Forming A Group Practice Part 1: Choosing the Right Entity
Whether you are setting up a practice group with friends just out of medical school, breaking off from an existing medical practice, or merging your practice with another doctor’s, there are some decisions you must make when forming a new practice group that can have far-reaching consequences.
This series of blog posts will explore some of the common issues that must be considered when forming a new practice group, from how to allocate the practice’s income and apportion expenses, to how to deal with a partner’s death, disability or retirement, to dealing with personal issues that can affect the group, such as divorce and bankruptcy. This first post will look at the first decision that will need to be made as you set up your practice: how the entity will be formed.
Options in Forming a Practice Entity
Some of the options you have in determining what entity to use include:
1, Partnership: The most basic business entity you can choose is a partnership. In fact, if you do not form any kind of legal entity for your practice, and more than one person owns the practice, Arizona law will deem a partnership to exist. Arizona will also apply a set of default rules for how partnership assets will be controlled and decisions will be made.[i]
You can vary these default rules through a written partnership agreement, but the primary feature of a general partnership is that each of the partners will be liable for the partnership’s debts individually. Therefore, a partnership is often a poor choice for doctors, as it can expose them to significant liability for the practice’s debts. Additionally, each partner owes fiduciary duties to the other partners. Therefore, if you violate the partnership rules, whether under the statute or under a partnership agreement, you can face significant tort liability.
Pros:
• Partnership is already implied by law, so there is no cost to set up.
Cons:
• Significant potential liability exposure
• The default rules may not match the intent of the partnership.
2. Professional Limited Liability Company. A professional limited liability company, or PLLC, is one of the most common forms for medical practices. Although a PLLC does not shield an individual doctor for liability for medical malpractice, it does permit the individual doctors, or members, from being exposed to personal liability for the debts of the practice.
In order to qualify as a PLLC under Arizona law, all of the members of the PLLC must be licensed in the same field (such as medicine or dentistry), and there are specific requirements that must be included in the original Articles of Organization that set up the PLLC.[ii] The individual owners are called members, and management of the PLLC is usually vested in one of the members, who is referred to as a manager.
Pros:
• Limited liability for the members
• Centralized decision-making authority is vested in the manager
• Fewer formalities than a professional corporation
Cons:
• The other members may be shut out of practice decisions, depending on how the PLLC is structured
• More expensive to form than a partnership
• Can be impractical if there are more than a few members
• May be subject to self-employment tax
3. Professional Corporation. A professional corporation, or PC, is similar to a PLLC, in that the individual owners are not liable for the debts of the corporation. The owners of the PC are referred to as shareholders, just as with any other corporation.
However, as with the PLLC, the shareholders must all be members of the same profession.[iii] There are additional rules that must be satisfied with PCs, such as annual shareholder meetings, officer elections and shareholder votes for major changes in the practice.
Pros:
• Usually the better choice if there are many owners
• More shareholder input on major decisions
• Usually easier to add new owners and sell ownership interests
Cons:
• More formalities that must be observed to maintain the corporation
• More expensive to set up and run
Making the Right Decision for You
Generally speaking, PLLCs work best with small groups, where the members are willing to vest control of the practice group in one person to make decisions, whereas PCs tend to work best with larger groups. Very rarely, if ever, is an unincorporated partnership the best choice for doctors. Additionally, some of these disadvantages can be mitigated through careful planning and drafting of the organizational documents, and every practice group has its own set of unique circumstances. In deciding how best to set up your practice, it is important that you consult with an experienced attorney who can create the framework for a successful practice group.
[i] See A.R.S. § 29-1001, et seq.
[ii] For a complete list of requirements, see A.R.S. § 29-841.4
[iii] See A.R.S. § 10-2201, et seq.