The Right Way for Physicians to Use Limited Liability Corporations

October 23, 2012

Here are some of the appropriate uses of limited liability corporations by physicians - and some inappropriate uses as well.

We’ve all heard the radio and TV ads, "Asset protection, tax savings, protection from creditors and your spouse, all you need is an LLC!!." Sadly that’s not the whole story, or even half of it. While the limited liability corporation is a well-proven and valuable tool it is not a magic bullet and the way they are currently being marketed to the public (and to doctors in particular) makes many experienced legal planners shudder.

In previous discussions we’ve examined the use of specific legal tools like limited partnerships, captive insurance companies and offshore trusts. Today we begin to examine the appropriate uses of LLCs by physicians, and many that are not.

Just “recording” an LLC is not enough

An LLC is a legal vehicle with specific foundational and operational requirements. I regularly meet with doctors who have an LLC or two in place but who have never been properly advised on its use and operation. Some of the most basic formalities include an operating agreement, funds that are segregated from your personal or other business assets, a legitimate business purpose, and management and reporting that complies with the laws of the state in which it has been established and which it relies on for protection. Make sure you understand these details and know if you are compliant with them.

They aren’t for everything

Legitimate business purpose mentioned above is a key issue. The legal theory behind the LLC laws of most states is that the LLC is a business entity separate from you, your personal liability and the liability of other non-related entities and activities. The LLC should have a definable and real business purpose and that business purpose should be supported by the way you actually mange the LLC and its operations. It is explicitly not a one-size-fits-all garbage bag that magically protects everything you put into it, just because you felt like it.

It likely won’t protect your cars or you from the liability of driving them.

The first most common misuse of the LLC is for one or more daily driver automobiles owned by a physician and his or her family. In most cases the doctor buys an LLC and simply transfers their personal vehicles into it, making the payments and insurance from a personal account, or worse, directly from their practice. This violates several basic rules of asset protection, comingles funds of unrelated entities, and can theoretically lead to those people or entities being implicated in any liability.

As a general rule, an LLC for your cars will not protect them as an asset or you if they cause harm. To do so, the LLC would have to be operated as a vehicle leasing company, with formal leases for the vehicles paid by you to the LLC as the lessee and would need to comply with local laws for such operation, operate a separate checking account, and a variety of other formalities and as just one simple example.

When does it work? If you have a collection of vehicles that are not daily drivers and are more easily defined as "collector grade" we recently created an LLC we’ll call Ron’s Hotrods, LLC, for a client with a collection of 25 vintage muscle cars. In Dr. Ron’s case, the collection was a true investment in collector grade vehicles and the maintenance, insurance, expenses, and buying and selling of the vehicles in his growing collection is run like a real business. His family’s personal vehicles remain in his own name, heavily insured and away from other safe assets like the collection his real estate and (God forbid) his medical practice.

This brings us to a second common fatal misuse of LLC and other entities like PCs and various corporations by physicians - the comingling of unrelated liability. A common example of this is holding a personal vehicle in your medical practice itself as an accident involving the vehicle draws your medical practice and its assets and income into the circle of liability. This "misplaced" liability is often seen in cases where the physician (and often their spouse) has a vehicle leased by the practice to get some tax advantage on lease payment deductions at the advice of their CPA. While this practice may be legitimate from a tax perspective I feel the exposure is unwarranted for the large and daily recurring risk. Instead, discuss taking a car allowance and keeping the vehicle personally titled.