How quickly can you set up a corporation for my practice?” the physician asked the attorney over the telephone.

“Why do you want to incorporate?” the attorney asked in return.

“Because I am going to set up a holistic health center with a friend who is a naturopathic physician, and I want to protect my personal assets and I do not want to be responsible for my partner if something happens,” the doctor responded.

“Okay, that’s fine, do you have a general business plan and a good accountant? Also, have you projected your income and expenses for the first twelve months? Do you know if you will be equal monetary partners? Have you planned for employees? Do you know who will manage the practice? Have you begun to plan for retirement? Do you know if you will bring on other owners, and whether they will be physicians or other types of allied health providers? Do you have an idea of how to get out of the business if you want to retire or change jobs?”

“No, why does all that matter? I just want a corporation,” the doctor blurted back, getting somewhat agitated by the seemingly bothersome questions.

“Well, your attorney can pretty much set you up immediately in any type of business form that you want, but what your business form should be may be a different story. All I am saying is that we should take a few moments to consider some initial questions and talk with your financial advisors before we fill out the paperwork.”

The doctor paused. “So how much is all this going to cost me?”

Finding the Right Fit For Your Business

There are so many choices out there and very little agreement on what the best form of business entity is for the professional. Further, there is a perception that the only way to protect yourself in business is to register as a corporation.

So is this akin to rocket science? Unfortunately, sometimes there can be a feeling of too much complexity because of something called the Internal Revenue Code and other laws that affect the health care industry such as the Stark Law. The purpose of this article is to outline the types of business entities available for health care professionals. Note that while this article touches on Oregon law, each state will have varying limitations regarding its business entities, so professionals should consult with an attorney licensed in their state.  The main point here is that business entities are not “one size fits all,” and professionals must weigh the pros and cons of the various options before deciding upon what is right for them.

Choice of Business Entities for the Health Care Professional

Traditionally, there were very few options available to health care professionals for setting up their business entities. Many professionals simply operated as sole proprietors or got together with a few colleagues and (by default) operated their business as a general partnership. And, historically, the only real choice for formally establishing a business was to incorporate as a professional corporation. Now, with limited liability companies and limited liability partnerships, the choices for professionals are varied. The following is a list of the most common businesses for health care professionals. Other forms of businesses such as general partnerships, limited partnerships, private corporations, and nonprofit corporations are not discussed in this article.

• Sole Proprietor

Basically, this form of business is the simplest. A single professional conducts business in his or her name, pays all the expenses, and retains all the profits. There is no need to register officially with the state as a sole proprietor. The advantage to this form of business is the ease of administration. The disadvantage to this form is that the sole proprietor is personally responsible for all the liabilities of the business. The secret for the sole proprietor is to have as much insurance in place as necessary for business activities in order to protect personal assets.

• Limited Liability Partnership

As stated above, many professionals who got together with their colleagues, simply operated the business as a general partnership. The main reason for using the general partnership probably was due to the ease of administration and lack of formalities required by more organized business forms. (The more likely reason, however, was that a group of sole proprietors simply started working together and never bothered formally organizing.) The danger from operating in a general partnership, is that each of the partners is personally liable for every other partner. And, in the medical professions this liability exposure can be significant (even though it may be insurable). As an alternative to the general partnership, professionals may register their business as a limited liability partnership (“LLP”). The protection this offers is similar to the professional corporation (and the limited liability company), in that, a partner’s personal liability exposure for the bad acts of his partners is capped by statute for all claims made against him (with that cap adjusted periodically by regulation). For this single reason, any group of professionals that are operating as a general partnership should ask their advisors about registering with the state as a limited liability partnership. Compared to LLCs or PCs, advantages to this form of business are that the LLP is almost identical to the ease of administration and operation of the general partnership and there is some flexibility in allocating profits and losses among the partners. The disadvantages are that partners generally may bind each other without consensus, and everyone in the partnership usually has a say in the management of the business (this could be difficult as the number of partners increases).

• Limited Liability Company

The limited liability company (“LLC”) has become more common in the last ten years or so because it offers many of the same advantages of a partnership and a professional corporation but without the corporate formalities. Understand, however, that no matter what business form is decided upon, there are basic formalities that must be followed or the business may be deemed nonexistent and indistinguishable from the individuals that own it. In that case, individual owners (called “members” in a LLC as compared to “partners” in a LLP or “shareholders” in the PC) may find themselves exposed to personal liability similar to that of sole proprietors or general partners.

The advantages of a limited liability company, therefore, are the ease of administration (although somewhat more complex than the LLP), and flexibility in allocating profits and losses among members (again, similar to the LLP). The disadvantages of operating as a limited liability company include the lack of familiarity with this form of business entity including the terms associated with the LLC such as “articles of organization,” “operating agreement,” and “members.” In addition, the operating agreement for LLCs can be a cumbersome document and very technical from a tax perspective.

• Professional Corporation

Clearly, as the most structured of all professional associations, the professional corporation (“PC”) is widely used by groups of individuals who want a healthy dose of organization and formality for their business. For all practical purposes, this is a corporation that elects a board of directors and officers who manage the corporation. The professional corporation also “employs” its health care professionals even though they are considered the owners (“shareholders”). One of the best advantages to this form of business is that professionals are likely to treat it as a separate business because of the degree of formality required. Other advantages come from the fact that the professionals are employees of the business, and therefore, may receive similar benefits of employment that other companies provide to their employees. Notably, the disadvantages are almost a mirror image of the advantages because some professionals do not like the formalities required to maintain corporate status, and still others may prefer not to be treated as employees.

Recommendations

“So what business entity should I choose?” You ask four different lawyers, you are likely to get four varied answers. The following recommendations are by no means exhaustive, but they may help to generate some common sense thinking as the professional goes about deciding what business form to set up.

• Have a general business plan, and get good tax and accounting advice before you select the business entity

Most lawyers can repeat stories about people who visited their office demanding that the lawyer set up a corporation. In this situation, the general perception seems to be that there must be a corporation set up before anything else can be done for the business. Sure, the lawyer can set up the corporation and can bill for his or her services, but does that mean the business will succeed? Of course, not. The only point here is that the lawyer probably should be the last person the health care professional calls in this process. A general business plan should be mapped out (nothing too fancy but at least some projections on revenue and expenses), and a good business accountant should be sought out to address the bookkeeping aspects and tax planning issues. Once those steps have been taken, interview some attorneys and bring the person you are comfortable with into the process of deciding upon the right business entity.

• Know your industry and your costs

This may seem like a no-brainer, but all too often we forget that the health care industry has many restrictions. There are different licensure statutes for physicians, dentists, chiropractors, naturopaths, and nurse practitioners, each with their own subtle differences. There are the Medicare and Medicaid laws and accompanying fraud and abuse prohibitions that may dictate how a professional should set up a business. There also are the unique tort law vicarious liability principles applied to health care professionals that may cause one “partner” to be liable for another partner’s bad acts. This liability exposure should be examined in each of the business forms, and it also should be insured against. These are just a few industry-specific considerations to review when deciding upon business entities.

In addition to understanding your industry, the phrase “it takes money to make money” should not be forgotten. Many people who start up businesses whether health care related or not, fail to grasp the concept that it costs money to maintain an effective business. Know your costs before you start. How much will it cost to set up the business? How much will it cost to maintain the office on a monthly basis? Frugality should be a guiding principle until a solid cash flow is established. Some professionals go out and buy the latest and greatest office equipment and furniture or hire a lot of staff, and max-out multiple credit cards well-before the first dollar is generated by the business. Unless the item or individual is an absolute necessity to your business (such as a piece of diagnostic equipment or an office manager that is adored by patients and keeps chaos in check), avoid the temptation to have it all right away. Start small, and make spending decisions based upon the success of the business.

• Plan for ownership changes or dissolution

Finally, the most important recommendation on this list is to plan for ending the venture or extricating individuals from the business. Suppose two professionals co-own a new practice, and eight months into the honeymoon, they decide to part ways. What happens to the business assets? Who will keep the office space? Who will keep the patients and the medical records? Will one person buy the other out, and at what price? Getting a clear understanding early on of how the business will deal with ownership changes or winding down is critical in order to avoid potential legal disputes months or years later when everyone has forgotten all the verbal promises. So what does this mean? Get it in writing. Document in a partnership agreement (for the LLP) or operating agreement (for the LLC) or bylaws and shareholder/employment agreement (for the PC), how individuals may come and go, and ultimately what happens to all the assets and liabilities if the business is ever dissolved.

In closing, remember that attorneys are good at generating the documents to set up businesses, but the decision about which business entity to operate within should be a combination of both legal and business thinking. Health care professionals should take a few moments to consider their business goals. They should interview different attorneys and accountants to find individuals they can work with effectively, and then the professionals and their advisors can sit down and decide upon the best choice of business entity