Optometrists are fortunate for many reasons. One of those is that after we spend years in school learning our profession, we have the opportunity to enjoy the fruits of our hard work by making a good living.
Hopefully, we live comfortably and earn more than we spend, allowing us to increase our wealth over time. But growing wealth is not particularly helpful unless you also ensure that you can preserve that wealth, especially when life throws unexpected and unwanted curveballs at you.
There are a variety of strategies – some well-known, others less so – that each of us can, and often should employ to ensure that we don’t lose the accumulated wealth we worked so hard to grow due to a single unexpected event.
Generally, these strategies fall into one of four categories: our form of practice, insurance, protecting our investments, and estate planning. In Part 1 of this article, I will give you a brief overview of practice protection and insurance. You can then take this information to your own personal lawyer or financial advisor and create a preservation strategy specifically for you.
Form of Practice Protection
If you own a practice, you need to consider the form in which you own it. This also applies to optometrists that work as independent contractors at one or more offices owned by others. You may not realize it, but the essential nature of being an independent contractor (as opposed to an employee) is that contractors “own” their business. In this case, the business of providing optometric services to optometry practices.
So, what form of business is best for an optometrist? In terms of wealth preservation, the best forms of practice fall in this order, from best to worst: LLC/PLLC, professional corporation, sole proprietorship, and finally, partnership.
Let’s dispense with partnership first. Simply stated, there is no good reason to be “partners” in a legal sense. The problem with a partnership is that each partner is personally liable for acts and omissions of the other partners, including the liabilities incurred by the other partners. If your partner faces a claim for discrimination or harassment, for instance, not only his or her assets, but your personal assets are at risk even if you had nothing to do with the conduct and knew nothing about it. That is an unnecessary risk. Partnership offers you virtually no advantages, so why assume the risk of being responsible for what another person does or does not do?
Next is the sole proprietorship, which is when you alone own the business, either as a practice or as an independent contractor. If you report your earnings on a Schedule C you are a sole proprietorship.
This means your personal assets are at risk for claims made against the business because you and your sole proprietorship are one and the same. Thus, if an employee wins a claim against you that alleged wrongful conduct by another employee, your personal assets are at risk. Similarly, if an employee makes a wage claim, such as for unpaid overtime, your personal assets are at risk. And if a patient has a claim that exceeds insurance coverage your personal assets are at risk. For these reasons, if you own a busy practice or one with more than just a few employees this is a risk that you should avoid. There is nothing inherently wrong with being a sole proprietorship, but as your risk of being sued increases the benefits of being an LLC or corporation increase.
Limited liability companies, known as LLCs (and similar Professional LLCs, or PLLCs) are not available for optometrists in all states. But, where they are allowed, they have some meaningful advantages over a corporation.
“Corporate formalities” like annual meetings and minutes are relaxed for an LLC. And profits in an LLC do not have to be distributed along with ownership. A 40% owner can receive 25% of the profits or 60%. This allows some flexibility which can be helpful in some instances if you have co-owners (which we colloquially call our “partners”).
More importantly, with proper drafting of the LLC’s operating agreement by a lawyer, an LLC can often offer a degree of asset protection against 3rd party claims that a corporation cannot. For instance, if you have a car accident that leads to a claim for damages that exceeds your car insurance limits, an LLC can be protected from the judgment whereas your ownership in a corporation may not be. A judgment creditor can obtain an order selling your stock in a corporation but not your ownership interest in an LLC that has been properly formed.
Finally, from a tax perspective, LLCs can be similar to corporations that elected to be taxed under Subchapter ‘S’, as yours typically should be.
If an LLC/PLLC is not available to you a professional corporation will be. Even if you are a sole owner, it is often preferable to do business as a corporation. There may be tax advantages, and there are always at least some liability protections compared with sole proprietorship. Most of these have to do with employee-related risks, however, because most creditors (like labs, vendors, and landlords) will require you to personally guarantee the obligations of your corporation.
A couple of additional points are worth noting. If you own more than one business it is best to separately own each as its own LLC or corporation. That isolates each business from claims against the others.
If you own the building your practice is in, you should almost always own that as its own LLC. Then enter into a written lease agreement between your practice and your building LLC. Your CPA can provide invaluable assistance with maximizing the tax benefits of doing so.
Finally, for independent contractors, it may be advantageous to form an individual LLC or corporation and have your entity hired instead of you, with you working then as an employee of your LLC or corporation. This provides some asset protection advantages and, importantly, some tax reduction opportunities. A good CPA can help you in understanding how that may benefit you.
Perhaps the most important form of wealth preservation comes from insurance. Insurance is a broad topic that is an article upon itself. Every business owner needs a competent insurance agent to provide advice and guidance. Among the kinds of insurance we need to consider having are life insurance, disability insurance, long-term care insurance, homeowners/renters insurance, car insurance, and an umbrella policy as your wealth grows beyond your policy limits.
Perhaps the greatest risk to your accumulated wealth is being underinsured. Your home, in particular, is often a big part of your wealth, and raising your coverage as the home’s value and as the cost of replacement increases is often overlooked, leading to a substantial risk of being underinsured. Review your coverage limits not more than every 2-3 years.
As for your business, there are two essential insurance products and most of us are familiar with them: malpractice insurance and general liability insurance. We know what malpractice (aka professional liability) insurance is for, and we’re required to have it by third-party payers. But it is essential to understand the two types of malpractice insurance: claims made and occurrence.
You must know which you have! An “occurrence” policy protects you from a malpractice claim if the alleged malpractice occurred during the term of the policy. A “claims made” policy only protects you if the malpractice claim is made during the term of your policy. This can create a big surprise: a lapse in coverage if you change insurers.
Say your policy ends on March 31st and you start with a new company on April 1st. In October, six months later, you are sued for malpractice that allegedly occurred in January. Your old claims-made policy won’t cover you because the claim arose in October after the policy lapsed. And your new policy may not cover you because the allegedly wrongful acts occurred in January, prior to coverage starting in April. Similarly, if you retire and end your claims-made policy you will have no coverage if a year later you are sued.
Thus, if you have a claims-made policy you need to be familiar with “tail” coverage. This is an extra period of coverage you can purchase that extends your claims-made coverage. Occurrence policies don’t require a tail. You will have coverage forever for any malpractice alleged to have occurred during the period the policy was in effect. But this generally also makes the coverage more expensive.
Also, consider your policy limits. As your wealth grows you should consider increasing your coverage from the common $1M/$3M to $2M/$4M. Few optometry claims exceed $2M and the additional cost of going up to $2M/$4M is generally not large.
Finally, you need to understand whether your malpractice insurance allows you to control the settlement of a claim and if so, how that works. Most ordinary insurance policies (car, home, general liability, etc.) allow the insurance company to settle a claim without your consent, even over your objection. But malpractice carries a stigma and has collateral effects with unwanted repercussions including state board reporting or investigation and reporting to the NPDB.
Thus, most malpractice policies give you authority to refuse a settlement the insurer wants to offer or accept. The most common optometric policies carry a steep penalty for you refusing a settlement the insurer wants to make, namely, that you may have to pay your legal defense costs from that point on and/or assume personal liability for any judgment that exceeds the proposed settlement offer. Understanding how this works may allow you the ability to shop for a policy that treats you more favorably.
In terms of wealth protection, both disability insurance and long-term care insurance have important roles. When you are accumulating wealth adequate disability insurance helps ensure that you can replace your income if you cannot work due to disability. This allows your accumulated wealth to continue to grow.
Of course, as you get older, and your accumulated wealth becomes more able to supply sufficient income in the event of disability, you can often let that insurance lapse. But almost nothing can (or will) deplete wealth faster than long-term care. Such care often costs $125,000 a year or more. Buying a policy to provide you with long-term care if it becomes needed, while you are relatively young and the policies are affordable, is important once you start accumulating wealth.