Why Accountants Should Not Form LLCs or PLLCs for Healthcare Practices
Many accountants include LLC and corporate formations in their menu of services. However, the complexity of healthcare regulation makes this risky for both accountants and their clients. We discuss the most common pitfalls.
When starting or expanding a business, many healthcare professionals rely on the services of an accountant. And one should—proper bookkeeping, tax filing, and other key steps to maintaining financial health are essential.
But should you turn to an accountant to prepare your healthcare practice’s LLC, PLLC, or corporation, called a “legal entity”?
Trying to navigate healthcare laws and corporate laws can be overwhelming, even for some general practice attorneys. So for accountants, who do not receive training in health law, it’s a minefield. Nevertheless, many accountants try to tackle this task despite the risks.
LLC or Corporation Formation Mistakes
Most states require licensed professionals to operate in a professional entity. In Illinois, for example, a physical therapist who is forming an entity may only form a professional corporation (abbreviated PC) or a professional limited liability company (abbreviated PLLC). Most accountants have less familiarity with these professional structures.
You are probably wondering, “What is the worst thing that could happen if my practice provides licensed healthcare services out of the wrong legal entity?” An improperly formed entity risks several potential negative consequences.
First, it can undermine your entity’s limited liability protection. Imagine this scenario: it is a rainy day, and one of your patients slips and sustains an injury in your lobby. The patient sues your practice for their medical costs and damages. In a worst-case scenario, your improperly-formed LLC may not provide legal protection from the lawsuit. Thus, your personal assets—your home and savings—could be on the hook for payment in the lawsuit.
Second, an improper formation can cause delays when you try to register your healthcare business with your state’s board or regulatory body, which governs licensed healthcare services, and you will face fines. For example, in Illinois, professional entities must register with the Illinois Department of Financial and Professional Regulation (IDFPR). The IDFPR won’t accept improper filings, and a failure to register can cost you up to $1,000 in fines.
Bylaws and Operating Agreements
Your LLC should have an operating agreement, and your corporation should have bylaws. These documents, known generally as corporate governance documents, are legal documents that determine how your entity functions. These documents discuss liability, payment of profits to members or shareholders, and many other factors that have legal consequences.
Most accountants do not have the background and experience for this type of work. By contrast, healthcare attorneys routinely draft corporate governance documents and often guide clients through the types of events that these documents are designed to address, such as practice disputes, acquisitions, and dissolutions. As a result, attorneys seek to create tailored documents that anticipate these potential issues.
Accountants and the Unauthorized Practice of Law
A final consideration when working with an accountant on your legal entity formation is that accountants teeter and occasionally cross the line between the practice of accountancy and the practice of law. States take the unauthorized practice of law seriously, and for good reason. Allowing someone other than a legal professional to give legal advice can have significant consequences.
Judges across the country have penalized accountants for forming LLCs and corporations. One judge noted that “certified public accountants perform a valuable function in advising on financial matters . . . there are still many remaining issues that require legal analysis in choosing a business structure.”
Another judge drove this point home, stating “preparation of various documents pertaining to corporations, constitutes the practice of law[.]” The accountant can face fines and even jail time for this conduct.
Consequently, an accountant’s clients can be put in the position of having business and legal disputes due to improperly formed legal entities.
Create an Accountant-Attorney Team
Every healthcare practice needs a trusted accountant in its team of professional advisors. Accountants provide invaluable guidance and support for the financial aspects of your business. Thus, we advocate a strong partnership between accountants and attorneys to ensure regulatory compliance and financial success.
An experienced lawyer, such as the healthcare attorneys at Jackson LLP, can prepare or review your legal entity formations with your goals and best interests in mind. If you’re a healthcare professional, practice, or business owner in one of the states that we serve (or an accountant who advises one), book a free consultation to learn how we can help you.
Sources relied upon above:
- 805 ILCS 185/20
- Columbus Bar Assn. v. Verne, 788 N.E.2d 1064. (2003)
- The Florida Bar v. Fuentes, 190 So. 2d 748 (Fla. 1966)
- CA Bus & Prof Code § 6126(a)
This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.