Limit your veterinary practice owner liability with an LLC

On the rare occasion you leave home to go someplace other than work, you may notice you're instantly engulfed in a sea of LLCs (limited liability companies). All of the taxi companies are LLCs. So is the manufacturer of all the cars they drive. And the hot dog cart you spot behind the taxi waiting at the corner? By golly, that's an LLC, too. And if you own a veterinary practice or other business, you should consider making it an LLC. Here's why.

Benefits of entities

For hundreds of years, businesses have been organized as entities separate from the people and organizations that own them. The primary reason was to permit ownership by multiple parties, thus enabling those owners to borrow money as a block.

The second reason was to limit the liability of the individual owners. Very small companies—say, 43rd Street Hot Dog Cart Inc.—can't borrow money any more effectively than owners can. However, Mr. Hot Dog is worried that a customer might sue if some of that boiling hot dog water spills, resulting in a serious burn. Should this happen, Mr. Hot Dog would prefer that he only lose his 43rd Street operation, not his 32 other carts and oceanfront home. That's why Mr. Hot Dog's empire is 33 separate corporations. (He would have preferred LLCs, of course—they're easier at tax time—but New York only recently allowed them.)

Why an LLC

There are three big reasons to organize your veterinary practice as an LLC. First, no veterinarian should underestimate the risks of running a business without the protection provided by the umbrella of a corporation or an LLC. You do have liability insurance in case boiling water from the coffee pot spills onto a client or if someone suffers a facial bite from an escaping Mastiff. But what if your insurance company tries to duck out and you end up the target of litigation? What if the demand in the burn or bite suit is double your insurance policy limit? Maybe you won't be held liable for twice your coverage, but do you really want to take that risk?

Second, the LLC protection is so inexpensive and easily done that it barely makes sense not to do it. You should speak to a CPA before forming an LLC, but you can probably handle the work without a lawyer. Heck, I am a lawyer, and I formed my last LLC for a real-estate project in New Mexico using an online document provider. I could have done the work myself, but why? I cost more than an online provider for something so routine.

Third, an LLC can help you accomplishment goals otherwise impossible. Consider my New Mexico example. New Mexico is a community-property state, which means that any realty acquired by one spouse is automatically owned by both. I have no problem with that, but I really don't want to badger my wife for her notarized signature every time I want to sell a lot.

Voila! A New Mexico LLC allows us to jointly own the property but permits me to transact business within any limits she and I set in the LLC-operating agreement. For example, if Mary wants to be in on equipment purchases, her signature is needed. If she says I can sell any lot for under $50,000, I can have authority to close that without her hands-on say-so.

Now, let's consider a veterinary practice as an LLC. If veterinarian A has lots of money and veterinarian B is a horrible spender but a great surgeon, an LLC gives them all kinds of flexibility. They can stipulate in the agreement that they share profits on a certain percentage basis but only Dr. A is allowed to sign checks. Purchases over $5,000, for example, could require the signature of both.

Sure, a partnership could accomplish the same goal. But what happens if the boiling coffee scalds your latest client, Lit E. Gator, Esq.? Gator burns her arm and asks for a million bucks in damages. If she wins, she gets the insurance money, Dr. A's summer house and Dr. B's car. On the way out of the courtroom, Drs. A and B will wish they'd used LegalZoom.com or BizFilings.com to create an LLC.

What LLCs won't do

There are limitations to LLC protection, of course. First, an LLC won't provide protection if you don't observe the identity of the entity. This means you need to establish a bank account and use it exclusively for business deposits and withdrawals. When you use the LLC's money as your personal piggy bank or otherwise ignore the independence of the entity, the courts will be inclined to ignore it as well.

Second, LLCs don't protect against malpractice claims.

Third, LLCs usually won't insulate you from liability for employee-related taxes, tax filings, tax withholdings or workers' compensation obligations. The IRS and your state are wise to that, so don't try it.

Dr. Allen is president of Associates in Veterinary Law P.C., which provides legal and consulting services to veterinarians. Call (607) 754-1510 or e-mail info@veterinarylaw.com.