice or hope to run your own practice in the near future? If your answer is “yes,” then you will want to pay close attention to the information within this Lesson. The purpose of this section of the article is to help you get the most—financially speaking—out of your practice. You will have to do more than the typical cookie-cutter planning that many CPAs and attorneys will suggest. As you learned in Lesson #3, an advisor who doesn’t specialize in the unique issues that Doctors face is likely to miss a number of key elements in their planning.
If your goal is to efficiently get the most out of your practice, you may find this Lesson to be the most valuable in this book. While intelligent planning can improve all aspects of your life, it is the impact on your practice that can be the most significant. You need to begin thinking about your practice not only as a treatment facility for patients, but also as a financial Fortress and a wealth-building Engine for you.
The Fortress analogy is important because we want to make sure that the practice is fortified. As the vehicle through which you will make most of your earnings in your career, the practice needs to be protected against all financial and legal threats. As you learned in the previous sections of the larger article, these threats are not just medical malpractice lawsuits. They include healthcare issues, employment risks, and other financial threats that can impact your ability to work and make money.
The Engine analogy is crucial because we want your practice to be an engine for wealth accumulation. You will want to apply the important concepts explained earlier in this book (e.g., Leverage and Efficiency) to your practice structure and operations. By doing so, you will finally be able to derive as much financial benefit as possible out of your practice—both during your working years and through your retirement.
In this Lesson, we will discuss ways to structure and operate your practice so it will act both as a Fortress and as an Engine. Specific articles will cover other risks to the practice not yet discussed, including the premature death or disability of a partner. This Lesson will also explain how to turn the practice into a Fortress by protecting your accounts receivable, real estate, and equipment. You will also be introduced to tools that can be used to transform your practice into a smooth-running Engine—including the use of qualified and nonqualified plans, friendly lease-back arrangements, and captive insurance companies. Finally, we will explain the ultimate wealth-building Engine—the million-dollar retirement buy-out.
How NOT to Structure Your Practice
Every year, we meet many Doctors who are practicing within a structure that offers very little, if any, protection for the assets of the practice. Even worse, we encounter Doctors who have put absolutely no barrier between the potential risks of their practice and all of their personal assets. In some cases, this is due to ignorance on the part of the Doctor. Other times, this is the result of poor advice. Many accountants have suggested that Doctors might not see enough benefit from incorporation to warrant the added time and expense corporations require. Other advisors still recommend general partnerships, although this practice form is all but extinct. In this chapter, we will discuss the pitfalls to avoid when structuring your medical practice.
It may be difficult to believe, but most Doctors who call us have practices that are structured with two things in common:
· Maximum lawsuit exposure
· Minimum tax-saving potential
In this chapter, we will discuss the common medical practice structural and operational mistakes that can cause these two highly undesirable outcomes. After you learn how not to structure your practice, you can continue reading the rest of this Lesson and learn how you can structure your practice for maximum flexibility and efficiency, enabling you to create the Fortress and Engine you desire.
The Worst Way To Structure A Practice: As A General Partnership
Fortunately, it is far less common for Doctors and their advisors to structure new medical practices as general partnerships today. Though new practices are rarely configured as general partnerships, we still come across dozens of mature (and profitable) practices every year that continue to be operated as general partnerships. There are rarely absolutes in medicine, finance, or the law. However, here is one simple rule: You should never operate any medical practice or other business practice as a general partnership. Why do we say this? The general (pun intended) reason is because a general partnership is a creditor’s or plaintiff attorney’s dream and a partner’s liability nightmare. More specifically, let’s consider the three hidden dangers of a general partnership:
1. Partners Have Unlimited Liability for Partnership Debts
This tragic fact goes unrealized by many Doctors who are involved in general partnerships. Without signing personal guarantees on every debt, the Doctors who are involved in a general partnership are, by default, personally guaranteeing every partnership debt and personally assuming the risk for malpractice, accidents, and other liability sources of the entire partnership. These Doctors fail to consider that their liability as a partner is joint and several with all other partners. A plaintiff who successfully sues the partnership can collect the full judgment from any one partner. Let’s look at an example to see how dangerous this arrangement can be:
Case Study: Jane and Ted’s Real Estate Venture
Jane and Ted were physician colleagues who wanted to increase their income by buying “fixer upper” houses, renovating them and then selling them. Events went well for a while, but the real estate market went sour and they defaulted on a $650,000 loan to the bank. Jane was much wealthier than Ted, so the bank pursued Jane for the full amount, ignoring Ted, under the theory of joint and several liability. To collect Ted’s share of the liability, Jane had to file suit against him, More