Other articles in Summer 2009
Relevance of LLCs to Anesthesia Practice: How Well Do They Protect the Founders' Income?
Aaron H. Sherbin, Esq.,
Jaffe, Raitt, Heuer & Weiss P.C.
Andrew B. Wachler, Esq.,
Wachler & Associates P.C.
Anesthesiologists may want to consider organizing their practice as a professional limited liability company (PLLC). The PLLC offers distinct advantages to other forms of business entities, while offering substantially the same limited liability benefits. This article will discuss how a PLLC provides limited liability to its owners, the nature of the tax treatment of a PLLC, the governance of a PLLC, and the admittance and withdrawal of a member of a PLLC.
PLLCs are governed by state statute. Most, but not all, states recognize and permit professionals to organize as a professional limited liability company. Certainly, any anesthesiologists interested in organizing as a PLLC should consult with their tax and legal advisor about whether or not their state permits PLLCs and how they are governed as well as how the PLLC and its members are taxed.
Specific limited liability statutes will vary slightly from state to state. However, the following general rules apply throughout the country. In a PLLC an individual member is liable for his or her own negligent or wrongful acts as well as for those same types of acts committed by individuals under his or her control or supervision. For example, in a PLLC, an individual member would likely be responsible for his or her own medical malpractice or overpayment liability only to the extent that he or she performed or supervised the services at issue. In contrast, in a partnership, each partner would be liable for the negligent acts of all other partners. A PLLC’s liability is also limited in the sense that the member’s personal assets are protected against the debts and liabilities of the PLLC.
For federal tax law purposes, a PLLC is treated as a partnership. As a result, the PLLC does not pay an entity level tax; rather, the profits are generally allocated to the members of the PLLC pro rata and the members will report their share of the profits on their individual income tax returns. This tax treatment is in contrast to a C-corporation where the corporation pays a tax on the profits at the corporation level and the shareholders pay a second tax on any dividends distributed to them by the corporation.
As a partnership, PLLCs offer a tremendous amount of flexibility in ownership interest in the PLLC and in how profits and losses may be allocated among members. Also, there are no restrictions as to the type of owner or number of owners of a PLLC. S-corporations, on the other hand, offer some of the same tax benefits as a PLLC, but have limitations on who may be a shareholder as well as limitations on the number of shareholders. For instance, only citizens or residents of the United States can be a shareholder of an S-corporation. In addition, an S-corporation may have only one class of stock, and thus, allocating profits among its shareholders based upon some metric or formula that deviates from shareholdings is not permitted. The effect of having an ineligible shareholder or a second class of stock is that the corporation will lose its S-status and be taxed as a C-corporation which could potentially result in disastrous tax ramifications.
Generally, owners/members of a PLLC cannot be considered employees of the PLLC. They must be treated as self-employed and, as a result, distributions received by a member of the PLLC are subject to self-employment tax. This may result in a member paying slightly higher income tax on his or her share of the profits than the member would have had he or she received the distribution in the form of wages.
Since the PLLC offers incredible flexibility with regard to who can be a member and how profits and losses are allocated, the PLLC provides various options for the admittance or withdrawal of a member. However, there may be different tax consequences depending on the assets owned by the PLLC and how the buyout of a withdrawing partner is structured. A withdrawing member may have to recognize ordinary income (as opposed to capital gains) on the buyout proceeds received depending upon whether the PLLC has account receivables and inventory and whether the buyout of the member is by the PLLC itself or by the other members.
PLLCs are not required to have the rigid structure associated with corporations. In other words, PLLCs do not need to have officers and directors governing their operations. A PLLC can be managed by its members (or owners) or by managers who may be a select group of the members or non-members. A PLLC is typically governed by an operating agreement, which usually includes provisions regarding how and when members meet, the power of a member to bind the PLLC, the required vote of members, the treatment of profits and losses, how and when additional capital will be required and by whom, and what is to happen in the event of the death, disability, retirement or termination of employment of a member. Members of a PLLC can tailor their operating agreement to fit their particular practice.
In summary, PLLCs protect the founders’ personal assets as well as do other corporate forms such as professional corporations, but they offer flexibility and tax advantages that may not be available with other forms. Before deciding on a corporate form, anesthesiologists should consult with experienced legal counsel and accountants.