Understanding the Basics of Business Structures

September 29, 2011 by · Leave a Comment 

By Adil Daudi, Esq.

business-structure-basicsRecently, I was approached by a client who was interested in starting a business, however he was curious to learn about the different business structures available, and which would be most suitable for him. Considering this was not the first time I have addressed such an inquiry, I felt it prudent to elaborate on the various structures and explain the differences between each.

Please be aware that this is not a comprehensive description of the structures and it is always advised to speak to an attorney who would better be able to provide sound advice on which structure is most suitable for your particular needs, expectations and business.

One of the most common misconceptions when it comes to creating a business is that many feel that an incorporation is automatically the best structure to use; however, that is not always true. In order to fully understand why, or why not, an incorporation is most applicable, it is important to get a basic understanding of the other available business entities.  

In Michigan, there are three common business structures that owners can typically choose from: Partnership/Sole Proprietorship, Corporation, and Limited Liability Company.

1. Partnership/Sole Proprietorship: The major difference between a partnership and a sole proprietorship is in the number of owners. In a sole proprietorship, there is essentially only one owner; hence the word “sole.” On the other hand, in a partnership, it is comprised of two or more owners who come together with the intent of advancing their mutual interest.

Depending on the specific type of business you are operating, creating a sole proprietorship or a partnership is not always recommended. Under either of these structures, you, the business owner, are responsible for all taxes. However, the method in how you file your taxes does not differ from your current procedure, as the income received by your company would simply be inputted in your personal tax returns.

However, probably the biggest drawback with a sole proprietorship and partnership is that in the event your company is involved in any legal action, you are ultimately responsible for any and all judgments, whereby your business assets and your personal assets can be seized to satisfy any judgment. 

2. Corporation/Limited Liability Company (LLC): One of the biggest benefits of setting up a corporation or an LLC is that it reduces the exposure of the owners and their assets in the event of a legal action. Because corporations and LLC’s are considered separate entities, requiring a separate tax ID number, a separate tax return, the only assets that can be seized for judgment are the assets owned by the corporation/LLC; therefore, the owners are not held personally liable, and thus have their assets safeguarded from potential liability.

With respect to the taxes, the profit obtained by a corporation/LLC is taxed to the company when earned, and if the shareholder (under a corporation) decides to distribute dividends, the shareholder would also be taxed individually. Thus, this creates a double tax, which is not always appealing. This double taxation can be avoided through the use of an LLC, where there are no shareholders, but rather members to the company. Please speak to an expert for further information in how to reduce your taxes through the set-up on an LLC.

As indicated above, it is always best to rely on the expert opinion of an experienced attorney who would be able to discuss in more depth the differences between each respective structure and determine, based on your specific needs, which structure is most efficient for you. Although starting a partnership/sole proprietorship is the easier and cheaper selection, it may not always be the most optimum, as you could be opening yourself up to unnecessary liability.

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Asset Protection for Physicians, Physician Contracts, Estate Planning, Business Litigation, Corporate Formations, and Family Law. He can be contacted for any questions related to this article or other areas of law at adil@josephlaw.net or (517) 381-2663.

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Corporate Employment Structure: A Way for Doctors to Reduce Income Taxes and Save Thousands…

July 14, 2011 by · Leave a Comment 

By Adil Daudi, Esq.

Whether you are a physician with a wealth of experience, or a new resident paying your dues, establishing and incorporating a structure to help lessen your income taxes is a concept widely accepted and beneficial to all. If you are currently employed within a Medical Office that also employs additional physicians, chances are you are not being given the opportunity to reduce your income taxes to the optimum level, meaning you are losing out on the opportunity to save hundreds, if not thousands of dollars in income taxes.

This concept, which is commonly referred to as the “Corporate Employment Structure,” (“CES”) is a concept that is not being utilized by many physicians, and that is partly because of the unfamiliarity with the topic. In this newsletter, physicians will learn the benefits of a CES and how it can be implemented as their current method of agreement.

What is the Corporate Employment Structure?

The CES is a very simple concept that requires limited additional documents to set up, but saves you thousands of dollars.

Under your current structure where your employment agreement is between your Medical Company (MC) and yourself, individually, the MC provides you with a W-2 salary, which you receive and deposit into your account. Therefore, if you decide you would like to implement a plan that helps reduce your income, your only option would be to seek approval from your MC. By seeking MC’s approval you will more or less be given the response you expect – “No”

The CES will help avoid you encountering such a problem, because under the CES, your company would be the one to implement your income reduction plans. Under the CES, you would be required to create a new Professional Corporation (PC) or a Professional Limited Liability Company (PLLC) for the purpose of having it employed by your MC. The CES is where your current employment agreement with your MC would convert your personal name with your PC.

Therefore, instead of your MC providing you personally with an income, your MC would instead provide it to your PC, who would in turn write a check out to you.

Once your PC receives the money, you have the authority and control, as the owner, of deciding when and how that money will be used. The special benefit received through the CES is that it gives you the ability to write-off various expenses that would otherwise not be allowed.

These expenses can vary depending on how you have your PC structured. Nevertheless, some of the more common expenditures that are typically considered written-off are: cell phones, mileage, food, or possibly vehicle lease payments. Moreover, you will have the flexibility of writing off additional major expenses such as insurance premiums, e.g. Disability Insurance, Long-Term Care Insurance. The advantage of a CES is that you would be able to implement your own tax reduction plans without the need of receiving your MC’s approval.

How do you set up a CES?

A common misconception with a CES is that many physicians feel it is too burdensome to set up. This could be true if the physicians attempted the set up process on their own, or had an inexperienced attorney guiding them.

With the proper help and guidance from your trusted advisors, there is no reason why this process should be difficult or complicated. As long as you follow the simple four-step process, your path to saving money should be ready in no time.

The Four-Step Process

Follow these four steps to ensure you have properly created your CES:

Creating a new company: If you are debating between a Professional Corporation (PC) or a Professional Limited Liability Company (PLLC), it is important to keep in mind that depending on how your PC is structured, there would not be a difference. However, it is advised to consult with an attorney to explain how to have a PC properly structured.

Cancel current employment agreement: Once your new Company is formed, your next step would be  to contact your MC and inform them (assuming you have already received their approval for allowing such a structure to take place) that your PC/PLLC has been created and you need to cancel the current employment agreement.

Creating new agreements: Once you have informed your MC about the cancellation, you must   move forward with drafting the new employment agreement between your MC and your PC/PLLC. Very simply, this will involve the MC changing your personal name to your PC/PLLC name.

Save money: At this point you are ready to receive your income from your PC/PLLC and begin to write-off whichever expenses you want through your company.

If you find yourself in an employment position that restricts your ability to reduce your income taxes, then a CES may be your gateway to saving money. Although an effective plan that helps physicians preserve their hard-earned wealth, it is still a plan that has yet to be fully utilized. Take advantage and see the savings grow!

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Asset Protection for Physicians, Physician Contracts, Estate Planning, Business Litigation, Corporate Formations, and Family Law. He can be contacted for any questions related to this article or other areas of law at adil@josephlaw.net or (517) 381-2663.

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A Doctors Guide to Protecting Their Assets

April 28, 2011 by · Leave a Comment 

By Adil Daudi, Esq.

EDIT_MoneyDoctorA very common joke used by most doctors who have had a bad experience with a lawyer is that “there are more lawyers than doctors in a hospital.” Although the joke itself is not completely true, it’s also not far from the truth.  More and more doctors are having to worry about being sued for some form of malpractice. Whether that makes doctors more alert when conducting a procedure, or more nervous, has yet to be proven. But what is quite apparent is that lawyers are quick to pull the trigger on a lawsuit whenever a doctor is on the receiving end of the complaint.

So what happens when a doctor is in the middle of a lawsuit where the potential judgment of the liability exceeds the doctor’s malpractice limits? Without a properly structured plan in this common scenario, the doctor becomes susceptible to having his or her personal assets exposed and seized; this can include bank accounts, investments, a primary residence, and rental property, among other assets.

However, with a few simple steps and with even the most simplistic plan in place, a doctor can potentially save and protect millions of dollars from creditors and bad lawyers.

The following are three strategies a doctor can, and should, implement into their day-to-day lives; which will, at the very least, help discourage potential lawsuits from arising:

i. Create a Professional Limited Liability Company (PLLC): As recent as December 2010, former Governor of Michigan, Jennifer Granholm, made Michigan one of the top States in the country to start a PLLC. The bill provides a distinct advantage for owners of a PLLC, as the exclusive remedy for any creditor against debtors is through a charging order.

A charging order is best exemplified when a creditor intends to obtain the proceeds that a debtor distributes to themselves through their PLLC. However, if the debtor decides to not make any distributions, which is often the case, then the creditor is left with no alternative remedy.

Moreover, a well structured medical practice with multiple PLLCs can deter potential lawsuits. Please consult with a professional attorney to learn more about creating and administering a PLLC.

ii. Create an Irrevocable Trust: Once created, an irrevocable trust is a trust that cannot be changed, altered or amended. Although this trust is extremely effective in protecting your assets, the downside is that it takes away ownership and possibly control from the creator of the trust (i.e. you). Your ownership loss prevents creditors from being able to reach these assets. Remember, a creditor can only attack the assets that you own; therefore, if it’s not in your name, creditors will not have access to it.

Prior to getting yourself into an irrevocable trust, be sure to speak to an attorney who practices in Asset Protection. More and more attorneys who are not familiar with this topic tend to advise clients that a Revocable Living Trust (RLT) can serve the same purpose. This is not true since an RLT does not take ownership or control away from your assets because the assets remain in your individual name.

iii. Create a Retirement Savings: There is a reason why OJ Simpson is continuing to live a normal life despite having a judgment against him for over $20 million. He took complete advantage of a protective tool that the government made available to the public. The federal government protects  all contributions made to a qualified retirement account from creditors. Therefore, all qualified retirement accounts, such as contributions to 401(k) plans, 403(b) plans and profit-sharing plans are protected from creditors, until you start making withdrawals.

In addition to qualified accounts, Michigan has also allowed contributions to Individual Retirement Accounts (IRA) to be protected from creditors. Therefore, if you have not already done so, it will be worthwhile for you to start maximizing your contributions.

Despite the fact that malpractice lawsuits have been on the rise for the past decade, doctors continue to take the reactive approach to planning and tend to take the necessary steps of protecting their assets only after the filing of a lawsuit. By doing so, the doctor is   exposed to possible criminal charges, as any transfers of funds or assets made after the filing of a lawsuit is considered a fraudulent conveyance. In other words, it is now too late.  You must plan before the lawsuit. 

Although the foregoing is not a comprehensive list of asset protection strategies, it is however a good starting point. For the number of years invested in your profession, it only makes sense that you consult with a professional attorney who can assist you in preserving your hard-earned wealth before it is all taken away.

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Estate Planning, Shariah Estate Planning, Asset Protection, Business Litigation, Corporate Formations, Physician Contracts, and Family Law. To contact him for any questions related to this article or other areas of law, he can be reached at adil@josephlaw.net or (517) 381-2663.

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