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

Avoiding Employment Threats

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Employment Lawsuits

Avoiding Employment Threats
After over a decade of educating Doctors on the importance of asset protection, we are seeing a noticeable increase in awareness. Unfortunately, the majority of Doctors who fail to employ asset protection planning give the same excuse: “Doctors never lose malpractice lawsuits with awards above coverage limits.” This is wrong for two reasons. First, half of jury awards against physicians are over $1,000,000. Second, malpractice suits are only a small percentage of the awards against Doctors. A less visible but arguably larger concern is that an employee will file a suit against the Doctor. In the larger version of this article, we will discuss the challenges of employment liability, which may result in very expensive defense costs—even in the event of fraudulent cases that you win. We will give some examples of cases that may be of interest, explain increased risks in the information age and offer some solutions.

The Risk Of Employment Lawsuitspost 13
Over the past 20 years, there have been monumental changes in the employment arena. There are a host of Federal Laws that have been put in place to protect employees’ rights and open the possibility for lawsuits against employers. Many argue that these laws are appropriate to protect the rights of workers while employers often argue that these laws place undue restrictions on their ability to manage their firms.
Regardless of which side of the issue you sit, the reality is that there are numerous “Laws of the Land” which employers must follow. Inclusive of these are the FLSA [Fair Labor Standards Act]; the ADA [Americans with Disabilities Act]; FMLA [Family Medical Leave Act]; Title VII of the Civil Rights Act of 1964; The Civil Rights Act of 1991; and many more. In addition to the federal law, California’s laws add another layer to these regulations. So what does it all mean? It means that you have to learn how to protect yourself against one of the fastest growing areas of liability.
What many employers—including Doctors—face today is the challenge of working in an ever increasingly complex world of employment regulations and guidelines. Most small business owners may have few resources with which to address human resources concerns and little or no training. This can result in the owner being held financially responsible for any mistakes they may make. It means that age-old established practices may plot a course for a company to end up in ruin. It means that business owners—including Doctors—must pay greater attention to how they hire employees; how they supervise them; and how they terminate them.
This environment has fueled the growth of Human Resources (“HR”) outsourcing. Many firms have established themselves as specialized providers of these functions for businesses, with the intent of alleviating the business owner’s HR headaches. While these firms do provide reliable HR services, they typically do not provide liability coverage for the companies they serve, especially in the realm of employee suits claiming sexual harassment, unlawful termination or discrimination. So, while business owners may benefit from outsourcing some HR tasks, they cannot outsource the risk and their companies are still responsible for their own actions. Insurance policies that address these risks are available to protect against catastrophic liability—one example is EPLI [Employment Practices Liability Insurance], also known as HIRE insurance (see www.hireins.com for more information). If the risk is real, and protective insurance is available, why are the vast majority of small business owners, including Doctors, operating without such coverage?
To small business owners, this type of coverage has historically been out of reach due to cost restrictions. Thankfully, this is now beginning the change. More affordable coverage solutions are making their way into the market. In fact, low deductible policies with coverage amounts as high as one million dollars can now be found. These more accessible policies, coupled with employment risk management services, provide a shield that can protect small business owners—including Doctors—from these potentially devastating claims.

Protecting Your Practice
There are two ways to protect your practice assets from risks. First, you can insure against the risk, effectively sharing the risk and passing it along to someone else. Second, you can assume the risk yourself and use asset protection and risk management strategies to protect assets from the threats. The second strategy is covered in Lesson 6. Here we will focus on passing off all of that risk to other people through insurance.
Fewer than 5% of small businesses (and, we imagine, even fewer medical practices) have any insurance coverage providing protection from employment-related lawsuit risks. This is despite government statistics clearly indicating that this threat is a growing problem. Additionally, recent federal court rulings have begun finding owners and management “personally liable.” This means that just incorporating a business will NOT, by itself, protect a business owner from being found personally and financially liable in employment-related suits. Thus, insurance coverage is key to protecting a business owner’s interests.
A solid EPLI policy coupled with a comprehensive risk management course can be obtained today for under $2,500 (sample for businesses of 10 employees or less). Retaining these services provides small business owners with the tools necessary to enforce the protections of the insurance coverage. By coordinating an insurance policy and consulting services, the small business owner/Doctor can expect to see a significant reduction in the threat posed by an employment lawsuit. Contact the authors at 877-656-4362 for more information.

Risks In The Information Age
Information is the currency of modern America. The role of the Internet—and its ability to locate and distribute information—has exploded in recent years. It has become the source of much of our information—our de facto provider of answers, so much so that the first thing a person will do when faced with a potentially life-changing issue is often to “Google it.”
What else, then, would you expect of an employee that feels they were treated unfairly? Most likely, they will explore the information available online and learn that they may have options available to them. In More