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

Turn Your Practice Into a Financial and Wealth-Building Engine

Posted by & filed under Business Owners, Doctors, Education, Healthcare, Resource, Uncategorized.

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