Protect your assets
Why you should never own your practice!
By David B. Mandell, JD, MBA, and Jason O’Dell

Never own your own practice — but that doesn’t mean you should be an employee, either.

What it means is you should structure your chiropractic practice in a way that offers you maximum control, flexibility, and creditor protection without changing the way you own and operate it.

Protecting your personal wealth from liability that may arise from your practice should be a primary goal for any doctor. Though a large number of doctors fail to take the necessary steps to protect themselves from their practice, a growing number are taking this concern much more seriously and are taking steps to protect themselves. Incidentally, you are one of them as your reading of an asset protection article is a step in the right direction.

A more significant concern almost never addressed by doctors is protection of the practice from itself. Philosophically, this makes sense. You have probably invested much of your personal wealth, as well as countless hours, into your practice. You may have some valuable equipment, real estate, and other assets as part of your successful chiropractic practice. Why would any chiropractor want to protect only personal assets and leave the valuable practice completely vulnerable?

There is no reason to do this, yet this is what most doctors do.

Although very advanced protection of a practice might include the creation of a financial tool, such as a captive insurance company, the first step in transforming your practice into a financial fortress is much simpler. The goal is to noninvasively remove the practice’s most valuable assets from the practice itself.

Why would you want to separate your practice from its most valuable asset? The practice generates liability. In addition to potential malpractice claims that would undoubtedly name you and the practice, the practice is at risk to nonmedical patient lawsuits, employee lawsuits, and the same business lawsuits every business owner has. These risks can include Medicare fraud, insurance fraud, slips and falls, wrongful terminations, discrimination, HIPAA violations, and dozens of others. Many of these risks are not covered by traditional insurance policies, which means any successful lawsuit against the practice can threaten any and all practice assets.

What to do: Make your operating practice entity as poor as possible by removing all assets. If your practice has no value, lawsuit plaintiffs have little to gain, beyond insurance coverage, by attacking the practice.

How to do it: Work with an asset-protection attorney — a member of your team of advisors — to establish new legal entities that offer higher levels of creditor protection to own the practice’s valuable assets. Then, lease or license these assets to the operating business entity (chiropractic practice).

The following tactics illustrate this strategy:

• AR segregation. In this technique, a practice can effectively shield what is often the most valuable entity for a chiropractic practice — its accounts receivable (AR). This tactic simply involves a leaseback of the AR between a limited-liability company (LLC) for each doctor and the chiropractic practice, using a collection agreement and a simple nonsubstantive modification of a doctor’s employment agreement.

Using this technique, if the practice is ever hit with a multimillion dollar judgment beyond coverage limits, the collection agreement can be terminated, thereby shielding the AR completely. Rather than losing your next three to six months of AR to a plaintiff (which would occur if the AR were owned by the practice), the doctor-owners could ultimately settle the claim for pennies or walk away completely with the AR collected by a new operating entity in a matter of weeks.

• AR factoring. In this technique, a practice sells its AR to a third party. Obviously, once the practice no longer owns its AR, a lawsuit against the practice would have no claim against the AR. The drawback of this strategy is the protection can be very expensive, since most factoring companies will only purchase the AR for a steep discount. This is typically done only in very extreme cases where the immediate need for money is great and other alternatives don’t exist. 

• Real estate or equipment leaseback. In some practices, real estate or equipment may be even more significant than AR. If that is true in your case, you must make certain you create a separate entity to own the real estate or equipment and lease it back to the operating practice entity.

Typically, this entity will be an LLC. Done correctly, this leaseback technique can also create income-tax savings as well. This is achieved by gifting passive LLC interests to children who are in lower income tax brackets (but over the age of 18). 

In doing so, you can enjoy beneficial tax treatment for some of the rent paid by the practice to the LLC. This strategy can create tax savings of more than $10,000 annually while protecting the real estate/equipment from lawsuits against the practice as well.

Many practitioners who claim to be concerned with asset protection fail to adequately shield the practice itself. The first step to protecting the practice is to remove its most valuable assets from the practice itself. By removing the assets from the practice, you really don’t own anything when you own your practice. With the proper legal structure, this can be achieved with minimal headaches and, often, with subsequent tax benefits. All of these benefits can be coordinated by working closely with your planning team.

David B. Mandell, JD, MBA, is an attorney, lecturer, and author of The Doctor’s Wealth Protection Guide. Jason O’Dell is a financial consultant and author of Financial Planning for Physicians: Strategies for Saving Money and Securing your Financial Future. The authors are also co-founders of O’Dell Jarvis Mandell, LLC — a consulting firm specializing in helping doctors manage their practices and personal affairs for maximum accumulation and protection. They can be reached at 800-554-7233, by e-mailing Mandell at dmandell@mandellpc.com, or through the Web site, www.ojmgroup.com.