Tennessee offers several options for organizing your medical practice. A physician’s practice can be organized as a sole proprietorship, a partnership, a professional limited liability company or a professional corporation. Some of these business entities will shield the physician/owner from certain types of liability. However, no matter what form of business entity a physician owns, he cannot shield himself from liability for his own professional acts. Because each type of business entity has specific legal and tax consequences to the owners, you should consult with an attorney and carefully consider the structure and governing documents of a medical practice before joining or organizing it. This article discusses some of the non-tax aspects of your choice of entity. You should discuss tax consequences of each form of organization with your financial or tax adviser before deciding which business form works best for your practice.
Sole Proprietorship and Partnership
The sole proprietorship and general partnership are the simplest forms of entity. There are no filings and no required documentation. However, because there is greater potential liability, few physicians operate their medical practice in either of these forms of entity.A sole proprietorship is owned and operated by one physician who can employ or contract for the services of other physicians and health care professionals. As a sole proprietor, the physician owns all the assets of the entity and the profits generated by the practice. The physician-owner bears all the liabilities of the practice. From a legal standpoint, a practice operated as a sole proprietorship is not a separate entity from the physician-owner and it does not offer the owner any limitation on personal liability for claims against the practice.
A partnership is owned by more than one physician-owner, but is otherwise quite similar to a sole proprietorship. A written partnership agreement is not legally required for the partnership to exist, though it is wise to have one. Without a written agreement, there is a risk that the partners may not have a mutual agreement as to their rights and obligations to the practice or to each other. The failure to have a written partnership agreement can result in costly and painful disputes and breakups between partners. Even if there is a written partnership agreement, a partnership offers no limitation on a partner’s liability and unless the partnership registers as a limited liability partnership, a partner is liable for all of the acts and omissions of his partners, as well as his employees.
The physicians in a practice which is a partnership may find limited protection from some claims by filing a certificate with the Secretary of State and becoming a registered professional limited liability partnership. Generally, partners in a registered limited liability partnership are not liable for the acts or omissions of their partners or the partnership. If a practice is operating as a partnership, it is wise to register as a limited liability partnership but the protection is very limited.
Professional Corporation
A corporation is a legal entity which has an identity separate from its owners and offers a shield from some of the liabilities of the practice. A corporation is usually owned by its shareholders, who elect a Board of Directors to direct the major polices and make most of the major decisions of the corporation. The directors appoint the officers of the corporation who direct the operations of the corporation. If proper corporate formalities are observed, the shareholders of a corporation are not personally liable for claims against the corporation or the other shareholders. In order to maintain this shield, the corporation should be run as an entity separate from the shareholders. The shareholders and directors should have regular meetings and keep minutes of these meetings. The corporation should follow its own bylaws and maintain separate financial records and accounts. The corporate form of practice usually protects a physician from any liability other than his own professional liability or a liability that he or she personally assumes, such as a guaranty. In Tennessee, in order for most corporations to employ physicians and to be in the business of practicing medicine, the corporation would have to be a professional corporation. All of the shareholders and directors of a medical professional corporation have to be physicians, or certain other medical professionals which are specifically set forth in the statute. Currently, optometrists, podiatrists, doctors of chiropractic medicine and physician’s assistants can be shareholders in the same professional corporation as physicians. All officers of a medical corporation, other than the secretary, treasurer, assistant secretary and assistant treasurer, must be physicians or one of the other medical professionals discussed above.
Professional Limited Liability Company
A professional limited liability company has characteristics of both a corporation and a partnership. A PLLC is owned by its members. A PLLC can be managed directly by its members. If it is managed by its members, the PLLC will function very much like a partnership. In the alternative the members may choose to be managed by a board of directors or board of members, either of which would be elected by the members. A PLLC will also have a President and Secretary and any other officers that the members or directors may determine. Like the shareholders in a corporation, the members of a PLLC are protected from liability for claims against the company. However, like a partnership a PLLC is not subject to tax at both the entity level and owner level. A PLLC is formed by filing Articles of Organization with the Secretary of State. Like a corporation, a single physician can form a PLLC. Like a professional corporation, the owners or members of a PLLC must be physicians or other medical professionals allowed by Tennessee law and all officers other than the secretary and treasurer must be physicians or medical professionals.
In addition to its Articles of Organization, a PLLC will usually have an operating agreement as one of its governing documents. An operating agreement is similar to both a partnership agreement and the bylaws of a corporation. It is the contract among the owners as to how the company will be operated and the rights and responsibilities of its members. It is not filed with any public office.
No one form of entity is necessarily the right choice for your practice and each physician or group of physicians will have their own circumstances that should be discussed with your attorney and tax adviser before deciding which form of entity will work best for your medical practice.
