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Last year, medical malpractice lawsuits paid out nearly $4 billion and that number is expected to steadily rise. Being aware of the risks your dental practice holds is the first step in protecting yourself and your assets. The second is knowing how to minimize or avoid them so that you can run your business successfully.
Protecting your personal assets
Depending upon how your practice is structured and set up as a business entity, you may be exposing your personal assets like savings, your home or other valuables to the liabilities of the business. Small businesses need asset protection to protect the owner’s assets from claims that are made in connection to the business. Having an asset protection strategy in place can provide security and place assets beyond the reach of lawsuits and creditors.
Brad Fletcher of Clark Hill Strasburger, a multidisciplinary, international law firm, explains: “You need to protect personal assets from claims that are made in connection with the business. Ideally, what a person wants to do is to hold assets in a structure, so that a malpractice lawsuit or a lawsuit related to business dealings doesn’t expose their own personal assets to the liabilities of the business.”
In addition, avoiding setting up an asset strategy can be catastrophic and should always be done as soon as possible.
“The time to act on this is now, before anything ever happens; it is too late after you have been sued” Brad urges. “What would the jury think? Do you really want your lawyer to have to explain why you aren’t liable; but that you felt the need to protect all your assets?”
For litigation-prone professions, the use of multiple business entities is a common strategy in which several entities are set up, each with a specific function. This typically includes an operating entity that does not own assets and carries out all business activity, such as interacting with patients, vendors and the day-to-day work. In addition, there is usually a holding entity, which owns the business’s assets such as real estate or medical equipment. Individual owners and partners will own the holding entity that in turn holds the operating entity, which functions as a subsidiary.
Because the operating entity conducts all business activities, the intention is that it bears all risk of loss and contains little to no vulnerable assets. The holding entity is also generally not legally liable for the operating entity’s debts and is limited in exposure during lawsuits.
Types of structures
An important decision when forming these entities is determining the structure. Most small businesses choose between limited liability companies (LLC), limited partnerships (LP) or various types of corporations; however in many states, professionals such as doctors or dentists need to form a professional limited liability company (PLLC) or professional corporation (PC). Ultimately, the decision between these options should be made with your tax advisors and legal counsel.
Small business owners like dentists also need to consider (but not be frightened of) the administrative requirements of a corporation. Because many dental practices are small, with only one or two dentists, a general partnership or sole proprietorship may seem like an attractive legal entity; however, each of these structures can create risk exposure for those seeking to protect assets.
“For doctors and dentists, sole proprietorship essentially gives them no legal protection from business risks,” Brad said. “Practicing under a general partnership also doesn’t provide protection and in addition, you may be liable for the acts of your partner.”
Remember, using multiple entities in your asset protection strategy is useful, but only if you respect the separateness of the structure.
“Treat them as the true entities that they are and not as your personal checkbook. That’s the type of thing that would allow someone in a dispute to step around your protection strategy because you are not treating your structure as a separate formal entity,” Brad said.
“With any structure, the owners (i.e., shareholders, members, partners) need to satisfy the administrative requirements of the state’s business organizations statutes. Generally, they need to have the required meetings, keep minutes, maintain the required books and records, stay compliant with state secretary of state and state comptroller filings, and make sure the business has a separate bank account. Never co-mingle personal assets with the entity’s bank account.”
Leveraging legal structures as a protection strategy
Besides utilizing holding and operating entities, dentists may also consider implementing a number of legal structures to protect their personal assets:
Family Limited Partnerships – spouses use accumulated assets to fund a limited partnership. If the practitioner is subject to a claim, then the assets are protected in a unique way. In most states, the primary remedy of a creditor of a limited partner is to obtain a “charging order” which essentially garnishes any distributions from the partnership to the debtor partner. The creditor who obtains the charging order is only an “assignee,” not a substitute partner. As such, the creditor may only receive distributions actually made by the managing general partner, and distributions might not be made. Further, if the managing general partner makes no distributions, the creditor with the charging order is still liable for the income tax on the distribution he had a right to receive had a distribution been made despite having not received such distribution.
Spousal Lifetime Access Trust (SLAT) – spouses divide their assets, and one spouse funds an irrevocable trust (a SLAT) for the benefit of the other spouse. The spouse beneficiary may be named as the trustee. The spouse, who is the beneficiary of the SLAT, may also at some point fund a separate SLAT for the benefit of the other spouse with some or all of his or her separate assets. Because a SLAT is irrevocable, it can protect assets from the beneficiary’s creditors.
Domestic Asset Protection Trust – allowed only in certain states, this is an irrevocable, self-settled trust, which allows the settlor of the trust (the person that funds it) to be the beneficiary. A third party within one of the allowing states serves as trustee of the trust. A benefit of such a trust is that despite the settlor being the trust’s beneficiary, the assets held in such a trust are protected from the settlor’s creditors. Because these trusts are new and are currently being tested by the courts, their efficacy is not yet fully known.
All of these legal structures are helpful in planning an asset strategy with your financial and legal advisors; however, you should never consider them a replacement for liability insurance. Instead these strategies compliment protection provided by this kind of insurance when utilized properly.
Every business is unique and should rely on the advice of legal professionals to develop strategies to protect business owners from litigation. Should you need guidance on your own strategy, contact us for a complimentary consultation.
