The Executive Suite: How physicians can use LLCs as a form of asset protection

Wednesday, July 10, 2019

How physicians can use LLCs as a form of asset protection

There are a wide variety of legal tools available to help physicians protect their personal wealth for themselves and their families. Understanding some legal basics about limited liability companies (LLCs) will help you spot your own needs and ask the right questions.

The following information is intentionally written to be as general as possible and merely scratches the surface of LLC law. While the details of drafting and use can be delegated to trustworthy advisers, there are some foundational basics you must learn as part of your own financial literacy. After all, legal tools are meaningless if used incorrectly, and their application must be tailored to your practice’s unique needs.

LLC buyers beware

One of the most common, effective and commonly abused legal structures is the LLC. LLCs are great tools for specific purposes, and I use them literally every day whenever appropriate.

I’ve covered some of the technical details of LLCs before, including the idea that an LLC combines the limited liability features of a corporation with the tax efficiencies and operational flexibility of a partnership. An LLC can protect the assets from an unrelated liability of the individual owner. An LLC also protects the owner from the internal liability the asset itself may create, such as owning a rental home or business.

Unfortunately, this well-proven tool is often used incorrectly. In some cases, the problems start with the people or organizations selling the LLC, especially if they just provide “document preparation” or a do-it-yourself kit rather than specific legal advice. In most cases, these promoters are salespeople, not lawyers. In a few cases, they may also have law degrees but are not currently licensed, are not offering their services as your attorney, or both.

If these salespeople are not currently licensed attorneys, they:

can’t provide specific legal advice,
usually don’t have professional standards or supervision,
don’t have professional malpractice liability or insurance and
conversations are not bound by attorney-client privilege.

I routinely hear reports from clients and advisers attending medical conferences about the tall tales or promises made by LLC promoters. Many medical conference organizers are not doing appropriate due diligence on these vendors who pay for an opportunity to come sell you a product, often over one of your meals, as opposed to speakers who are there to teach you something without any other agenda.

Not only are these LLC promoters substituting kits and forms for representation, they often provide information that’s just plain wrong. In some cases, they are wrong about the features of what they are selling. Other times, they are spreading harmful myths.
3 common falsehoods about LLCs

“You can reduce or limit your insurance coverage if you buy asset protection tools like an LLC.”

Wrong. Insurance is always your first line of defense. It should be carried at high limits and acquired with the help of an experienced agent. Insurance may help you with both liability and loss. Most importantly, insurance will cover the costs of legal defense.

“All you need is one or two LLCs.”

No, you need to separate assets based on a variety of factors including use, value and risk. Even deciding how many LLCs to use (if any) requires looking at multiple factors. You can’t effectively, for instance, use one LLC to protect savings, a rental home and your primary residence.

In this example, putting cash assets in the same LLC as a rental property would needlessly put your savings at risk for any internal liability the LLC experienced, such as a suit from a rental tenant. Unlike putting an actual rental in LLC as a real estate business, your personal residence usually has no legitimate business purpose, and it shouldn’t be exposed to unnecessary liability.

“The jurisdiction we use provides special benefits.”

Typically not. Common promises I’ve seen made are secrecy, privacy, tax benefits and divorce protection, among others. None are completely true. For example, some states allow privacy, but you have to disclose the LLC if asked about it. You’ll usually be taxed on where you live, and local law will control what happens to marital assets.

We will continue this discussion later this month, where we will also explore other asset protection tools — and what physicians need to know about them. Until then, do your homework and make sure that your LLCs are actually structured to limit your liability, not increase your risk.