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How the Entity You Select Can Protect You From Liability

by William Prescott | 03/15/2007 | Practice Acquisition & Start-Up , Physicians

Are you forming or purchasing a practice? Are you planning to practice with another doctor? What entity form is appropriate and what do you need to know to select the right one?

There are basically five entities for practice operations: sole proprietorship, C corporation, S corporation, limited liability company (?PLLC? or ?LLC?) and general partnership. Your choice should be driven primarily by liability protection and, to some extent, tax benefits.


Sole proprietorship provides no liability protection in and of itself. So the decision to practice as a sole proprietorship should be based on two criteria. First, the more employees you have, the greater the need to consider an entity that provides liability protection. Second, if there is more than one doctor in the practice, it is essential to consider operating in an entity that provides liability protection. Although you are always liable for your own acts, an entity that provides liability protection protects you from the acts of other doctor(s) and often, but not always, for the acts of your employees against others or your employees? claim(s) against you.


How can you operate your practice and shield yourself from liability, irrespective of practice entity? Carry the necessary insurance in appropriate amounts. And, more importantly, adopt and fund a tax-qualified retirement plan, e.g., a safe harbor 401(k) profit-sharing plan for younger doctors or a defined benefit plan for older doctors to contribute substantially more. Unlike simple plans and IRA?s, the tax-qualified plans are creditor proof, except for child support orders and Federal tax liens. This assumes that the owner is not the only participant in the plan.


As to solo groups, whereby two or more practices operate separately in the same facility, the need is less pressing to operate in an entity formed with liability protection, as compared to co-ownership.


Nevertheless, such practices often hold themselves out to patients and the public as ?partners,? which creates additional liability to one doctor for the acts of another doctor within the solo group.


The greater number of employees you have, the more important it is to consider an entity that provides liability protection. Where two or more doctors practice together, it becomes very important to consider practicing in an entity that provides liability protection.


The business entity you select affects many aspects of your practice including both liability protection and tax issues. It is an important decision that should be made with careful consideration and professional advice.


Statements of opinion not necessarily endorsed by the American Medical Association, or any of its subsidiaries, counsels, commissions, or agencies.

William Prescott
William P. Prescott, M.B.A., J.D. is a practice succession and transition attorney at Wickens, Herzer, Panza, Cook & Batista. He has also worked as a dental equipment and supply salesman. He can be reached at 440-930-8067 or w.prescott@wickenslaw.

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