The LLC is an excellent tool to hold real estate. Ideally, you would hold each parcel of real estate in a separate LLC. This is usually quite doable until you acquire four or five properties and beyond. In those circumstances – we love utilizing the Series LLC for asset protection. Only fourteen states currently permit Series LLCs. We routinely use Nevada and Delaware, but stay up to date on new possibilities. The beauty of the SLLC is that you only need one entity to segregate the real estate holdings (or other property). Therefore – one legal fee, one annual filing fee, and one registered agent fee instead of several recurring fees when utilizing separate LLCs. We usually recommend having at least one North Carolina LLC to use in conjunction with a SLLC.
My practice is properly set up; I have malpractice insurance; so why do I need an asset protection plan?
You’re off to a good start. Of course, a malpractice claim can exceed the amount of insurance coverage in certain situations. But, more often, a dentist would face liability from a claimant who is not a patient at all – perhaps a creditor, an employee, a business partner, etc. Dentists are active outside of the practice. So, while it’s imperative to protect the practice, the building, and segregate valuable work-related assets. It’s also important to examine personal vulnerability, and protect real estate investments, personal property, and liquid accounts.
In reality, there is probably no difference. It may be true that a S-Corp provides more tax advantages (namely pass through taxation) than LLC that has multiple members and is defaulted to a partnership. However, single member LLCs, or other entities that are members of an LLC – can easily “disregard the entity” and elect S-Corp (pass through) status for tax purposes. This is the best of both worlds. Because each dentist will set up his or her own professional corporation, and will be the only shareholder / member – S-Corp tax status is the optimum election under the current tax code.
A creditor of a member of the LLC cannot take interest from the LLC or assets from the LLC. In North Carolina, a creditor is merely entitled to obtain a charging order against the LLC. Thus, if any distributions are made by the LLC to a member (whose creditor holds a charging order), the creditor would be entitled to those distributions until the judgment is paid in full. The same holds true for creditors who hold charging orders against the LLC itself. The charging order does not entitled creditors to become a member of the LLC. Therefore, the important component in this situation is that the LLC’s members or managers have authority and discretion regarding the issuance of distributions to its members.
An LLC provides liability protection from two different angles. First, an LLC protects its members from any liability generated by property owned by the LLC. For example, if an LLC is formed and a rental property (such as the dentist’s office building that is leased back to his/her practice) is held by the LLC and later someone is injured on the property, and sues the owner, it is the LLC that gets sued. Any liability belongs to the LLC. Only the assets owned by the LLC, in this case the building, are available to the plaintiff if the lawsuit is successful. The other assets owned by the members (probably one or more of the dentists) of the LLC are not available to the plaintiff.
Second, the assets owned by the LLC are protected from any liability of any member. For example, assume that, as in the previous example, multiple dentists have formed an LLC to own the building that the practice operates from. Now, if one of the dentists is sued for malpractice and the suit is successful, the office building is protected.
In basic part, we are separating the dentist’s important assets through a very basic and cost efficient asset protection tool (the LLC) – such that we mitigate a plaintiff’s ability to reach these separated assets. I’ll talk more about more developed LLCs strategies, and the use of multiple LLCs or Series LLCs below.
I have heard a lot about “living trusts.” Would a living trust provide protection for my assets if I were sued?
No. While a properly structured living trust can provide privacy, and avoid the probate process (when assets are properly assigned to trust), it provides practically no protection from the dentist’s creditors. The trust’s assets will ordinarily be available to creditors.
Thus, while living trusts are an important component of the dentist’s comprehensive estate plan, trusts must be used in conjunction with asset protection measures. In some instances, the dentist might employ a domestic asset protection trust, or different type of trust, that would protect his or her assets from creditors.
Usually, dentists structure their practices as an S corporation or in some unique cases a C corporation. It is important to note that while these options are routinely referred to as corporate forms – really, they are tax classifications. S-Corps are “disregarded entities,” and thus income is passed-through to the individual members or shareholders, while C-Corps elections require the corporation to pay the corporate tax rate, while its owners are taxed as employees of the corporation.
For several years now, most all dentists elect S-Corp status. In fact, I can squarely state that I have never formed advised a dental professional to operate under C-Corp status. However, if tax laws change with the incoming Trump Administration and the corporate tax rate adjusts to say – 15 or 20 percent – that could certainly change. It’s important for a dentist’s attorney to be and stay informed on the tax code and its effect on corporate form tax elections.
The actual corporate forms that a dentist may choose from are: Professional Associations (or P.A.s); Professional Limited Liability Companies (P.L.L.C.s). Form an asset protection standpoint, these entity types function very similarly. Historically, the P.A. has been used more frequently, while the emerging trend is to utilize the PLLC. P.A.s operate as a corporation (like and Inc.) with shareholders and stock, while PLLCs operate as a company (like their name sake limited liability company) with members and membership interests.
If the practice owns the building and/or expensive equipment, a separate (standard) LLC should be created to own the land and/or the equipment. In some cases, LLCs situated in other states that have advantageous laws or series LLC capability may prove preferable.