Everything Physicians Need to Know About the LLC Asset Protection Strategy

Even the best, most careful doctors can find themselves at the wrong end of a malpractice suit. Studies from 2022 performed by the American Medical Association show that almost one-third of physicians reported claims against them, and most of those ended with no negligence or error found.

Still, the costs of a lawsuit add up, even if the practitioner is found not liable for any damages.

Malpractice insurance is an essential barrier between your assets and these lawsuits. However, if the costs of the claim and the amount awarded are more than the insurance, your personal assets may be used to pay the plaintiff.

An LLC, or limited liability company, could be precisely what you need to protect your assets from the dangers of a malpractice lawsuit.

What’s an LLC?

Per the IRS, an LLC is a business structure that states regulate in terms of their operations and uses. Designed to provide an extra layer of legal protection between business and personal liability, an LLC is a separate business entity that offers the benefits of a corporation without the formalities, such as annual meetings and corporate minutes.

In addition to its use as a business entity, an LLC can also be utilized to own and shield personal assets. Corporations are not suited to this task.

Note that every state has different regulations, adopted as “LLC Acts” which govern how LLCs will be used in their state.

Owners of an LLC are called “members”, and there is no cap or minimum number of members allowed. Not all businesses can become LLCs (banks and insurance companies are excluded, for example), but physicians can use LLCs for their medical practice in many states (called “PLLCs” or “professional LLCs”).  In addition, in all 50 states, doctors can use LLCs to own personal assets for asset protection and estate planning benefits.

Benefits of LLCs

Once formed, an LLC is considered a separate legal entity, separate and distinct from its members and the liabilities they might incur.

But in addition to this crucial factor, there are other benefits an LLC brings to the table.

Tax Advantages

An LLC includes the option to use pass-through taxation, where profits and losses are taxed on the member’s tax returns instead of being taxed as a C Corp. Pass-through taxation helps avoid double taxation for business income.

Single-member LLCs may qualify for “disregarded entity” taxation, where the LLC need not file its own tax return, even as it is a legally-distinct entity.  The owner pays income tax on the profit and must pay self-employment, Social Security, and Medicare taxes.

Multi-member LLC owners are generally taxed as a partnership. Business profits pass through to each member, who pay taxes on their portion (as well as paying self-employment taxes).

Single or multi-member LLCs may also elect to be taxed as an S Corp, paying themselves a salary.  Payroll taxes are based on that salaried amount. In these structures, the business profit balances pass through as owner income, but the profits are not subject to self-employment tax.

C-Corp LLCs, which can be single or multi-member, are taxed at corporate rates, and profit distributions are double taxed on the owners’ personal income taxes. As a C-corp member, you wouldn’t have to pay self-employment taxes, but if you receive a salary, the LLC pays payroll taxes.

These flexible tax strategies have pros and cons. Your financial advisor can help you decide which LLC structure is best for your business or practice.

Flexible Profit Distribution

Businesses with more than one owner must determine how the profits are distributed. An LLC gives you this flexibility, allowing you to establish profit allocation within your ownership agreement, considering the above-listed tax requirements.

Default Rules

Although you can draft an operating agreement detailing your LLC members’ rights and responsibilities, it isn’t required. However, without an official agreement, the LLC defaults to the rules listed in the state’s statutes – including how well (or how poorly) the LLC will protect against liabilities of members.  Thus, it is always recommended to have an LLC operating agreement drafted by an experienced attorney.

LLC Drawbacks

Before establishing an LLC and assuming it will protect your assets, consider the disadvantages and limitations that come with this type of business structure.

There are also limitations to what the LLC protects. They are subject to automatic dissolution if:

• The company doesn’t report its filings on time.
• There are no succession provisions in the operating agreement, and one or more members withdraw or pass away.
• The structure of the LLC changes.
• Any terms with expiration dates pass.

An automatic dissolution means that the LLC can continue to operate, but the liability structure may change, leaving your personal assets open.

Because of the differences in state statutes, LLCs in more than one state may need extra legal assistance and paperwork to adhere to the rules of the appropriate jurisdictions.

What Are the Types of LLCs?

There are two main categories of LLCs: single-member and multi-member. Each one has pros and cons for physicians.

Single-Member LLCs

Single-member LLCs provide the liability protection and tax benefits that you may want. LLCs add a significant layer of credibility to your business that patients, vendors, and investors see as legitimate. They also give you flexibility in operating without the strict rules involved in corporations. But as the only person “running” the structure, you’ll be responsible for all filing fees and other costs, as well as establishing the paperwork.

Many people elect to stick with a sole proprietorship instead of dealing with the hassles of a single-member LLC, but the key element of protecting your personal assets is missing in that type of structure. Single-member LLCs may not be as secure as multi-member ones, depending on the state, when it comes to shielding assets from claims against the members.

For instance, in such states, if you’re sued personally and found liable for damages, the courts may be able to foreclose on your interest in the LLC. Charging order protection is available in some states, protecting even single-member LLC owners from this possible issue.

Charging orders occur when an LLC owner gets sued. It establishes a lien on the distributions from the LLC. In states where asset protection is weak, the courts may require you to sell your interest in your LLC, which prompts a complete loss of the business.

Reverse veil piercing can also harm your assets. This method permits creditors to use the LLC to collect a judgment against you.

Multi-Member LLCs

As part of a multi-member LLC, your liability protection includes business debt. As long as you haven’t signed a personal guarantee for the company’s debts, business creditors can’t go after your assets.

However, in this type of business structure, members may be held responsible if another member makes a poor business-related decision or action, such as:

• Misusing company funds (such as commingling accounts)
• Intentionally engaging in illegal or reckless behaviors
• Causing harm to someone
• Committing fraud
• Neglecting to keep legal or financial records

When these actions are in question, whether in a single- or multi-member LLC, the courts may do what’s called piercing the corporate veil, setting aside the limited liability rules and going after the member’s personal assets.

How Do You Form an LLC?

As part of an asset protection strategy, an LLC includes many benefits., An LLC is established using the laws of the state in which it’s filed.

Typically, this includes submitting articles of organization to the secretary of state (depending on the state’s laws). Some states require a public notice to be filed in a local newspaper or similar forum.

When you’re ready to file your LLC, use these steps to guide you:

1. Choose the state where you want to form your LLC. This decision may be a simple one when using an LLC for an existing or new business operating in one state, but can be more complex when involving a business operating in multiple states or for owning personal assets for asset protection and/or estate planning purposes. Working with an experienced attorney is crucial here.
2. Select your LLC’s business name. It must be “distinguishable on record,” meaning not already listed on the secretary of state’s records as a qualified LLC or business entity.
3. Decide your registered agent (if applicable). If you’re registering an LLC in a foreign state, you must have a registered agent on file in the formation state. This is the agent for service of process who receives legal notices and tax documents on your behalf.
4. Create your operating agreement. Per above, written operating agreements are recommended to ensure your wishes for the business’s operation are followed and that the protections one strives for are achieved.
5. File your paperwork with the state. Your LLC formation documents, including your Articles of Organization, must be filed with the Secretary of State’s office (or similar, depending on the state).
6.  Apply for your EIN. As a separate business entity, you may need an EIN (employer identification number) from the IRS. You’ll use it on all bank accounts and tax filings. You may also need a sales tax identification number if you’re selling products. EINs are necessary for LLCs with more than one member. (Single-member LLCs may not need their own EINs). Each LLC needs an identity created under a formal operating agreement.
7. Open your business bank account. Separating your personal and business finances starts here.

With a fully-funded business bank account, you’re ready to start using your LLC as a business entity.  All business agreements, business assets and materials should be in the name of the LLC.

For doctors using the LLC to shield personal assets, the process of “funding” the LLC begins once the LLC is formed.  This often takes time and involves changing title of real estate, bank and brokerage accounts, and other assets from the names of the member(s), to the name of the LLC.

Once your LLC is operational, you’ve taken a major step. With that out of the way, an asset protection trust is the frequent next choice for those who wish to develop a holistic asset protection strategy.

Learn More: Asset Protection for Doctors — 3 Effective Strategies

Conclusion

Limited liability protection through an LLC is quite common in healthcare. Physicians who own a practice or other business want to ensure the owner’s personal assets aren’t at risk if the business is sued, keeping their income and valuables safe to pass on to their beneficiaries.

Establishing an LLC is an integral part of such planning.  An LLC to own personal assets can also be a significant part of asset protection/estate planning. OJM Group can help you determine the best structures for your needs and guide you through this next level of asset and estate planning.