• Industry News
  • Law & Malpractice
  • Coding & Documentation
  • Practice Management
  • Finance
  • Technology
  • Patient Engagement & Communications
  • Billing & Collections
  • Staffing & Salary

Your Money: Impoverish Your Practice

Article

Is your practice poor enough to keep creditors at bay? It should be.


Chances are you’ve heard plenty over the years about wealth protection - high-earners such as physicians are frequently (and correctly) advised to set up mechanisms for protecting their personal wealth against adverse events such as lawsuits. But if you own your practice, protecting your personal wealth from the practice’s creditors should not be your only goal. You must do more.

You should make your practice itself invulnerable to creditor attacks. In other words, set up your practice the way you should your personal finances: as a fortress. You have probably invested much of your personal wealth in your practice. So it doesn’t make sense to protect only your personal assets, leaving your practice completely vulnerable. Yet this is what most physicians do.

While advanced protection might include tools like nonqualified plans and captive insurance companies (beyond the scope of this short article but discussed in previous columns; search the term “Your Money” at www.PhysiciansPractice.com), the first step in transforming your practice into a financial fortress is to remove the practice’s most valuable asset from the practice’s operating legal entity.

Why shouldn’t you want your practice entity to own its most valuable asset? Because if the operating entity owns the asset, the creditors of the practice can claim it. Your strategy should aim to make your operating practice entity as poor as possible. Then, lawsuit plaintiffs have little to gain by attacking the practice beyond insurance coverage. Establish other legal entities to own valuable assets, and then lease or license these assets to the operating business entity. The following tactics illustrate this strategy:

A/R segregation

In this technique, a practice can effectively shield what is usually the most valuable entity for a medical practice - its accounts receivable (A/R). It calls for a lease-back of the A/R between a limited liability company (LLC) for each physician and the medical practice using a collection agreement, and often, a simple nonsubstantive modification of a physician’s employment agreement.

With this approach, if the practice is ever hit with a multimillion-dollar judgment beyond its insurance coverage limits, the collection agreement can be terminated, thereby shielding the A/R completely. Rather than losing millions in A/R to a plaintiff (which would occur if the accounts receivable were owned by the practice), you could ultimately settle the claim for pennies, or walk away completely, with the A/R collected by a new operating entity in a matter of weeks.

A/R factoring

This technique calls for the practice to sell its A/R to a third party. Obviously, once the practice no longer owns its A/R, a lawsuit against the practice would have no claim against the A/R. However, there may be a significant price to pay for this protection, as most factoring companies will only purchase the A/R at a steep discount. Is it worth it to shield the A/R for you to sell the asset on the cheap? Usually it is not, which explains why factoring is a rarely employed technique that most practice management experts advise against.

Other assets

In some practices, real estate or equipment may be as significant an asset as the A/R, if not more so. If that’s your situation, you must make certain that you create a separate entity to own the real estate and/or equipment and lease it back to the operating practice entity. Typically, this will be a limited liability company. Done correctly, this lease-back technique can also create income-tax savings in the form of “gifting” (as they say in tax parlance) passive LLC interests to children who are in lower income-tax brackets (but over the age of 18). You can thus enjoy beneficial tax treatment for some of the rent paid by the practice to the LLC. We have seen this yield tax savings of more than $10,000 annually for some clients - while protecting real estate and equipment from lawsuits against the practice as well.

Many physicians are concerned about personal asset protection but fail to adequately shield the practice itself. The first step to take to protect the practice is to remove its most valuable asset from the practice’s ownership. With the proper legal structure this can be achieved with minimal headaches and often, with subsequent tax benefits.

David B. Mandell, JD, MBA, is an attorney, lecturer, and author of “The Doctor’s Wealth Protection Guide” and “Wealth Protection, MD.” He is also a cofounder of The Wealth Protection Alliance, a nationwide network of financial advisory firms whose goal is to help clients build and preserve their wealth. Mike Breedlove, CLU, ChFC, is principal of First Financial Resources and provides sophisticated business planning to physicians around the country. David and Mike can both be reached at 800 554 7233 or via editor@physicianspractice.com.

This article originally appeared in the April 2007 issue of Physicians Practice.

Related Videos
Krisi Hutson gives expert advice
Krisi Hutson gives expert advice
Krisi Hutson gives expert advice
Krisi Hutson gives expert advice
Krisi Hutson gives expert advice
Krisi Hutson gives expert advice
Jay Anders gives expert advice
Jay Anders gives expert advice
Jay Anders gives expert advice
© 2024 MJH Life Sciences

All rights reserved.