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#4411 - 01/24/06 12:02 AM PA vs LLC vs ??? for a Doctor's office
Dr Mike Offline
Member

Registered: 11/07/05
Posts: 212
Loc: Florida
What would be the best organization for a doctor to use to set up his office practice from an Asset Protection point of view? If I set up my office as a PA (professional association), can a judgement creditor, who is not a doctor, some how get control of my shares of stock in my PA and fire me? Or force me to liquidate my shares to pay whatever equity is in the company? Would a long term employment contract between me and the medical practice entity force the judgement creditor to have to pay my salary for years if they did fire me? Could a long term lease between the LLC that owns "my" medical office building force the judgement creditor to pay the LLC for years to come?
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MJS

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#4412 - 01/24/06 12:48 AM Re: PA vs LLC vs ??? for a Doctor's office
Jay Adkisson Offline
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Registered: 06/05/04
Posts: 1108
Loc: Newport Beach, Orange County, ...
Having a P.A. or LLC will not prevent you from being sued directly for negligence, of course.

It is typically more difficult for creditors to attack an LLC or LLP, etc., than it is a corporation. With a corporation, the court can appoint a receiver to liquidate the company to allow creditors to be satisfied. With an LLC or LLP, etc., the creditor is at least initially limited to a charging order, which is akin to an assignment of income.

Creditors cannot be forced to pay salaries or rents; creditors are very much in the nature of passive investors who only receive money but who have no affirmative duties.

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#4413 - 01/24/06 01:58 AM Re: PA vs LLC vs ??? for a Doctor's office
Ryan Offline
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Registered: 08/19/05
Posts: 970
Loc: SLC, Utah
Things vary from state to state. This is a prime example of where you would benefit from having an asset protection planner and your local attorney work hand in hand.

Some states allow you to use a normal LLC for your practice, however most states require you to use an LLP, PA, PC, or PLLC. Some states (such as California) will not let you use PLLCs or PAs, so you're basically stuck with PCs or possibly an LLP.

Many states restrict stock ownership of PAs and PCs to professionals of the same practice. In other words, a non-physician creditor may not be allowed to seize stock in a doctor's professional corp. and then liquidate the company. In this instance, a PC could have a measure of protection akin to the charging order. However, all of these contingencies are HIGHLY state specific. A thorough review of statutory and case law is necessary, especially if you're going to do a PC or PA.

If you're using a PLLC (and if you can use one), things are more uniform due to the universality of charging order protection among LLCs.

Florida allows PLLCs, so if your practice is in Florida, consult your advisor regarding formation of a PLLC. However, be aware that there is a small franchise tax on LLCs and corporations on FL.

A long term employment contract is an interesting idea.... if your stock can't be seized by a creditor (or instead you use a PLLC), then I think it would be unnecessary. My gut tells me a creditor may also be able to get around this contract, but I'd have to research the topic before having something to hang my hat on.

I will also add this: to the greatest extent possible, all real estate, equipment, and employees (through the use of a Professional Employment Organization, or PEO) should be owned by other companies and then leased to the PLLC. These other entities may be owned by you, and need not (usually) be professional companies.

Another thing I do is have a PLLC 99% own an LLC, to which excess funds could be directed and invested. This not only puts a wall between your PLLC and investments if your business is sued, but it also keeps the investments from becoming a part of your marital estate, which could be helpful if you end up getting divorced.

As you can see, there's a ton of things you can do, however many standard asset protection strategies must be tweaked in order to fit in with the modified laws that govern the formation and operation of professional companies.

Regards,

W. Ryan Fowler
www.pfshield.com
wrf90@hotmail.com

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#4414 - 01/24/06 02:02 AM Re: PA vs LLC vs ??? for a Doctor's office
Ryan Offline
Expert

Registered: 08/19/05
Posts: 970
Loc: SLC, Utah
By the way, there is no single best entity for a professional practice, that would work equally well in every state. For example, in Florida I often structure PLLCs, but in Texas I usually form a PA. This is because a PA in Texas avoids a 4.5%+ franchise tax that the PLLC would be liable for.

Regards,

W. Ryan Fowler
www.pfshield.com
wrf90@hotmail.com

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#4415 - 01/24/06 12:46 PM Re: PA vs LLC vs ??? for a Doctor's office
Roccy Offline
Member

Registered: 11/11/05
Posts: 54
Loc: St. Joseph, Michigan
For the most part I agree with Ryan's comments. Most states require professionals to be PCs or PAs.

If your practice is properly structured, it won't own anything of value so it's really a non-issue.

I don't really agree with Ryan's comments about using a PEO. Most people do not understand the costs involved with a PEO as they are not disclosed by the PEOs. Unless you have a large staff and the HR issues are a headache, using a PEO is just a big expense you’ll want to avoid. Having said that, I do know of a few PEOs that have a really interesting deferred compensation program for key employees.

I also do not understand Ryan’s comments about protecting you in a divorce. After practicing law as a divorce attorney, what I can say is if you own it and it has value, it is subject to division in divorce (unless you are in a community property state and kept property separate when coming into the marriage and throughout). The way to protect asset in a divorce (and it’s an ethical dilemma) is to move them offshore to an offshore trust that the wife has no involvement with. Just as a court can’t get assets of yours in a typical negligence suit, they can’t get your assets in a divorce suit. However, you can bet that whatever is left in the states is going to the other spouse.

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#4416 - 01/24/06 06:55 PM Re: PA vs LLC vs ??? for a Doctor's office
Ryan Offline
Expert

Registered: 08/19/05
Posts: 970
Loc: SLC, Utah
I wrote an article called "Pre-divorce/pre-marital planning" that explains why this strategy is effective. (Having a PC, or preferably a PLLC own another LLC.) Also, I forgot to mention that keeping the property out of the marital estate is more effective for community property states. Regardless, the strategy in my last post is a much more complex and subtle than I let on. Read the article below and you'll see what I mean smile

Like Roccy mentioned, if you put assets offshore the judge will usually compensate for that fact by giving the spouse more onshore assets. The subtlety of the below plan increases the chance of you keeping more assets both onshore and off. (And I only implement this plan for wealthy people who are going to marry less wealthy spouses - the goal is not to screw a spouse, but rather to ensure a wealthy spouse retains most of the wealth he or she had before the marriage.)

By the way, figure 1 wouldn't paste to this site confused

PRE-MARITAL/PRE-DIVORCE PLANNING

It is a widely known statistic that approximately half of all marriages in the United States fail. Nonetheless, most people see marriage as desirable. For high net-worth individuals who marry, the potential destruction of one’s wealth in the event of divorce is a serious concern. Therefore, many such individuals are interested in a special type of asset protection, known as Pre-Marital/Pre-Divorce planning (PD/PM planning), as a means to minimize the hazards of a marriage gone bad.
Before we discuss PD/PM planning, we should discuss what it is not. PD/PM planning is not a means to avoid child-support payments. It will also not bar 100% of your assets from spousal attachment. Rather, PD/PM planning is a means to ensure that most of the assets you had before you married will either remain yours or revert to your ownership within 1½ years of the divorce being final.

The Pre-Nuptial Agreement

The fairest and most honest way to work out the division of assets between spouses in the event of divorce is through a pre-nuptial (or sometimes post-nuptial) agreement. Many will argue that such an agreement casts a shadow on the marriage, is unromantic, and shows one’s pessimism towards the possibility of a happy marriage in general. However, in the event of a divorce, a pre-nuptial agreement will reduce the emotional pain, bitterness, and cost of divorce. This is because a pre-nuptial agreement will clarify many issues that may otherwise be brutal battlegrounds in a divorce proceeding. Furthermore, a pre-nuptial agreement may clarify certain terms and expectations of the marriage itself. This helps avoid misunderstandings and misconceptions that might otherwise cause marital conflict.
Notwithstanding the usefulness of a pre-nuptial agreement, the author has had several clients whose spouse-to-be was not willing to sign an agreement (or the client was unwilling to even approach their fiancée about an agreement.) Nonetheless, the client wanted to make sure that, if the marriage ended in divorce, s/he would not lose everything that s/he had worked so hard to acquire. This is where asset protection planning and PD/PM planning coincide.

The Fundamentals of PD/PM Asset Protection Planning

Pre- and post-nuptial agreements aside, there is one fundamental strategy we use in PD/PM planning, known as the Trojan Horse Method®. The Trojan Horse Method® involves placing assets out of the ex-spouse’s reach. Then, in divorce proceedings, we offer an attractive “gift” to the ex-spouse, which in actuality is a carefully laid trap, or Trojan Horse. In a nutshell, this is accomplished when we place assets in certain Charging Order Protected Entities (COPEs) and, if divorce seems likely, management of the COPEs are shifted away from the client and out of U.S. jurisdiction. Subsequently, although the ex-spouse may receive a sizeable or even near-complete ownership of the entities, s/he will not have any control or access to their assets. We can then either stalemate the spouse into a favorable settlement (where the ex-spouse receives a smaller share of assets than s/he would otherwise receive, in exchange for his entities’ interests that are essentially worthless) or, we can make sure that, although s/he receives no entity profits, s/he receives all the tax liability from such profits. Optimally, the ex-spouse will receive a sizeable tax liability from the entity(s), but s/he won’t receive any funds to pay the tax. We are essentially placing the ex-spouse in a financial vice-grip until s/he cries “uncle!” At that point, we offer to buy the company interest back, pay for the tax liability, and offer a much smaller settlement than the ex-spouse would otherwise have received.

Why is the Trojan Horse Method® More Effective Than Other Pre-Divorce Planning Strategies?

Besides the Trojan Horse Method®, there are two other less effective PD/PM strategies that are often utilized:
• The most common method is for one spouse to transfer assets out of his name and hide them from the other spouse. Practically all divorce attorneys are aware of this tactic, and have subsequently found effective ways to discover hidden assets.
• A more effective strategy is to shift assets offshore. These assets will then be outside of the divorce court’s jurisdiction. While this technique can be effective, the court will usually counter this approach by giving the ex-spouse a greater portion of remaining onshore assets to compensate for the offshore assets outside court jurisdiction. Because it is usually difficult to shift all of one’s assets offshore, the divorce court may be able to effectively counter this strategy.
The Trojan Horse Method® is more effective than the above strategies because it allows the client to appear to be cooperating with the court in dividing marital assets. This means that neither the spouse nor the court will likely suspect any PD/PM plan is in place, and therefore the court will likely not see any reason to give more onshore assets to the ex-spouse. Indeed, if for example the client’s assets are in COPEs that are not managed by him, then all s/he can do is give up his membership interest in the entities. However, because the entities are solely managed by a friendly 3rd party , both the client and court are unable to compel entity profit and/or asset distributions to the ex-spouse. Furthermore, although management should be offshore immediately before and during divorce proceedings, assets may be held in domestic entities (if the plan is implemented more than 1 year before the divorce’s initiation ), which are less suspicious to a U.S. judge and therefore also less likely to invoke him to give more of the client’s onshore assets to the ex-spouse. Finally, because the Trojan Horse Method® anticipates giving at least half of an entity’s ownership interest to an ex-spouse, the Method is equally effective in community property and non-community property states.

An Illustration and Explanation of the Trojan Horse Method®

Figure 1, below, gives a more detailed illustration of how the Trojan Horse Method® is implemented. First, as many assets as possible are placed in domestic or offshore COPEs (in this illustration, all such entities are collectively referred to as “LLC #1”.) Although it may not always be feasible to hold mortgaged real estate or one’s home in LLC #1, these assets may be effectively shielded via a multi-stage equity stripping program, wherein LLC #1 would hold the majority of the real properties’ equity in the form of un-trapped equity/liquid assets.
Second, an offshore LLC (LLC #2) is formed, which holds a 1% interest and all management powers in LLC #1. The manager of LLC #2 may, in turn, be the client or a trusted domestic 3rd party while the marital seas are calm, although the management should be shifted offshore at the first sign that a divorce may be pending. The membership interest of LLC #2 should be held by an offshore grantor trust (such as a Purpose Trust, which is essentially a trust with no beneficiaries) so that LLC #2 is completely independent of the client.
If divorce proceedings commence, the negotiation regarding division of marital assets begins. At this point, the client’s attorney should offer at least half of the client’s interest in LLC #1 to his spouse. Since this is the only thing the client has to give (in connection with LLC #1) such an offer makes sense and will be welcomed by his spouse. The client could possibly even offer all of his interest in LLC #1 if his spouse was willing to make other concessions (custody of or favorable visiting rights with the couple’s children, for example.) Every effort should be made to make the divorce as quick and painless as possible. Once the division of assets is finalized, the bait has been taken and the trap is set. At this point, the client merely has to wait until the end of the taxable year. In the meantime, no distributions are made from LLC #1, although the client may draw funds from the company by rendering consulting services to it in exchange for monetary compensation. Soon after the end of the tax year, LLC #1 will distribute a K-1 to each member. A K-1 is a report given to each LLC member and the IRS stating the tax liability of each member for company gains and losses. Assuming there has been company profit (which can be ensured through conservative investing), the client’s ex-spouse will essentially receive a tax bill. However, since no distributions have been made to either party to pay for the tax debt, the spouse will now have a tax liability without the means to pay it (at least from LLC #1.) The client is now in an extremely advantageous position to negotiate a pennies-on-the-dollar buy-back of the spouse’s LLC #1 membership interest in return for alleviating of his surprise tax burden.
FIGURE 1


Implementing the Trojan Horse Method® After Threat of Divorce Has Materialized

Timing is always a factor when implementing an asset protection program. Ideally the program should be set up before any creditor threat arises (including divorce.) However, some clients fail to set up a program until the need to do so has already materialized. At this point, any transfer of assets to an onshore entity would be vulnerable to a fraudulent transfer ruling, which would cause the program to fail. The solution to this problem is to transfer assets to an offshore LLC (LLC #1 in Figure 1), or to an onshore LLC that is subsequently re-domiciled offshore by the LLC’s manager. Although transferring assets offshore may trigger extra reporting requirements and possibly even additional tax liability, plus greater expense when structuring the Trojan Horse, the offshore manager and LLC #1 would not be subject to a U.S. court order and therefore a domestic fraudulent transfer ruling would be an ineffective remedy against the transfer. It must also be noted that any PM/PD planning should be done under the supervision of an attorney, especially when divorce is already pending, so that attorney/client privilege may attach to the program for an extra layer of privacy.

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#4417 - 01/25/06 01:55 AM Re: PA vs LLC vs ??? for a Doctor's office
Ryan Offline
Expert

Registered: 08/19/05
Posts: 970
Loc: SLC, Utah
By the way, I've used PEO's in the past and have been charged about 4.5% of the employee's wages. To me, that's reasonable, especially considering I can now focus on making money instead of administrative drudgery. Furthermore, you get the increased benefit of not being sued if the employee screws up, and it's also a tax deductible expense.

Last year a major league football stadium concession company lost a $135 million suit, because their employee sold alcohol to someone that then drove drunk and caused a fatal car accident. These guys could have shifted liability to the PEO (because the employee would have been hired and managed by the PEO instead of the concession company) and saved themselves a ton of money.

But, not everyone wants to pay a PEO. So it's not for everyone.

Regards,

W. Ryan Fowler
www.pfshield.com
wrf90@hotmail.com

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#4418 - 01/25/06 11:35 AM Re: PA vs LLC vs ??? for a Doctor's office
Roccy Offline
Member

Registered: 11/11/05
Posts: 54
Loc: St. Joseph, Michigan
I wanted to clarify Ryan’s comments on the PEO issue. It’s clear Ryan has a good knowledge base on a technical level on a number of different topics which is great for this web-site, but my guess is readers want practical advice and practical application of these topics in the real world.

PEOs are nice for employers who have HR problems or headaches they do not want to deal with. The problem for most small business owners is that the owner makes the majority of the money and has that 4.5% expense levied against his/her own salary (which makes no sense to the owner).

For example, if a doctor makes $500,000 and the rest of his staff makes $500,000, the fee for the PEO using Ryan’s number of 4.5% would be $45,000 for the year (half of the cost came from Dr. Smith’s salary). Dr. Smith is not interested in paying a PEO that kind of money especially when for $45,000 he could hire an internal HR person. While there are a few PEO’s that will negotiate that fee in the above example, most will not.

The limited liability of the employees is an interesting concept which will insulate the employer in some areas (like sexual harassment), but for the most part in the small employer setting this benefit is well outweighed by the tremendous cost of using the PEO.

PEO’s are a neat topic when you first hear about them, but in practical terms for high income small business owners, they make little financial sense.

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#4419 - 01/25/06 09:48 PM Re: PA vs LLC vs ??? for a Doctor's office
Ryan Offline
Expert

Registered: 08/19/05
Posts: 970
Loc: SLC, Utah
I agree that PEO's are not for everyone. However, from an asset protection point of view, they are a good tool.

You can also consider this: form your own LLC that acts as a PEO to the main company. Then you are merely diverting profits (and liability!) to another company. The PEO LLC of course has much less to lose than the main company if it's sued. For a high-income small business, this would be a way to get all the benefits of a commercial PEO without losing your shirt.

I have used PEO's as a business owner (20 employees), however most of these employees were making $10 an hour, 20-30 hours a week. When a PEO does the same amount of work, but gets 4.5% of someone earning $100,000 a year, then using a commercial PEO makes a LOT less sense.

By the way, Roccy, your website is awesome. It's about time someone came up with a LEGITIMATE certification program for asset protection consultants. And it costs a lot less than Bill Reed's $9,000+ training course that supposedly makes you an 'expert' on asset protection in just a few days.

Regards,

W. Ryan Fowler
www.pfshield.com

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#4420 - 01/26/06 04:59 PM Re: PA vs LLC vs ??? for a Doctor's office
Dr Mike Offline
Member

Registered: 11/07/05
Posts: 212
Loc: Florida
Ryan, could I use a PEO to receive the money from health insurance companies, and have a separate entity act as an independent contractor to do the medical work (with me being the doctor employee of that separate entity)? Would this be a way to protect the accounts receivable? It seems to me that the AR would belong to the PEO, and the LLC that has me as it's employee would be getting a fee for providing services? Just a complicated thought on how to protect AR....sigh....
_________________________
MJS

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