LLC vs. solo proprietorship

[danut15]

As an independent physician who provides work at different hospitals in the country, one can function as a solo proprietor or single-member LLC.

Question:

From a liability perspective, if let's say you get sued while doing this work (and having appropriate state mandate malpractice coverage) and you're unlucky and lose, but the amount awarded is above your malpractice policy caps (in states without caps)-does it make a difference to you if your work was a LLC instead of solo? In other words, does the LLC statute in this case protects your personal assets and only the income within the LLC would be subject to creditors if you'd lose?

 

My understanding is the LLC limits your liability and only income made within the LLC is subject to risk, not your personal assets, such as home, car...etc.

[Zaphod]

Makes zero difference. LLC, nor any corporate structure will protect an actor from a tort action. Even if youre an employee at walmart and following orders and are found negligent you can be sued as an individual.

[jfoxcpacfp]

Zaphod wrote:

Makes zero difference. LLC, nor any corporate structure will protect an actor from a tort action. Even if youre an employee at walmart and following orders and are found negligent you can be sued as an individual.

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@Zaphod is correct. Walmart would be protected but you, as an individual, would not.

[danut15]

Right, but that would be a civil lawsuit if you are sued as an individual, for which umbrella policy would help.

But if you are sued as a professional (professional lawsuit) in your line if business, does the LLC make a difference if your malpractice coverage is not enough?
If it doesn't, why people create LLCs? Doesn't it confer limited liability?

[Zaphod]

It does confer limited liability as a legal structure. However, given the type of liability you are most concerned about as a physician, it is of little value. Other forms of business dont necessarily have that same problem. I dont know why people create llcs if they are sole proprietors, its more expense and hassle for little gain now that the tax benefits are available to an SP. You could go for the salary+dividend, but its just not worth it imo, lots of hassle and risk for little gain.

When I was looking into how to structure things myself I read several books and I just couldnt find a compelling reason to incorporate. It seems there may have been better reasons in the past, but they are less now.

[danut15]

So then, is there a legal structure that a physician should form to better protect himself and limit his liability, if these LLCs don't offer that protection?

[jfoxcpacfp]

Zaphod wrote:

It does confer limited liability as a legal structure. However, given the type of liability you are most concerned about as a physician, it is of little value. Other forms of business dont necessarily have that same problem. I dont know why people create llcs if they are sole proprietors, its more expense and hassle for little gain now that the tax benefits are available to an SP. You could go for the salary+dividend, but its just not worth it imo, lots of hassle and risk for little gain.

When I was looking into how to structure things myself I read several books and I just couldnt find a compelling reason to incorporate. It seems there may have been better reasons in the past, but they are less now.

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You are correct that LLC does not confer the type of liability you are most concerned about as a physician, but what you are most concerned about is not the same as everything you shold be concerned about. You can't insure away every single risk, but you can try. Naturally, you should compare the cost-time factor to the potential benefits (i.e. What is the worst that could happen?) when making your decision.

I don't see the hassle factor myself. Sole proprietors who form an LLC continue to file on the same Schedule C on their form 1040 as they did before. In KY, it is under $100 to file a simple form to set up online and $175 per year after that. Of course, it varies for other clients depending upon locale. California is the highest, I believe, at $800 per year; in NM, entities file only every other year, and so forth. If you're in CA, it may be simpler to cover with an umbrella policy but in most states, I don't know why you would not opt for the extra protection - simple and cheap - unless you are in the early stages of your career with more debt than assets. Why tempt an attorney to go after your personal assets in the event your office manager (or spouse) runs down a pedestrian when you've sent him out for lunch?

Note that an LLC is not a corporation, which I wouldn't recommend unless you have employees, and then an S-Corp.

[danut15]

In regards to the LLC, some colleague of mine was "advised" by his CPA to form a single member LLC and choose S corp status, so he can save on SE tax on the dividend portion of his income. Is that something wise to do, cause i personally don't see how a physician can claim lots of dividends, unless one gets a bonus every week or so?

[Zaphod]

Well, since Im in California, the high initial and maintenance cost along with limited benefit are what make it especially less worthwhile. Umbrella insurance is excellent of course.

As far as the dividends go, you can do it, its simply drawing a line in the sand of your earnings and calling part of it salary and the rest "dividends". For fear of audit, most people will not give themselves a out of norm salary and dividend ratio (say, 50k salary and 350k dividends). While you could do whatever you want, its probably not worth it. There were a couple of good posts last year on the blog on this exact topic I think.

Your lawyer or CPA will of course lean towards corporation formation as its more complex and requires their input and maintenance.

[jfoxcpacfp]

danut15 wrote:

In regards to the LLC, some colleague of mine was “advised” by his CPA to form a single member LLC and choose S corp status, so he can save on SE tax on the dividend portion of his income. Is that something wise to do, cause i personally don’t see how a physician can claim lots of dividends, unless one gets a bonus every week or so?

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No, No, a thousand times NO - for a physician in most cases. First of all, there is no need to form an LLC if you are going to be an s-corp. Second, it would be very hard to justify that a physician's practice would be worth anything without his/her services. That is where dividends come from - the retained earnings of the business beyond the FMV salaries paid to the owners.

[jfoxcpacfp]

Zaphod wrote:

Well, since Im in California, the high initial and maintenance cost along with limited benefit are what make it especially less worthwhile. Umbrella insurance is excellent of course.

As far as the dividends go, you can do it, its simply drawing a line in the sand of your earnings and calling part of it salary and the rest “dividends”. For fear of audit, most people will not give themselves a out of norm salary and dividend ratio (say, 50k salary and 350k dividends). While you could do whatever you want, its probably not worth it. There were a couple of good posts last year on the blog on this exact topic I think.

Your lawyer or CPA will of course lean towards corporation formation as its more complex and requires their input and maintenance.

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heh heh - I suspected you were in CA. Very expensive to do business there.

>>Your lawyer or CPA will of course lean towards corporation formation as its more complex and requires their input and maintenance.<<

And some of us do the right thing, so don't assume that we make recommendations with ourselves first. Just as you don't recommend surgery if not needed, right?

[danut15]

I am actually based in Maryland.
If i may ask a question: what would be the least costly and most tax efficient entity that a physician should form in the end for himself, as a ine member and owner? SP, LLC, S corp, C corp?

[jfoxcpacfp]

danut15 wrote:

I am actually based in Maryland.
If i may ask a question: what would be the least costly and most tax efficient entity that a physician should form in the end for himself, as a ine member and owner? SP, LLC, S corp, C corp?

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Single owner, no employees?

[danut15]

Single owner, but will have 2 employees.

[jfoxcpacfp]

danut15 wrote:

Single owner, but will have 2 employees.

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I would go with S-corp, since you'll have employees and will have payroll compliance requirements, anyway. Name $25, filing/capitalization fee $125, annual filing fee $300. You'll have an extra tax form (1120S) but you may save enough in Medicare taxes (via distributions) to make up for it since the work of other employees will contribute to the profits of the business. You'll still need to pay yourself a reasonable salary, though.