Should I Form an LLC? FAQs for Healthcare Practices
We answer some of the most frequently asked questions that we hear from clients who are interested in forming a corporate entity but would like additional information and clarification.
Many clients come to Jackson LLP Healthcare Lawyers with questions about forming a corporate entity, such as a limited liability company (LLC) or corporation. We understand—these are not intuitive concepts. But how you structure your practice or healthcare business can have a major impact on your outcomes, particularly in the area of liability.
What types of liability does a corporate entity help to limit? Does this include professional negligence?
Corporate entities are set up specifically to limit your personal liability for the actions or debts of the business or practice. There are three primary sources (or buckets) of potential liability to which you could be subject.
Debts of the Corporate Entity
The first bucket is liability for the corporate entity’s debts, often referred to as contractual liability. A properly formed corporate entity can protect you from being personally liable for the corporate entity’s debts. For example, your corporate entity purchases a new rehabilitation table for use in your practice, but it does not make the agreed-upon payments. If you contracted in the name of your corporate entity only (instead of in your own name), the vendor could only go after the corporate entities’ assets, and not your personal assets.
Simple Negligence Liability
The second bucket of liability is tort liability or simple negligence liability. A properly formed corporate entity can also protect you from being personally liable for tort liability that occurred through your corporate entity or at your business location. For example, someone walks into your new office for an appointment and slips on a banana peel left carelessly on the floor. The ensuing lawsuit would be a simple negligence claim. Having a properly formed corporate entity would mean that the corporate entity, rather than you personally, would be liable for this claim. You did not provide professional services negligently. Rather, the act of not cleaning up the banana peel was negligent and caused an injury.
Finally, the third bucket of liability relates to your personal liability for your own actions related to the practice or business, such as professional negligence. Because having a corporate entity will not limit your personal liability for your own actions, every professional—including doctors, mental health professionals, and physical therapists—needs to purchase professional negligence insurance.
However, having a properly formed corporate entity can shield owners from personal liability for the wrongdoing perpetrated by co-owners or employees while conducting business. Even if a co-owner of the corporate entity who committed a particular action were found personally liable for their actions, the other owners would not necessarily be personally liable. Additionally, circumstances such as these are why corporate entities can benefit from general liability insurance.
In short, a corporate entity can help protect you from contractual liability and liability from others’ actions, but not professional malpractice claims arising from your own actions.
What is the difference between an LLC and an S-Corporation?
An LLC is a corporate entity, while an S-Corporation is a tax distinction. In other words, an LLC is one of many corporate entities that can be formed. Other corporate entities include corporations, limited liability partnerships, and various professional corporate entities. In contrast, an S-Corporation is one of several ways a corporate entity can choose to be taxed.
Jackson LLP’s lawyers are not tax professionals; however, we will provide an overview of the taxation considerations. Corporate entities are assigned a predetermined taxation method. For example, a single-member LLC is taxed as a sole proprietorship—profits and losses of the LLC are taxed the same way as personal income and losses are taxed. In this sense, the IRS disregards the LLC, which is why you may see the term “disregarded entity.” Meanwhile, the default tax designation for an LLC with two or more members is taxed as a partnership.
Corporate entities can elect to be taxed in a way that is different from the default taxation method. For example, an LLC that meets certain requirements can elect to be taxed as an S-Corporation by completing an IRS Form 8832. This is commonly known as the “check-the-box” tax designation form, where you can check any box indicating a tax designation for your business. This tax election can be changed annually.
Some other tax designations include an S-Corporation or a C-Corporation. An S-Corporation, sometimes known as a “Small Business Corporation,” is also a pass-through tax-entity. The profits and losses of the entity are passed down to an individual’s personal income. However, a C-Corporation is taxed separately from its owners, ultimately resulting in two levels of taxation.
My accountant created my LLC. Can you create my operating agreement?
The first point to consider here is whether your accountant created the appropriate corporate entity for your business. This depends upon what kind of services you intend to provide through your business. If you intend to provide licensed professional services, such as physical therapy or psychology services, you will need to operate out of a professional corporate entity. Two common professional corporate entities are a professional limited liability company (abbreviated as PLLC) or a professional corporation (abbreviated as PC).
However, if you are not planning to provide licensed services, you can operate in a non-professional entity, such as an LLC or Corporation. For instance, if you are a physical therapist with a passion for fitness and personal training and want to begin a business focused solely on improving people’s fitness performance, you can form and properly operate that business out of an LLC.
Correct corporate entity formation aside, it is essential to have an operating agreement. This document is the governing document of your business. The operating agreement provides for how new members are allotted ownership interest in the business and what happens when the business is dissolved. A well-crafted operating agreement ensures that your LLC is correctly formed and can offer you an important benefit of a corporate entity: limited liability. Once we determine the appropriate corporate structure, we can help to prepare an operating agreement.
Do I need to form an LLC or a PLLC?
Whether you need an LLC or PLLC (or other corporate structure) is dependent upon the nature of your business. For example, if you intend your business to offer solely non-licensed services, an LLC is likely the most appropriate corporate structure. However, if you are providing licensed professional services, a PLLC is likely the correct corporate structure.
In making this decision, you should also consider the long-term goals of your business. For example, in many states, a PLLC would be suitable for a physical therapist who may also, at some point, choose to offer personal training or some other unlicensed service.
Sometimes, it makes sense to have two separate corporate entities: one for your licensed professional services and one for your wellness or other unlicensed services. Your business goals will determine the best course.
What does it mean to ‘pierce the corporate veil?’
The corporate veil is a legal concept that separates the actions of a corporate entity from the actions relating to your personal, non-business matters. If your corporate entity is properly formed, it provides you, the individual, limited liability. To illustrate, if your corporate entity takes out a loan on some medical equipment and can no longer pay that loan back, the lender to whom you owe money can only sue your corporate entity. The lender cannot sue you personally or go after your personal assets.
Piercing the corporate veil refers to a situation where courts do not recognize the limited liability of a corporate entity, holding the owners of the corporate entities personally liable for the debts or actions of the business. The courts tend to weigh many factors in determining whether or not to pierce the corporate veil. Some facts that you, as the owner of a corporate entity, can control to ensure that the corporate veil is not pierced include:
- observing corporate formalities, such as maintaining separate bank accounts and conducting all corporate business in the name of the corporate entity;
- ensuring that your business has some funds in its business account; and
- not treating the assets of the corporate entity as if they were your personal assets.
Do I need to use my business name on everything? Do I need to use the “LLC” or “Inc.” portion too?
To maintain the corporate veil that helps ensure you are not personally liable for the corporate entity’s debts or actions, you should always sign paperwork by using the full legal business name, including the “LLC” or “Inc.” Use the full name on all contracts, agreements, or other documents related to your business.
Is a separate business account truly necessary (even if I keep excellent records on my business revenue and expenses)?
Yes, having a dedicated bank account for your business is absolutely necessary. Maintaining separate bank accounts for your business and personal activities is part and parcel of ensuring a clear separation between your business and personal matters, preserving the corporate veil that shields you from personal liability.
Additionally, to protect the corporate veil, your corporate entity should have some funding in its business accounts. This legal concept, known as the adequate capitalization of your business, is one factor that a court can review when deciding whether or not to allow you to be personally liable for your corporate entity’s debts and actions. Having separate bank accounts helps you satisfy this element. Having separate bank accounts also allows you to have separate bank statements with a clear separation between business expenses from personal expenses.
Will I need a new National Provider Number if I form a corporate entity?
Whether or not you need a new National Provider Identification Number (NPI) depends on your situation. There are two types of NPIs. A Type 1 NPI is the NPI that is assigned to you, the individual practitioner. If you are operating as a sole proprietor, but you do not have a corporate entity, you can continue to use only your personal Type 1 NPI number.
A Type 2 NPI number is the NPI that is assigned to an organization. For example, suppose you are a psychologist, and you have established a corporate entity. In that case, you should obtain a Type 2 NPI for your organization, even if you are the only member of that organization. Another example is a provider with a corporate entity who wants to start a practice with other providers working as employees. Such a provider likely will need to obtain an organizational Type 2 NPI for the practice. The providers working for you will bill insurance plans by using that organizational NPI number. However, the process of obtaining a Type 2 NPI is fairly straightforward and uses largely the same information used to obtain a personal Type 1 NPI.
I go by a different name, but the state wouldn’t let me form an entity in that name. Is that okay? And how do I keep others from stealing it?
If you operate under a name different than that of your corporate entity, most states will require you to file an application for an assumed name (also known as a DBA or fictitious name). The public needs to be able to search the name under which you are operating and connect it to your corporate entity. In the same way that there are rules and limitations for naming your corporate entity, there are regulations that cover the assumed name.
However, once you have an assumed name that aligns with the state’s requirements, registering that assumed name with the state will ensure that others do not steal it. No other corporate entity will be able to use the registered name, either as an assumed name or the name of another corporate entity.
If you are launching a new healthcare-based business venture or want to establish a corporate entity for your existing healthcare practice or business, reach out to the experienced lawyers at Jackson LLP: Healthcare Lawyers for additional guidance.
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.