The Dental Lawyer | Entities as Liability Shields

One issue that consistently surprises me is the number of dental practices which are run as sole proprietorships and without the liability shield of an entity.  (To be clear by “entity” I am talking about corporations, limited liability companies, limited partnerships, and other legally created business forms).  Entities provide a liability shield by protecting the owner’s personal assets from lawsuits.  What this means is that if Smith Dental Arts, P.C. signs a lease with Goliath National Landlord and then fails to meet its obligations under the lease, if Goliath sues the dental practice, only those assets which belong to the professional corporation are subject to any adverse judgment against the practice.  In that same situation if Dr. Smith had been practicing without being incorporated the landlord would be able to go after the personal assets of the doctor; meaning the doctors home, vehicles, and personal bank accounts. The value of forming an entity is that any obligations on the part of the practice stay separate and distinct from that of the personal assets of the person who owns the practice.    

The main limiting factor which dental and other medical professionals have to deal with when forming an entity is malpractice.  Malpractice is always personal, meaning that if Dr. Smith is sued for malpractice his personal assets are always at stake (this underscores the need for every dentist to have malpractice insurance, even if it’s not a legal requirement in your state).  Forming an entity will not limit the ability of a plaintiff to reach a dentist’s personal assets like it would for the contractor looking to recover on a breach or an individual who fell and injured himself on the practice’s property.  Another limiting factor is the “personal guaranty.”   Any contract or agreement entered into with a personal guaranty obligates the person offering the guaranty to satisfy agreement.  In other words, that person’s personal assets can subject to an adverse judgment.  

Despite the restraints on the liability shield, the advantages of entity formation are still palpable. The doctor’s personal assets will be protected from any business dealings of the practice or any torts committed by the practice (outside of malpractice).  In addition there are tax benefits to forming an entity which will be discussed in a subsequent post. It is noteworthy that if there is any anticipation that the practice will be sold at some point, the entity formed should NOT be a C-corporation (again, more on this later).

The types of entities which can operate as dental practices vary from state-to-state. In New York P.C.’s (taxed either as S-Corps or C-Corps) and P.L.L.C.’s are the primary entities which can run as dental practices.  There are some additional entities which can also operate as a dental practices.  Check with an attorney in your state before forming and entity, and avoid the compulsion to try to do it yourself.