Setting up an LLC can be an effective solution for doctors trying to protect themselves from potential liability and lawsuits. But do Limited Liability Companies (LLCs) really provide adequate asset protection for physicians?
It is true that for doctors or any other professional, a corporation or Limited Liability Company (LLC) does not provide complete protection from malpractice claims. However, setting up a professional corporation or a professional LLC (PLLC) can offer significant benefits.
Read on to find out what other options may be available and how professional LLC (PLLC) might be beneficial in such a situation.
Setting up a professional corporation or a PLLC offers many benefits and perks such as:
- Limit personal financial liability by protecting personal assets from being used to satisfy a judgment in a malpractice suit.
- Tax advantages by offering different tax options and write-offs.
- Reliability as a registered entity with the state.
Therefore, as a doctor or someone in the medical field, establishing either a professional corporation or an LLC could be key to protecting your assets and having more flexibility with taxes. Even though you won’t get protection from malpractice, it will keep business resources separate – something that sole proprietorships just can’t do.
Let’s dig deep into does LLC protect doctors, the advantages and disadvantages of forming a professional LLC for doctors, and whether a PLLC offers more tax flexibility and asset protection.
What is PLLC and Why Should Doctors Consider It?
An LLC (limited liability company) provides business owners with a certain level of liability protection. This means that if your business is sued or faces any other legal action, you won’t be held personally liable for the damages.
Instead, the lawsuit can only reach the assets of the LLC itself. For doctors, this type of protection is invaluable, as it keeps their personal finances safe from any risks associated with their professional practice.
Many states allow licensed professionals such as doctors, lawyers, accountants, nurses, etc to form a special type of LLC called a professional LLC or PLLC. This type of LLC is specially designed to protect business owners with licensed occupations from financial risks or personal liability for actions taken by the company.
Benefits of LLC For Doctors
Pros of an LLC for Doctors
- Personal Asset Protection: One of the main benefits of an LLC is that it provides personal asset protection for the members of the company. This means that if your practice is sued, your personal assets such as your home, car, and savings will be protected.
- Flexibility in Management: LLCs also offer flexibility in management. Unlike a corporation, which requires a board of directors and regular meetings, an LLC can be run by its members or by a manager. This allows doctors to focus on their patients while still having control over their practice.
- Reliability and Trust: Many states require physicians to maintain their professional licenses in order to form a PLLC. Hence, a PLLC can help ensure compliance with these regulations and help patients build trust in the company.
- Tax Advantages: LLCs also offer tax advantages. Because LLCs are pass-through entities, the company’s profits and losses are passed through to the members, who report them on their personal tax returns. This can save doctors money on taxes. Moreover, an LLC can also choose to be taxed as an S corp or C corp. No other business entity has such flexibility.
The downside of LLC For Doctors
Apart from zero protection from professional malpractice and negligence, there are some potential disadvantages of LLC for physicians.
Cons of an LLC for Doctors
- Limited Life Span: Unlike a corporation, an LLC has a limited lifespan. This means that if a member leaves or dies, the LLC will be dissolved. This can make it difficult for doctors to plan for the future of their practice.
- Increased Administrative Burden: Forming and maintaining an LLC also requires additional administrative tasks such as filing annual reports and keeping accurate financial records. This can be time-consuming and may require the help of an attorney or accountant.
- Limited Fund-raising Opportunities: An LLC may limit the ability for a doctor to raise capital for their business since an LLC can’t go public and LLC does not issue stocks as a corporation does.
Does LLC Protect Doctors from Professional Malpractice Liability?
Unfortunately, no. LLCs do not provide complete protection against professional malpractice liabilities since they don’t cover activities for which you may be liable due to negligent acts or omissions in the course of your professional practice as a doctor.
If one of your patients alleges malpractice or negligence on your part, the resulting lawsuit could extend beyond both the company and its assets into your personal finances and possessions as a sole proprietorship.
However, one of the key features of a PLLC is that LLC membership interests cannot be transferred or assigned if you write this in your LLC operating agreement. It means that if a member is sued for malpractice and loses, their creditors cannot come and take the assets of the PLLC.
This is because the PLLC operating agreement usually includes provisions that provide good charging order protection, which protects the assets of the practice in the event of a malpractice suit, divorce, auto accident, or other financial loss.
Other Options for Doctors Seeking Liability Protection
Professional liability insurance (also known as malpractice insurance) is an alternative to PLLC that can provide greater protection against medical malpractice suits. It covers damages that may result from negligence in providing professional services.
Professional liability insurance does not guarantee immunity from being sued by current or former patients who claim negligence happened during care received from you or anyone working in your practice.
However, professional liability insurance does provide financial protection in case such a claim is brought forth since it can cover the cost of lawyer fees and settlements up to the policy limit amount chosen by you upon the purchase of coverage.
While setting up an LLC can help protect doctors from many financial risks associated with running their own practice, it does not provide full coverage against medical malpractice claims arising from negligent acts committed during patient care activities.
However, by segregating business and personal assets, PLLC shields your personal finances and assets from business liabilities. Moreover, if you draft your LLC operating carefully, your personal asset will be shielded from malpractice suits.
Alternatively, professional liability insurance should always be considered as another important layer of protection for any practicing doctor looking to safeguard themselves financially in case of something unexpected arise down the road.
Aisha Noreen is an owner of a small business with more than 9 years of experience in the marketing industry. With the wisdom of an old soul, she always seeks innovation and mind-blowing ROI techniques. Her unique approach helped many small businesses thrive and she can surprise you in many ways as well. Believe it or not, her energy, passion, and creativity are contagious enough to transform your business and take it to another level.