Protect your practice: Shield valuable assets

August 1, 2007

If you own your medical practice, your goal should not be simply to protect your personal wealth from the practice's creditors. While this is certainly a mandatory first step, you must do more.

It only makes sense - you have probably invested much of your personal wealth into your practice; why would you then want to protect only your personal assets, while leaving your practice completely vulnerable? You wouldn't. 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), 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.

Your strategy: 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.

AR segregation

A practice can effectively shield what is most often the most valuable entity for a medical practice - its accounts receivable (AR).

While thousands of practices attempt to shield their ARs through the AR financing technique noted below, despite all of its inherent tax pitfalls and interest rate and investment risk, relatively few have implemented this tactic here - which has no tax benefit or financial risks whatsoever. It simply involves a "lease back" type tactic with the AR between a limited liability company (LLC) for each physician and the medical practice using a collection agreement and, often, a simple non-substantive modification of a physician's employment agreement.

Using this technique, if the practice is ever hit with a multi-million dollar judgment beyond coverage limits, the collection agreement can be terminated, thereby shielding the AR completely. Rather than losing millions in AR to a plaintiff (which would occur if ARs were owned by the practice), the physician owners could ultimately settle the claim for pennies or walk away completely, with the AR collected by a new operating entity in a matter of weeks.

AR factoring

In this technique, a practice sells its AR to a third party.

Obviously, once the practice no longer owns its AR, a lawsuit against the practice would have no claim against the AR.

However, there may be a significant price to pay for this protection, as most factoring companies will only purchase the AR for a steep discount. Is it worth it to shield the AR for you to sell the asset on the cheap? Often it is not - explaining why many of our clients are more interested in AR segregation.

Real estate or equipment leaseback

In some medical practices, real estate or equipment may be as significant an asset as the AR, if not more.

If so, you must make certain that you create a separate entity to own the real estate/equipment and lease it back to the operating practice entity. Typically, this entity will be a limited liability company.

Done correctly, this lease-back technique can also create income tax savings as well. This is achieved by gifting passive LLC interests to children who are in lower income tax brackets (but over the age of 18). In so doing, you can enjoy beneficial tax treatment for some of the rent paid by the practice to the LLC. We have seen this create tax savings above $10,000 annually for some clients - achieved while protecting the real estate/equipment from lawsuits against the practice as well.