How LLCs Can Protect Doctors

By: Ted Sutton

Doctors are frequent targets of medical malpractice suits. This is why many of them have malpractice insurance to cover these claims. But what happens when the insurance does not cover the full amount? In this situation, the last thing doctors want is to have their personal assets exposed. Fortunately, doctors have a few options to protect their assets.

Forming an LLC for their Practice

The first thing doctors can do is set up an entity for their practice. The entity must be formed in the state where the doctor is licensed to practice, and each state has different requirements. Some states allow doctors to simply form an LLC for their practice. Others such as California require doctors to set up a Professional Corporation (PC). A third group of states, including Illinois, require doctors to set up a Professional Limited Liability Company (PLLC). For the latter two categories, entity owners must be licensed members of their respective profession.

Forming an LLC for their personal assets

Using an entity for a medical practice is useful to protect against a slip and fall or other accidents on the premises. But what happens when the doctor is sued personally? A malpractice claim is personal, meaning the doctor can’t hide behind the entity. The patient, after collecting against malpractice coverage, can reach the doctor’s personal assets. Having a separate LLC for personal assets can prevent an easy taking.

To insulate from personal liability, many doctors use LLCs to hold title to personal assets, including stock portfolios and real estate holdings. But the patient may still attach the doctor’s interest in the LLC to pay their claim. Choosing which state to form the LLC makes the biggest difference in what the patient can collect.

Form an LLC in a Strong State

Some states, including Wyoming, offer better protection for one simple reason: the charging order. This order only allows the patient to collect any distributions the doctor may receive, and gives them no right to participate in the LLC’s management.

In Wyoming, the charging order is the only way that the patient can collect anything from the LLC. You do not have to make any distributions from a stock portfolio. So if no distributions from the LLC are made, the patient collects nothing. This can aid doctors, especially if the LLC holds valuable assets.

Other states, including California, have weaker protections. Contrary to only allowing the patient to receive distributions, a California court may force the sale of the doctor’s LLC to pay the claim. Do doctors want this to happen? Of course not, and fortunately, this scenario can be minimized. By forming the LLC in a state with better protection, the doctor is better protected.

Conclusion

Doctors must not only consider an entity for their practice, but also an LLC for their personal assets. When faced with a claim, these considerations make the difference between how much or how little a claimant can collect.