Law in the Marketplace: When do you need to form a single-member LLC for your business?

For the Monitor
Published: 8/31/2020 4:09:35 PM

Question: I have recently finished my studies to qualify as a psychiatric nurse practitioner in New Hampshire, I’ve received my license to serve patients in that field, and I have begun working full-time in my field for a New Hampshire hospital. However, my hospital permits me to work part-time for other companies outside of my normal hospital hours, and a New Hampshire psychiatric practice group (the “practice group”) has asked me to provide services to its patients from time to time under the supervision of its psychiatrists as an independent contractor. They’ve provided me with a draft agreement for that purpose.

I have obtained full malpractice insurance covering my practice for the practice group. However, a friend of mine has suggested that before I sign their agreement or do any work for them, I should form a New Hampshire single-member professional limited liability company in order to obtain a statutory liability shield in case one of the patients of that group sues me for malpractice. Should I form this PLLC?

Answer: There are four main reasons why individuals who, like you, conduct their businesses or professions as sole proprietorships and have no need for employees should consider forming single-member LLCs or, if they are professionals, forming single-member PLLCs for that purpose. But from what you’ve said, none of these reasons applies to you.

-- LLC liability shield. As your friend has suggested, a PLLC will, in theory, provide you with a liability shield against malpractice claims in your capacity as your PLLC’s member. However, a patient who makes such a claim against you will also sue you for negligence or breach of contract in your individual capacity. Thus, the above shield probably won’t afford you any real malpractice protection, though it may afford protection against other types of claims.

-- Estate planning. A well-drafted operating agreement for your PLLC could serve you not only by providing a liability shield (which, as I’ve noted, won’t actually protect you) but also as an estate-planning document that will specify, for example, what will happen with the PLLC’s business and assets if, because of illness, absence or otherwise, you can’t conduct its business. However, because, among other considerations, working for the above group, you will have no employees or significant business assets except, possibly, cash in a bank account, you won’t need these estate planning benefits in your work for the practice group. For example, as to any bank account, you can ask a trusted relative or friend to be a co-signer. And I presume that all records you may keep about patients of the practice group that you serve will be maintained by the group itself, not by you.

-- Marketing. A PLLC could conceivably provide marketing benefits for your practice by, among other things, making your practice look more substantial than it might look as, effectively, just you as an individual. However, from what you’ve said, you don’t presently need any marketing advantage that a PLLC might provide.

-- Education. If you form a PLLC, you should consider hiring a lawyer to draft an operating agreement between you and your PLLC. If it’s well-drafted, this agreement will, among other benefits, give you and any relevant third parties (such as tax auditors) a clear understanding about the nature and operation of your PLLC and about your relation with it; in other words, the agreement will be a teaching document. However, this PLLC function will probably be covered largely or entirely by the independent contractor agreement you’ve mentioned.

However, the following additional points may be useful to you in response to your question:

-- Indemnification. When plaintiff’s lawyers bring suit against any individual or entity defendant, they often include as defendants in the suit everybody with any business relationship with the defendant. Thus, you should consider asking the practice group to include in its independent contractor agreement with you a provision providing that if you are sued in the above situation, the practice group will defend and indemnify you for any claim against you.

-- Practice on your own. If you ever decide to go out on your own as a practitioner in your field, you should consider forming a PLLC to address issues, such as file maintenance issues and therapeutic and management continuity issues, that are not issues for you in your present situation.

-- Collaboration with colleagues. For complicated reasons I won’t address here, if, in your practice, you work or consult with one or more third parties in your field, you should probably do so through a PLLC in case you and any of your colleagues are ever sued as a partnership.

-- Employees. If, in your practice, you ever have employees, including even part-time employees, you’ve got to form a PLLC to protect you from liability for real or alleged employee misconduct.

(John Cunningham is a Concord tax and businesses lawyer and estate planner. He has published Drafting Limited Liability Company Operating Agreements and Maximizing Pass-Through Deductions under Internal Revenue Code Section 199A. Both are the leading books in their fields. If you have business or tax questions you’d like addressed in this column, call John at (603) 856-7172 or e-mail him at lawjmc@comcast.net. He’d like to thank  Patrick Closson, an attorney in the law firm of McLane Middleton, P.A., for assisting in the writing of this column.)

 




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