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The primary focus of risk management is the protection of resources from losses due to legal action and the activities associated with risk management are easily adapted to a dental practice. The focus of these activities is directed at identifying areas of legal vulnerability and taking steps directed at mitigating or eliminating these risks. Additionally, purchasing insurance to offset potential financial losses is essential to risk management. The current areas of legal vulnerability center around issues of (1) absence of consent to care, (2) negligence, and (3) breach of contract. Consent to care, to be valid, must be informed and granted voluntarily. To meet the test of "informed," the information given to the patient must be in understandable language and contain the risks, benefits, and alternatives to the recommended treatment. Otherwise, it may not provide much of a defense. In addition, the patient must be given an opportunity to have his or her questions answered. Obtaining consent in the treatment of minors requires the signature of those with legal capacity to grant consent. Being creative, however, does not always equate to optimal results. In other words, asset protection plans which are elaborate or suspect are likely to collapse under the scrutiny of a judge or jury. In the wake of litigation, you will be expected to describe specifics about how assets were transferred, and why. If the explanation is not sound and compelling, the court is likely to rule for the plaintiff, leading to disastrous consequences. The objective here is making it as difficult as legally possible for litigators, creditors, and others to win a judgement against you, or your business. Creating such protection litigants on notice that going to court will require an expensive lawsuit that could stretch on for months or years. When the Marriott Corporation split itself into two corporations in the early 1990s, their primary motivation was dividing cash rich assets from its lawsuit-prone operations. Now, as a dentist, you may not think you need to worry about this since your assets are nothing like those of a resort giant like Marriott. However, this lesson should be used by every dentist who wishes to build a veil around their assets and practice. All over the country, business owners are discovering the benefits of establishing multiple legal entities in an effort to alleviate the risk of civil litigation. Building an asset defense strategy is paramount, and must be done before you are facing unintended consequences. While most dentists will not be sued as often as global hotel chains, plaintiffs are winning million-dollar judgments against dentists. Cases range from allergic reactions to anesthesia, failure to diagnose ailments to procedures resulting in permanent nerve damage, and more. And lawsuits against dentists unrelated to dental care can be just as real (slip, trip, and fall lawsuits; wrongful termination lawsuits, sexual harassment, and discrimination claims). We live in a litigious society. Therefore, one would think that few dentists would be shortsighted enough to operate as sole proprietorship's or general partnerships, leaving themselves personally liable for a judgment. However, surveys tell us that as many as 50 percent of dentists in the United States were practicing without the benefit of legal structures, leaving them vulnerable to a host of non-medical liabilities. Whatever the actual number, any dentist practicing as sole proprietorship's is personally exposed to unlimited legal liability in their business operations. Being in business without legal protection is like riding a motorcycle without protective headgear – all it takes is one incident. What might not be obvious to the dentists who are operating under one all-inclusive legal identity — such as a professional corporation, or PC, a professional association, or a Professional limited liability company — could be just as risky. I knew one doctor who had more than $2 million in his professional corporation’s accounts receivable. Another dentist told me he held almost $1 million worth of real estate owned by his professional corporation. One lawsuit against these professional corporations could result in a total loss of the corporation’s assets. Many corporations have learned (the hard way) that combining business assets with business operations in one legal entity, they risk losing everything in a single lawsuit. The new rule of lawsuit protection is simple: Keep your business assets separate from your business operations. So, how does one achieve this measure of protection? Simple, cash-rich assets such as buildings and land should be kept in separate legal entities, such as limited partnerships or limited liability companies. Otherwise, one lawsuit against a dentist can drain his or her corporation entirely. Instead, professional corporations should own as few assets as possible so they do not become a target of litigation. There is no right or wrong way to diversify. There are many variables to consider: How many dentists participate in the practice? Are the building and land owned or leased? What is the value of the professional equipment? Following are some general principles dentists can use to protect themselves from lawsuits directed at either the practice or the dentist specifically. If you own land, buildings, or both, talk to your legal advisor about holding them in a distinct legal entity from your dental practice. If the same corporation owns property and operates the business, both are jeopardized by one lawsuit. Just as Marriott divided its assets into two corporations, you can limit what assets are exposed to a lawsuit by dividing your real property from your professional practice. My entity of choice for holding assets is a limited partnership, or LP. Your LP then leases the land, building, or dental equipment it owns to your professional practice corporation. Your professional practice corporation now owns no assets, but functions as your operating company: it employs your employees, pays expenses, bills insurance companies, and collects fees. Now, when a patient sues your professional corporation, it has no assets to be seized in the lawsuit. Depending on the value of the equipment in your practice, you might want to use the same principle in owning your office equipment. If everything from the lobby chairs to the CBCT machine is owned by your LLC and leased to the practice, then all of your business assets are insulated from lawsuits. With the fast rate at which dental equipment traditionally depreciates, however, smaller offices may find this unnecessary. Nevertheless, let’s say a dental office owns $400,000 in new equipment and falls victim to a judgment which forces a sale of the dental equipment. This event could effectively put this practice out of business. Let’s say the same dental practice is sued, but this time all of its assets are owned by a separate entity — perhaps the popular limited liability company. In this case, a plaintiff’s attorney would be unable to touch the business assets. Therefore, if the dental corporation is closed, the dentist is free to reopen under a different corporation and subsequently lease all the same equipment to the new practice, effectively never missing a beat. Our firm believes too many dentists operate their practices like a family business. Having helped many dentists set up their business and legal structures, this area “trips up” more dentists than any other. Suffice it to day, if dentists go to the trouble of having corporations, they need to run them like corporations. This means yearly meetings of corporate officers. It means minutes are recorded and filed at all meetings. And above all, it means spouses cannot go grocery shopping with the corporation’s checkbook. Courts can pierce the corporate veil all too easily when dentists get lazy with the details of their corporations. In case after case, dentists open themselves up for trouble when they mingle their family finances with their dental business. Also, remember that liability insurance is not perfect. Judgments may not be entirely covered by insurance policies because of payout caps or exclusions. For instance, one dentist found out a lawsuit filed against him fell under a policy exclusion. This oral surgeon was held personally responsible for more than $300,000 in a judgment. The lesson is clear: Although you may faithfully pay your malpractice premiums, nevertheless, you could have to pay a large judgment with your personal assets. Exhausted Protecting personal assets requires more than simply deeding assets to spouses. Today, courts consider these practices, in response to a lawsuit, to be a form of fraud. For this reason, a growing number of dentists title their homes, savings accounts, and investments to separate legal entities. Much like dividing land and buildings from a dental practice, some dentists wisely title their family assets to trusts, limited partnerships, or corporations. If your home is owned by a correctly drafted legal entity, it is much harder for a court to seize. Some forms of ownership, such as the LP, even can serve as a deterrent from lawsuits ever being filed against you. An LP includes wording that not only makes assets held in the partnership almost impossible to seize, but also may require the plaintiffs to pay the taxes on these items. In fact, many attorneys will retreat if they discover assets are owned by a limited partnership. The principles are simple First, divide your business assets from your business operations. Review carefully the nature of your business and professional activities. Can you logically divide the business or professional activity into two or more separate entities? For example, why does the dental practice have to include the laboratory? Why can’t the A/R be kept separate from the PC? Why must your PC also own your office? Dividing the ownership of your assets can literally save them when a lawsuit strikes. Second, keep your personal life separate from your professional life. If private and professional assets are mixed, both are made vulnerable in lawsuits. Third, structure yourself to withstand litigation before a lawsuit occurs. Any steps to rearrange your assets after a potential lawsuit occurs can be ruled fraudulent by the courts. Using asset protection principles before a problem arises, however, is seen as smart and strategic. The same measures taken after a lawsuit-prone incident occurs can be ruled evasive and fraudulent. As you restructure your assets, make sure your lawyer is fully versed in modern asset-protection principles. Equity stripping Although the idea of borrowing money from a bank when you don’t need it may seem counterproductive, when used for the purposes of “equity stripping” it not only makes sense but could be the wisest financial move you’ll ever make. It works like this: You take out a bank loan and secure it with property of your business that is shown on the balance sheet (such as equipment, real estate, a vehicle, or even receivables and inventory). Should creditors or a litigant attempt to seize the encumbered assets, they would first have to pay off the bank loan, likely rendering the entire exercise without financial gain. Despite the simplicity and rock-solid effectiveness of this strategy, rarely do we hear of financial advisors talking about this with a client. The reality is that your success and stature as the owner of a prosperous dental practice make you a target for a wide spectrum of potential misfortune. From creditors, judgments, divorce, tax audits, partnerships gone wrong—there are many forces that can quickly erode or drastically reduce your business and personal assets. Few professionals have as much to gain from asset protection as private-practicing dentists – operating with the reality of business and malpractice liabilities. There has never been a better time to consider your set of circumstances and make necessary changes to protect yourself, your practice, and your family. Sit down with your wealth management professional or financial advisor to evaluate your liabilities and insurance policies. What assets might you have overlooked, or might have grown in attractiveness to potential litigants? The quickest and most cost-effective approach to gaining blanket coverage is to take out a large umbrella policy to safeguard assets. Placing your assets in someone else’s name, such as your spouse or adult child, usually places them beyond the reach of any legal action directed at you or your business. Sole Proprietorship in Dentistry (DBA) A sole proprietorship means doing business as yourself – you and the company are the same entity for legal purposes. While it’s rare for private practices, it can be more common for associates working as independent contractors. Select CPAs may recommend a sole proprietorship for your dental practice because • You report income and losses on a 1040, not a corporate tax return. • If you start your dental practice from scratch, you can take advantage of the losses on your 1040 in the early years, likely before your business starts making and reporting a profit. Other legal and accounting professionals may advise against a sole proprietorship because • If you’re sued for medical malpractice, your personal assets can be taken. • It makes the web of personal and professional finances very difficult to separate. • Your personal credit is at risk. • As an associate, your profits are subject to self-employment tax; you will pay payroll taxes as an employee and an employer. • You will pay more in Social Security and Medicare taxes. Professional Corporation (PC) A Professional Corporation (“P.C.”) is simply a corporation for licensed professionals, like doctors or lawyers. This structure can be appealing to a single dentist because • Financials clear – your income is separate from the practice’s income and profits. • The corporation can provide health insurance to you as its employee and deduct the cost as a business expense. • Caps on self-employment taxes. Because of its corporation status, however, PCs • Require more paperwork. • Require formal annual meetings. • Pay franchise taxes. A Professional Limited Liability Company (PLLC) A group of licensed professionals that want to form an LLC must form a PLLC which ensures that all managers of the entity must be of the same licensed profession. PLLCs are often recommended for dentists opening/starting a new practice: • PLLCs offer the tax and liability advantages of a corporation • They are generally considered to have less of an administrative burden, meaning less paperwork. Drawbacks of a PLLC include: • A dentist’s Medicare and self-employment tax liability is capped based upon the profitability of the practice, not personal income, so the tax burden will likely be higher. Making the S-Election for Dentists? An S-Corp is often referred to as an entity. However, Sub-Chapter S is actually a federal election and doesn’t affect how the state sees your business. It does, however effect the taxation for you and your practice. Electing an S-Corp may be advisable • Because only the income paid to employees is subject to employment taxes. Other distributions made to owners are not considered wages and aren’t taxed as such. • If you’ve selected to form a PLLC. Because of the self-employment tax savings mentioned above, it can be a good match for a PLLC, which has less burdensome administrative requirements making for a ‘best of both worlds’ match.