Business Situation Essay Sample

Business Situation Pages
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How you would select professionals to rely upon for business advice, and whom would you choose?

The appropriate selection of a real estate professional will enhance our prospects for a secure purchase and a property that will increase in value; the incorrect selection will be costly in terms of time, money and stress.

There are several factors we are supposed to consider when selecting advisors. For example, professional qualifications, experience in real estate, and also fee for services. Previous to we entrusting an advisor with our work, we will need to know that he or she has the appropriate qualifications. These may consist of a professional degree in the case of a lawyer or accountant, or some other professional training or qualifications relative to the area of work.

It is very significant to take a look at the advisor’s experience in the area where you need assistance. Such factors as the degree of expertise, the number of years of experience, and the percentage of time spent offering a service in that area are significantly important.

While deciding on an advisor, we should make sure that we feel comfortable with the individual’s personality. If we are going to have an ongoing relationship with the advisor, it is significant that you feel comfortable with the degree of communication, the attitude, the approach, the frankness, and the commitment to your interests

We have to have confidence in your advisor if you are going to rely on the advice to enhance the quality of our decision-making and reduce your risk.

We have to look for a specialist. We have every reasonable right to expect knowledge, expertise, and exceptional service. If we search for these qualities, and we are likely to find them.

Legal and regulatory issues to be considered for this business

Whether starting a new medical practice or reorganizing an existing practice, one of the first things we’ll need to do is choose a legal entity through which the practice will be conducted. We in the legal profession refer to this as “choice of entity.”

Generally, state laws permit the use of the “professional corporation,” “general partnership,” “limited liability company” and “limited liability partnership” for the operation of a medical practice. Professional corporations may be Subchapter “C” or Subchapter “S” corporations for federal and state income tax purposes. The choices, therefore, are plentiful. Choosing the best legal form for a practice requires consideration of three important factors: liability insulation, tax treatment and ease and convenience of formation and administration.

The ideal entity would shield the physicians personally from practice liability, be nontaxable and be free of requirements, restrictions and limitations in co-ownership arrangements, formation and administration. Unfortunately, this is an imperfect world. Nonetheless, the law has evolved to the point where most of the foregoing objectives can be achieved in whole or in part.

A brief review of this evolution is beneficial to understanding the comparative benefits and disadvantages of the choice entities. So, here goes.

One disadvantage of the corporation, professional or otherwise, is that the tax law treats it as a distinct taxable entity. Therefore, the incorporated medical practice was required to pay state and federal tax on net income and was subject, for state purposes, to capital stock and franchise taxes as well. The unincorporated practice was not so subjected. Many, if not most, medical practitioners incorporated their practices anyway.

Franchise and capital stock taxes of a few hundred dollars per year were generally viewed as the annual cost for acquiring the liability insulation they had sought. And taxes on net income were generally minimal or nonexistent as net income was passed through as tax deductible compensation to the physicians. Hence, professional corporations reported little, if any, corporate net income on a yearly basis. Still, the potential for “double tax” on net income (i.e., once at the corporate level and again on the individual level upon distribution) did exist.

Of far greater potential, however, was the double tax which could occur with respect to proceeds resulting from a sale of a practice’s assets. It would be far more difficult to pass proceeds through to the practice owners in a deductible fashion if the proceeds represented gain from the sale of practice assets rather than compensation for the services rendered by the practice owners.

At the outset, we stated that the ideal entity would limit liability, be nontaxable and be flexible with regard to co-ownership arrangements, formation and administration. As recently as a few years ago, the state enacted legislation permitting the formation of two new legal entities, the limited liability company (LLC) and the limited liability partnership (LLP) after almost all other states had already passed similar legislation. The entities are fairly similar in that they both offer liability protection and can be treated as partnerships for income tax purposes. There are differences, however, which relate primarily to the type of liability protection afforded.

The limited liability company affords its owners or members the same insulation from personal liability as a professional corporation. That is, the members of a LLC will be personally liable for their own professional malpractice; they will not, however, be personally liable for the debts or liabilities of the company or for the acts or omissions of other members, agents or employees of the company, solely by virtue of their being members of the company.

In somewhat contrasting fashion, the LLP limits the personal liability of partners for the negligence and misconduct committed by other partners and representatives of the partnership, provided that the LLP maintains liability insurance for the negligent or wrongful acts or misconduct of the partners. This insurance is in addition to the malpractice insurance which the partners are required to maintain. Unlike the LLC and the professional corporation, however, the LLP does not shield a partner from the general debts and obligations of the partnership (such as leases and operating lines of credit). This is a distinct advantage of the LLC.

On the flip side, the state’s CAT Fund is not required to, and does not, cover the LLC for malpractice liability. It does, however, cover the LLP. The distinction, itself, is a mystery to us, as well as to many insurance brokers (many of whom are unaware of the gap in coverage). Some private insurers will extend coverage to the LLC to bridge the gap. Others will not. The question therefore arises: What is at stake if the practice entity is not adequately insured? The answer is, basically, its accounts receivable. If a practice can obtain sufficient coverage through private insurance, this may not be a significant issue. In any event, the issue figures to be fairly short-lived if the CAT Fund is phased out of existence, as many predict.

An advantage that both the LLP and LLC have over the professional corporation (both Subchapter S and Subchapter C) is that the professional corporation entails a number of formalities and greater administrative expense than do non-corporate forms. State corporation laws distinguish among boards of directors, shareholders and officers, and set forth requirements and responsibilities of each with respect to each other and the corporation. In contrast, non-corporate forms, in essence, are governed by their internal governing agreements. Thus, in general, non-corporate forms are governed in whatever manner their agreements provide, with minimal restrictions imposed by law.

One noteworthy disadvantage of the LLC and LLP as compared to the professional corporation is continuity of life from a tax perspective. Under the partnership tax laws which govern LLCs and LLPs, an entity is deemed terminated from a tax standpoint when there is a 50 percent or more change in ownership. Thus, for example, the departure of one owner in a two-owner practice can trigger tax consequences of a deemed liquidation, the ramifications of which are potentially significant. This figures to be less of an issue over time as the number of smaller medical practices decreases.

What legal entity choice would you make for this business and why?

So, considering all of the foregoing, which entity do we prefer? The LLC. We prefer it (and, for that matter, all “flow through” entities) to the Subchapter C professional corporation because of its “flow-through” tax feature. We prefer it to another of the flow-through entities, the Subchapter S professional corporation, given its greater degree of flexibility. (In particular, we dislike the rules prohibiting S corporations from having more than one class of stock.) We prefer it to the LLP because it offers a greater degree of personal liability protection.

In addition, the liability protection featured by the LLC is unqualified, whereas the LLP’s liability protection can be lost in the blink of an eye upon the unwitting lapse of an insurance policy. That said, we might opt for the LLP if we could not obtain coverage to bridge the gap in CAT Fund coverage (keeping in mind that we could consider changing the LLP to an LLC if the CAT Fund were phased out).

In sum, to achieve our goals of liability insulation, favorable tax treatment and ease and convenience of formation and administration, of all the plentiful choices we, more times than not, would choose the LLC.

References

David L Weiner, Brain Tricks: How to Cope with the Dark Side of Your Brain … and Win the Ultimate Mind Game, 1993.

Daniel D Wheeler and Irving L Janis, A Practical Guide for Making Decisions, 1980.

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