Using Multiple Entities For Asset Protection

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Asset Protection

Using Multiple Entities For Asset Protection
In the last chapter, you learned how a C corporation can make more financial sense for a medical practice than a S corporation. You also learned that, if you have an S corporation now, you can easily convert to a C corporation—or use both an S and C corporation in a multi-entity structure. The strategy of using multiple entities goes beyond the tax and financial benefits of S and C corporations, as you will see here. In this chapter, we will explain additional multiple entity asset protection concepts that can help you better shield practice assets from lawsuits (Fortress) and earn more without seeing more patients (Engine).

Protecting Practice Assets By Using Multiple Entities
We understand that it is a tremendous risk to put all of a practice’s “eggs” into one basket, but what’s the solution? For your practice, it may be as simple as using multiple baskets. In fact, using multiple entities to run a practice is quite common in many types of business outside of medicine. Consider:
· Most restaurant businesses use different entities if they expand beyond one location.
· Most real estate developers or investors use multiple entities for different pieces of property.
· Many owners of taxicabs use one entity to own each taxicab.
Why do these business owners use multiple entities in this way? They do so primarily because they want their businesses to be Fortresses—shielding different business units or assets from claims against other businesses or assets. If one restaurant location performs poorly or there is a lawsuit at one property, the restaurateur does not want the other locations to be held responsible. If one taxicab is in a terrible accident, the owner of the taxicab business does not want the income from the other taxicabs to be exposed to the lawsuit creditor. Doctors can use the same tactic for the exact same reason.

How should a Doctor use multiple entities to protect a medical practice? The most common way is to separate the practice’s assets into various entities. Typically, the practice’s accounts receivable (AR) is its greatest asset. We will deal with this asset in its own chapter later in this Lesson. After AR, many practices own the real estate where the practice operates, as well as some valuable equipment.
There are three asset protection goals of separating the ownership of the real estate and equipment (RE) from the operating practice.
1. First, the RE is a valuable asset that should be isolated from any liability created by the practice. By isolating the practice from the real estate, you may have isolated malpractice or employment liability created by the practice from the valuable RE.
2. Second, the RE itself may cause liability, such as slip-and-fall claims from those coming and going on the premises or by damages resulting from the equipment (or improper use of it by an employee) injuring a patient or employee. If the RE and the practice are operated by the same legal entity, all the “eggs” are in the same “basket.” This means that the claim will be against an entity that has something to lose—all of those valuable assets. By separating the RE from the practice, you have also insulated the practice from these risks.
3. If there is a claim against the Doctors personally, the LLC can provide (+2) protection from such claims—though not in California—due to the charging order protections that you can read about in Lesson #6 on personal asset protection.

posy 18Separation Involves LLCs And Lease-Backs
The actual tactic of separating ownership simply involves creating a new Limited Liability Company (LLC) and transferring ownership of the real estate or equipment to the new LLC. Because the RE is no longer owned by the operating practice, claimants suing the practice have no claim against the LLC that owns the RE. For this arrangement to be respected and to ultimately protect the assets, Doctors must:
1. Properly create the LLC, with the right language in its operating agreement and all formalities being followed by the owners.
2. Respect all entity formalities.
3. Transfer title of the RE to the LLC.
4. Create fair market value leases or license documentation between the practice and the LLC(s) and make actual rental payments.
5. Ensure proper tax treatment for all parts of the transaction.
6. Transfer all insurance policies for the RE to, and premiums paid by, the LLC.
7. Comply with all other formalities that evidence the ownership of the RE by the LLC.
8. Note California gross receipts tax issue.

Your Financial Incentive
As we noted at the outset of the chapter, there is also a way the LLC lease-back tactic can be part of your “practice as Engine” strategy as well. In other words, the LLC lease-back can actually allow you to create more wealth while also protecting the RE. In fact, it can help you build wealth without requiring you to work additional hours or see more patients.
For simplicity’s sake, we will assume that you have a one-Doctor medical practice (although these techniques work equally as well for group practices). Let’s assume today that you own the practice’s office building in the same practice entity (PC). Tomorrow, you follow our advice and use the LLC lease-back technique for the practice office and follow all the proper formalities.
We would use an LLC that is initially owned by you and your spouse. Over time, you can gift ownership interests to children while maintaining 100% control of the LLC and the RE the LLC owns. Once the children are over the age of 18 (or age 24 if they are full-time students), their percentage of the LLC income will be taxed at their (likely) lower income tax rates. If you can take full advantage of this opportunity for tax bracket sharing (see Chapter 7-3), you can save tens of thousands of dollars in income taxes each year. Stretched out over a career, the savings (and growth on saved dollars) More

S Corporation, C Corporation Or Both?

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S Corp vs C Corp

S Corporation, C Corporation, Or Both?
Choosing the form and structure of one’s medical practice is an important decision. Most advisors to medical practices believe that the avoidance of potential double taxation makes the S Corporation the logical choice. This “conventional wisdom” overlooks the potential benefits a C Corporation can offer. If you want to truly have your practice be an engine and explore ways to reduce unnecessary taxes and would like to see how you can do this without having to change any of your insurance provider or Medicare provider numbers, understanding this chapter is crucial.

post 9The Tax Basics of Corporations
Per the last chapter, there is no reason to practice as a sole proprietorship or general partnership. This results in unnecessary lawsuit risk, in addition to the inability to take advantage of many valuable tax-deductible business expenses mentioned in this chapter.
In our analysis, we need to compare and contrast C Corporations and S Corporations (re¬member that PLLCs and PAs that are used in some states are also taxed as either an S or C corporation). All businesses that incorporate are automatically C Corporations, absent an election to become an S Corporation. Both S and C Corporations have separate tax ID numbers and are required to file tax returns with the federal and appropriate state tax agencies. Both entities have shareholders. Both entities can be created in any state in the country.
When a C Corporation earns profit, it must pay tax at the corporate level. Profit is the difference between income and expenses. Compensation paid to physicians, as long as it is reasonable, is deductible by the corporation on its tax return (and is therefore not taxable to the corporation). The salary received by the owner is taxable to the owner as wages. After the C Corporation pays taxes, distributions of earnings already taxed at the corporate level can be paid to the physician-owners in the form of dividends. These would generally be taxed to the physician-owners as qualified dividends, thus leading to the “double taxation” of such earnings. As you will see below, this drawback is often overrated.
An S Corporation is also a separate entity that must file its own tax return. However, the S Corporation is often referred to as a “pass through” entity. Rather than paying tax at the corporate level, all income and deductions pass through to the shareholders and the shareholders must pay tax on any S Corp income at their individual rates. Whether the income to an S Corp is paid to the physician-owners as salary or as a distribution will not impact the federal or state income tax rates that will be applied to that income for the physician. There is never any tax to the corporation, therefore there is no “double taxation” in an S Corporation.

Double Taxation—Much Ado About Nothing
Mistakenly, most physicians think of S and C Corporations as having exactly the same benefits. Since the C Corporation has a potential double taxation, most doctors and their advisors elect to form an S Corporation to avoid one more potential problem. First, the double taxation problem can be easily avoided by reducing practice profits to zero, or close to zero, at the end of the year. This is done by the thousands of medical practice C Corporations that exist today. Second, after you review the next sections you will see the increased benefits C Corporations offer medical practices, including the cost (in time, not money) of using and zeroing out a C Corporation far outweighing the benefits of an S Corporation.

Additional Deductible Benefits of a C Corporation
Contrary to much “conventional wisdom,” a C Corporation can be the right choice for many small entities because of the deductions it allows. The corporate deduction for fringe benefits paid to employees is generally limited for shareholders owning more than 2% of an S Corporation. However, a C Corporation enjoys a full deduction for the cost of employees’ (including owner employees) health insurance, group term life insurance of up to $50,000 per employee, and even long term care premiums without regard to age-based limitations. The C Corporation can also deduct the costs of a medical reimbursement plan. If one has a small corporation and a lot of medical expenses that aren’t covered by insurance, the corporation can establish a plan that results in all of those expenses being tax deductible. Fringe benefits such as employer provided vehicles and public transportation passes are also deductible.
In contrast, health insurance paid by an S Corporation for a more than 2% shareholder is not deductible by the corporation. The shareholder must generally take a self-employed health insurance deduction on his personal return. Long term care premiums paid through an S Corporation are also not deductible with regard to these shareholders. The shareholders, in deducting them personally, are subject to the age based limitations.

Digging Deeper on the Potential Benefits of a C Corporation (over an S)
Before some of the authors were educated on the potential benefits allowed for C corporations, we too often advised doctors to use S Corporations. However, when we realized that the potential tax benefits to many doctors can be hundreds of thousands of dollars over a career by using a C Corporation rather than an S, we changed our minds.

The two most financially significant benefits allowed for C corporations are the following:
1. Only C Corporations can offer Section 79 plans
As you will read in chapter 5-5, Group Term Life plans, also called “Section 79” plans for the tax code section that authorizes them, are only available to C Corporations. These plans can be utilized in addition to a qualified plan like pension, profit-sharing plan/401(k) or IRA. While the specifics of Section 79 plans are described more specifically in Chapter 5-5, it is important to note a few of the following important benefits:
· These plans can be utilized in addition to a qualified plan like a pension, profit-sharing plan/401(k) or IRA.
· The More