Understanding IPAs

By: Mathew J. Levy, Esq. & Stacey Lipitz Marder, Esq.
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Overview:

As the healthcare industry evolves and reimbursement rates from third party payors decrease, many physicians are quickly realizing that they must ban together in order to survive. In addition to joining or forming large group practices, many physicians are being drawn to offers to join or form independent practice associations (IPAs) and similar organizations. The formation and participation in IPAs and similar organization is growing rapidly as physicians recognize that they can take advantage of having more leverage with respect to negotiating reimbursement rates with third party payers, while being able to continue to operate their medical practices independently.  Physicians must recognize that there are a number of legal issues associated with the formation of IPAs, and failure to address and resolve these issues can jeopardize an IPA’s success.  We have addressed a few issues that must be addressed when forming an IPA below.

Formation:

When evaluating what type of entity to form for the IPA, physicians must consider several factors including whether all of the owners of the IPA will be physicians and whether the IPA will render professional services, as well as tax and liability considerations. In the event that an IPA will provide or arrange for professional services, the IPA must be set up as a professional entity (ie a PC or PLLC).  However, in the event the IPA is set up as a messenger model where professional services will not be rendered, the IPA can be formed as a lay entity (ie an Inc or LLC).  It is generally not recommended that an IPA be formed as a general partnership as there would be increased general liability.  Physicians must also take into consideration issues involving pension plans (ie will the IPA be considered “affiliated” as per the Internal Revenue Code), and requirements under the securities law (specifically if the IPA will have a lot of members and will issue securities). 

Once an IPA determines what type of entity to form, either a Certificate of Incorporation or Articles of Organization would have to be drafted. The IPA would also have to draft either a Shareholders’ Agreement or Operating Agreement dictating the terms of the relationship between the owners.  Physicians should note that not all of the members of an IPA have to be owners.  The relationship between the members and the IPA would be memorialized in a Members’ Agreement.  As such, it is often recommended that ownership be limited to fewer individuals. Prior to the entity being formed, the IPA would have to get consent from the Department of Health, Education Department and the Division for Financial Services (formerly known as the Insurance Department) which can take several months. 

Anti-trust:

Since physicians participating in an IPA are essentially competitors, it is imperative that the IPA be in compliance with the applicable anti-trust rules and regulations in order to ensure that the physicians do not engage in “anticompetitive behavior”[1]. As per the Federal Trade Commission (FTC), in order to avoid anti-trust violations the IPA would have to be integrated, either through financial risk sharing or clinical integration between the physicians. Examples of financial risk include accepting a capitated rate (per member/per month fee based upon the number of patients assigned to a physician), agreement to provide certain services for a pre-determined percentage of revenue, use of financial incentives (ie a financial withhold), and a significant investment subject to risk of loss. 

Clinical integration on the other hand involves the establishment of systems and procedures that encourage greater interdependence and joint responsibility in managing the cost and quality of care rendered by the IPA’s physicians. Elements of clinical integration include physicians establishing goals, standards and protocols to govern treatment and utilization of services by the physicians, both individually and as a group.  Furthermore, physicians would be required to actively review performance and take corrective action if necessary.  Becoming clinically integrated is a very involved process which may require significant time and money.

Physicians should also consider adding additional safeguards to the IPA to withstand antitrust scrutiny including making the arrangement nonexclusive, creating mechanisms so that competitors are not using the IPA as a means of price fixing through communication of  their price structures, and ensuring that the IPA offers a product that is different from what the physicians can offer individually.  Furthermore, when discussing the formation of an IPA, physicians should avoid engaging in conversations which can be perceived as anticompetitive. 

Illegal Remuneration:

Physicians must also be aware of the Federal and state laws which prohibit remuneration in exchange for referrals.  As such, any cross-referrals which occur through the IPA need to be analyzed in order to ensure compliance with applicable rules and regulations governing this area.

Insurance Regulations:

Physicians must also ensure that the IPA is compliant with applicable state insurance regulations.  Depending on how the IPA is structured, the IPA may be deemed to be an insurer or HMO, and the IPA would therefore have to comply with additional rules and regulations.

Compensation:

Prior to entering into arrangements with third party payers, it is imperative that physicians understand and address the risks associated with the different financial arrangements including capitation. Credentialing, quality assurance, utilization management and use of data can often times help IPA’s mitigate risk. 

Governance:

Prior to forming IPAs, physicians must also consider how the IPA will be governed and managed.  For instance, physicians must discuss who will manage the IPA and how will that person be compensated.  Additionally, it is imperative that physicians discuss how the IPA will make decisions, as well as how members can be added or terminated.  Furthermore, physicians need to determine upfront what the annual fees will be for physician members, as well as how distributions will be made to the members of the IPA.

Conclusion:

Forming an IPA can be a very exciting prospect; however, there are many issues that need to be evaluated both from a business and legal standpoint.  To that end, it is in the best interest of the physician to retain a team of professionals specializing in health care to help address the issues raised with respect to the formation of an IPA.   

About the Authors:

Mathew J. Levy is a Partner of the firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has particular experience in advising health care clients with respect to contract issues, business transactions, practice formation, regulatory compliance, mergers & acquisitions, professional discipline, healthcare fraud & billing fraud, insurance carrier audits including prepay and post payment review, litigation & arbitration, and asset protection-estate planning. You can reach Mathew Levy at 516-926-3320 or email: mlevy@weisszarett.com.

Stacey Lipitz Marder is an associate at Weiss Zarett Brofman Sonnenklar & Levy, PC., with experience representing healthcare providers in connection with transactional and regulatory matters including the formation and structure of business entities, negotiating and drafting contracts and commercial real estate leases, stock and asset acquisitions and general corporate counseling.  Ms. Marder also has experience advising healthcare clients on a wide range of regulatory issues including Stark, the Anti-Kickback Statute, fraud and abuse regulations, HIPAA, reimbursement and licensing matters.


[1] Certain activities including price fixing, group boycotts, and division of markets are considered “per se” violations of antitrust as they constitute anti-competitive behavior.

Understanding Physician Partnership/Shareholders’/Operating Agreements

By: Mathew J. Levy, Esq. & Stacey Lipitz Marder, Esq.
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Overview:

For many physicians there are several benefits associated with partnering with one or more physicians- You can share administrative costs involving the operation of the practice, have built in coverage when you are away, and plan for the future to name a few [1].  Although there are many benefits associated with entering into a partnership with other physicians, prior to entering into such relationships physicians must carefully evaluate the arrangement in order to ensure that the arrangement is indeed appropriate based upon the physician’s goals and current situation.  In the event that you do enter into a partnership arrangement with other physicians (either through ownership in a PC, PLLC or LLP) it is imperative that you enter into an agreement outlining the terms of the relationship with the other physician(s).  This agreement is referred to as either a Partnership Agreement, Shareholders’ Agreement or Operating Agreement (hereinafter “Agreement”) depending on what type of entity the physicians render services through (ie LLP, PC or LLC)[2].   The parties must all be on the same page prior to entering into such a relationship or else it will not work out.  We have outlined some key concepts that need to be addressed prior to physicians entering into partnership arrangements with other physicians.

Management/Voting:

When a physician joins forces with other physicians, decisions regarding the practice will no longer be made solely by that physician.  Since decisions will now be made by all of the physicians, it is important to dictate how such decisions will be made.  For instance, will decisions regarding the practice be made by a majority vote or by a unanimous vote of the physicians?  If there are more than two (2) physicians in the practice and decisions are made by a majority vote, there is always a chance that a majority of physicians can team up against the minority physicians. Even if ordinary decisions are to be made by a majority vote, the parties can agree that certain decisions are to be made by a unanimous vote including for instance admitting new physicians, dissolving the practice, changing the compensation of the physicians, terminating physicians, entering into litigation regarding the practice, selling the practice, and purchases exceeding a certain amount.

Compensation/Benefits/Expenses:

The physicians must also all be on the same page regarding compensation and expense reimbursement.  With respect to compensation, the physicians need to determine how they will be compensated and how net profits will be divided.  It is important that the physicians look at the practice’s cash flow in order to ensure that the practice is able to make such payments and pay administrative costs involving the operation of the practice.  Prior to determining compensation structure it is advisable to speak with your accountant regarding the practice’s cash flow.   Additionally, the physicians need to determine what expenses and benefits will be paid for by the practice (ie CMEs, automobile allowance, cell phone, conferences, books, license and registration fees, disability, health and life insurance).  In the event the physicians’ expenses would be vastly different, it may be advisable for each physician to have a predetermined expense account.

Termination:

Physicians must also be cognizant of termination provisions in the Agreement.   Physicians should especially be concerned if the Agreement allows for the physician owners of the practice to be terminated without cause upon a majority vote of the other physician owners.  In order to protect the physician, the Agreement should allow for termination only in limited circumstances including for instance if the physician loses his/her license to practice medicine.  Additionally, the Agreement should outline the specific terms involving termination/withdrawal, including the amount of notice that must be provided in the event a physician voluntarily withdraws from the practice, as well as the practice’s and withdrawing physician’s responsibilities upon withdrawal. 

Buy-outs:

Physicians must also consider whether or not there will be a buy-out in the event of termination (including for retirement, death, disability, voluntary or involuntary withdrawal), as well as whether such buy-out will be deminimis or significant.  The buy-out can differ depending on the reason for withdrawal. For instance, the buy-out for death or disability can be the value of the physician’s life insurance or disability policy, while the buy-out for a voluntary withdrawal can be the withdrawing physician’s share of the accounts receivable of the practice.  The parties should also discuss when such buy-out payments shall commence, as well as how payments will be made and over what duration.  Furthermore, it is important to have a provision in the Agreement to protect the practice from having to make several buy-out payments simultaneously which could place a significant financial strain on the practice.  This provision is often in the form of a cap, and payments exceeding such cap are deferred. 

Malpractice/Tail Coverage:

This is especially important in the event a physician has a “claims made” policy, which only offers protection to a physician while the policy is in effect. If a “claims made” policy is discontinued, the physician would have to obtain “tail” coverage, which is very expensive.  As such, the physician should ensure that the Agreement indicates that upon withdrawal the practice will be responsible for paying for such tail coverage if such situation arises.

Restrictive Covenant:

Physicians also need to consider the scenario in which one of the physicians is no longer affiliated with the practice.  Specifically, physicians need to ensure that the practice is protected, and it is often recommended that there be a restrictive covenant which restricts the former physicians from competing with the practice within a specified time and location. However, if several established physicians in an area are joining together to form a practice it may not make sense to have a restrictive covenant if the physicians already were established in the community.

Buy-in:

In the event a physician is offered the opportunity to buy-in to an existing practice and become a partner, the physician must review the terms of the buy-in, including how much the physician is required to pay to become an owner in order to ensure that the buy-in is financially worthwhile.  Furthermore, before buying into a practice, the physician must do his/her homework so the physician knows exactly what he/she is buying into and that the practice is financial sound.  It is recommended that the physician obtain a valuation of the practice by a certified healthcare appraiser or accountant. 

Conclusion:

Being presented with an offer to enter into a relationship with other physicians can be very exciting, however, there are many issues that need to evaluated both from a business and legal standpoint.  To that end, it is in the best interest of the physician to retain a team of professionals specializing in health care – attorneys and accountants– to ensure that the partnership arrangement is appropriate and in the best interest of the physician. 

About the Authors:

Mathew J. Levy is a Partner of the firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has particular experience in advising health care clients with respect to contract issues, business transactions, practice formation, regulatory compliance, mergers & acquisitions, professional discipline, healthcare fraud & billing fraud, insurance carrier audits including prepay and post payment review, litigation & arbitration, and asset protection-estate planning. You can reach Mathew Levy at 516-926-3320 or email: mlevy@weisszarett.com.

Stacey Lipitz Marder is an associate at Weiss Zarett Brofman Sonnenklar & Levy, PC., with experience representing healthcare providers in connection with transactional and regulatory matters including the formation and structure of business entities, negotiating and drafting contracts and commercial real estate leases, stock and asset acquisitions and general corporate counseling.  Ms. Marder also has experience advising healthcare clients on a wide range of regulatory issues including Stark, the Anti-Kickback Statute, fraud and abuse regulations, HIPAA, reimbursement and licensing matters.


[1] As per New York State Law, physicians can only partner with other physicians with respect to provision of professional services. 

[2] Many physicians who are owners of a practice also have an employment agreement with the practice which dictates certain terms including for instance termination and compensation.

Understanding Third Party Vendor Relationships

By: Mathew J. Levy, Esq. & Stacey Lipitz Marder, Esq.
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Overview:

Throughout a physician’s career, he/she will enter into several relationships with third party vendors – billing companies, EMR companies, marketing companies, internet providers, staffing companies and medical device/equipment suppliers to name a few. Prior to entering into these arrangements with third parties it is imperative that the agreement be reviewed from a business and legal perspective in order to ensure that the physician is protected.  Furthermore, physicians must do their homework and research the third party vendor.  If a third party vendor is not trustworthy this could have a major impact on the practice.  We have outlined a few key concepts that need to be taken into consideration when reviewing an agreement with a third party vendor.

Compensation:

It is important to have the compensation and fee structure reviewed in order to ensure that it is appropriate.  This is not only important from a business standpoint, but is also crucial to ensure compliance with the myriad of state and federal laws regulating this area including but not limited to the Anti-Kickback Statute and the New York State law regarding Fee Splitting. Federal and state regulators and prosecutors are aggressively pursuing allegations of improper financial relationships between physicians and vendors, and failure to comply with the applicable rules and regulations can result in hefty fines, charges of professional misconduct resulting in loss of license, and potentially even jail time.

Specifically, compensation should be set in advance, be fair market value for the services provided, and not take into account the volume or value of patient referrals[1].   Physicians must also ensure that they do not allow the third party vendors to share in the fees for professional services[2]. Therefore, physicians should be weary if an agreement indicates that the compensation to be paid constitutes a percentage of, or is otherwise dependent upon, the income or receipts of the professional services rendered by the physician, or if the fee is grossly above or below fair market value.

The agreement should also clearly list when payment is due, and if there are late fees.  Final payments should also be conditioned upon the third party vendor’s complete performance of its obligations. The third party vendor’s reimbursement, if any, of expenses should be addressed as well.

Exit Strategy:

When reviewing an agreement with a third party it is important to make sure that you have an exit strategy and can terminate the agreement.  Otherwise, in the event the arrangement is not working out and you terminate the agreement you may be in breach.  Furthermore, many agreements have penalties in the event of termination. These penalties can be very high, and should be limited if not removed entirely.  It is also important that each of the party’s responsibilities be delineated in the event of termination.

Duties/Responsibilities:

It is also imperative that the parties define their specific duties and responsibilities with respect to the arrangement. If you are entering into an agreement with respect to provision of a service, you must understand and document exactly what services will be provided, how often such services will be performed, what type of training is available and how accessible a representative is.  Furthermore, the agreement should address the date, time, place, method, standards and other specific requirements of performance.  If the parties are not on the same page with respect to expectations, then the arrangement will not work out.  It is also advisable that each party appoint a point person to address specific concerns and to check-in with on a regular basis.

Governing Law/Venue:

Since many third party vendors are located out of state, many agreements will indicate that any dispute will be governed by the laws of the state of the third party vendor, and that any legal action must be brought in that state.  Physicians must be aware that the laws of the other state may not be advantageous to the physician.  Furthermore, since the third party vendor is doing business in New York, the laws of the state of New York should govern any dispute.  With respect to venue being outside of New York, physicians must recognize that they would have to travel to that state in the event they bring a lawsuit against the vendor.  If the venue is California for instance, bringing a suit would be expensive and time consuming.  This must be taken into consideration when evaluating a potential arrangement.   

Liability:

Many agreements with third party vendors include a limitation of liability provision which essentially limits the amount that the third party vendor can be sued for.  This provision should be removed or at minimum the third party vendor’s liability should be increased. Furthermore, many agreements contain a provision indicating that there are no warranties with respect to the service or product being offered.  

Confidential Information:

In the event the third party vendor will have access to confidential information involving your patients, HIPAA requires that you enter into a business associate agreement with the third party vendor.  As such, if applicable, you must enter into such an agreement with the third party vendor outlining how the third party vendor will protect the confidential information.  Especially with the passage of the Healthcare Reform Act, the government is taking a strong position with respect to the protection of patient information.

Assignment:

In order to ensure that the vendor cannot have another entity perform its duties it is recommended that there be a non-assignment provision added to the agreement.

Conclusion:

Third party vendors are an important part of a physician’s practice.  Prior to entering into a relationship with a third party vendor, it is important to evaluate the agreement in order to ensure that the arrangement is compliant and offers protections for the physician. To that end, it is in the best interest of the physician to have all potential relationships reviewed by a healthcare attorney since there may be serious implications as the result of such a relationship.

About the Authors:

Mathew J. Levy is a Partner of the firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has particular experience in advising health care clients with respect to contract issues, business transactions, practice formation, regulatory compliance, mergers & acquisitions, professional discipline, healthcare fraud & billing fraud, insurance carrier audits including prepay and post payment review, litigation & arbitration, and asset protection-estate planning. You can reach Mathew Levy at 516-926-3320 or email: mlevy@weisszarett.com.

Stacey Lipitz Marder is an associate at Weiss Zarett Brofman Sonnenklar & Levy, PC., with experience representing healthcare providers in connection with transactional and regulatory matters including the formation and structure of business entities, negotiating and drafting contracts and commercial real estate leases, stock and asset acquisitions and general corporate counseling.  Ms. Marder also has experience advising healthcare clients on a wide range of regulatory issues including Stark, the Anti-Kickback Statute, fraud and abuse regulations, HIPAA, reimbursement and licensing matters.


[1]Any compensation arrangement that involves the payment of fees in connection with furnishing professional medical services subject to reimbursement by Medicare or Medicaid must be compliant with the Federal anti-kickback statute.  The Federal anti-kickback statute, provides, in pertinent part:

(1) whoever knowing and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind –

(A) in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program …

shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both, unless the physician complies with one of the “Safe Harbors”. See 42 USCA §1320a-7b(1)

In addition to the criminal penalties described above, violation of the Federal anti-kickback statute can result in civil penalties and exclusion from participation in Medicare and Medicaid.  See42 USCA §1320a-7. 

[2] See New York Education Law Section 6530(19) and Section 6531 regarding fee-splitting.

Understanding The Process of Merging Your Medical Practice with A Large Mega Group or Hospital

By: Mathew J. Levy, Esq. & Stacey Lipitz Marder, Esq.
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理解诊所与大型医院的并购

Overview:

As the costs of running a medical practice increase while the reimbursement rates from third party payors decrease, many physicians are being drawn to offers from large medical groups and hospitals to take over their practices.  Although many physicians are attracted by these offers to increase their take home pay, as well as not have to deal with the day to day administrative duties of running a medical practice, physicians must weight the benefits and costs associated with entering into these relationships.  Specifically, physicians must do their due diligence with respect to the business terms, as well as have the agreements reviewed from a legal perspective.  Although these offers may seem very desirable, a more in depth analysis may result in a physician’s realization that this arrangement is not a good fit and is not as glamorous as initially presented.  Furthermore, since many medical practices are comprised of more than one physician, it is important to recognize that such offers may not be ideal for all of the members of the group.  As such, each member of the group needs to do his/her own analysis in order to ensure that such an arrangement is appropriate for his/her needs.

Autonomy:

When a physician group is taken over by a large practice or hospital, the physician group will no longer be in existence and the physicians will no longer have control regarding the operation of the practice.  For many physicians this is a positive thing, as many physicians purposely chose to pursue a medical career as opposed to a business career, and would rather devote their energy solely to patient care.   However, at the same time, physicians must recognize that they will lose autonomy with respect to the operation of their practices.  This is a major issue for many physicians as they have spent years building and developing their practices and would like to remain in control.

Compensation:

As noted above, when evaluating whether to go forward with an offer from a large medical practice or hospital, it is imperative to evaluate the offer from a business perspective.  When a large medical practice or hospital approaches a physician group, they will in almost all instances entice the physicians in the group with an increased salary based upon the fact that the large medical practice or hospital has more leverage and is in a better bargaining position to obtain higher reimbursement rates from third party payors.  Although higher reimbursement rates may be promised, the physicians need to do their own homework with respect to whether the represented reimbursement rates are indeed accurate. Specifically, physicians should obtain a copy of the large medical practice or hospital’s fee schedule for the top ten CPT codes billed in their practices. 

Additionally, many large medical practices and hospitals will offer reimbursement to the physician based upon a percentage of fees collected by the large medical practice or hospital for services personally rendered by the physician minus expenses. Physicians need to recognize that prior to joining a large medical practice or hospital, 100% of the fees collected for services rendered belonged to the physicians.  Furthermore, in many instances physicians will also be expected to pay an “administrative fee” to the large medical practice or hospital, which may be as high as a few thousand dollars a month. 

It is also important to note that in many instances the percentage paid to the physician does not include ancillary services, as well as diagnostic health services (DHS) as defined by the Stark Law, including for instance diagnostic tests and lab work.  Therefore, if a physician’s practice is heavily based on diagnostic testing, then the expected compensation may be significantly lower than the perceived compensation.  

Benefits/Buy-out:

Prior to entering into a relationship with a large medical practice or hospital, physicians must also weigh and compare the benefits being offered.  The general benefits offered through a large medical practice or hospital (ie healthcare) are generally better due to economies of scale.  However, the buy-out in the event of termination (including for retirement, death, disability, voluntary or involuntary withdrawal) are often minimal.  Physicians must recognize that if their group is structured where the physicians are paid a substantial amount of money in the event of withdrawal, they would no longer be eligible for their buy-outs pursuant to their operating/shareholders’/partnership agreement. 

Office Lease/Equipment:

When a large medical practice or hospital acquires a physician group, the physician group will likely be required to assign its office lease and equipment leases.  Although this may not initially seem like an issue, a problem arises in the event that the relationship does not work out since the agreements would have to be reassigned back to the physician group, which would require the consent of the equipment company and landlord.  Since the large medical practice or hospital will have deeper pockets so to speak compared to the physician group, the equipment company and landlord may not be so inclined to reassign the lease.  As such, in order to protect the physician group, it is our recommendation that the office lease and equipment leases be licensed to the large medical practice or hospital for a few years.  The leases would remain in the name of the physician group, and the large medical practice or hospital would pay the physician group a set fee for the use of such space and equipment based upon a fair market value analysis.  In the event the relationship is terminated, the physician group would then have the ability to continue practicing at the space and using the equipment without any issues. 

Malpractice Insurance:

Malpractice insurance is another issue that must be taken into account when determining whether to transfer a medical practice to a large medical practice or hospital.  This is especially important in the event a physician has a “claims made” policy, which only offers protection to a physician while the policy is in effect. If a “claims made” policy is discontinued, the physician would have to obtain “tail” coverage, which is very expensive.  Although the large medical practice or hospital will likely be responsible for maintaining malpractice insurance for the physician, there is a chance that a new policy will be purchased for the physician as opposed to coverage being continued. As such, physicians need to be mindful as to who will be responsible for paying for such tail coverage if such situation arises.

Restrictive Covenant:

When a physician joins a large medical practice or hospital he/she will likely be subject to a restrictive covenant which will restrict the physician from essentially competing with the large medical practice or hospital within a specified time and location following termination.  Physicians need to be aware of how their practice would be restricted should they terminate their relationship with the large medical practice or hospital, especially if the physicians were not previously subject to a restrictive covenant as per their operating documents.  Physicians also need to be careful in the event a large medical practice or hospital purchases their practice.  Specifically, physicians need to be mindful of the Anti-kickback statute as it relates to the structure of the deal, since some transactions have been deemed to be in violation of the Anti-kickback statute based upon payments made in connection with a restrictive covenant.

Conclusion:

Being presented with an offer to transfer a medical practice to a large mega group or hospital can be very exciting, however, there are many issues that need to evaluated both from a business and legal standpoint.  To that end, it is in the best interest of the physician to retain a team of professionals specializing in health care – attorneys and accountants– to ensure that the offer is appropriate and in the best interest of the physician.  Although an offer may be appropriate for some physicians, it may not be as desirable for others.  Physicians also need to recognize that if an offer seems too good to be true, it generally is.

About the Authors:

Mathew J. Levy is a Partner of the firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has particular experience in advising health care clients with respect to contract issues, business transactions, practice formation, regulatory compliance, mergers & acquisitions, professional discipline, healthcare fraud & billing fraud, insurance carrier audits including prepay and post payment review, litigation & arbitration, and asset protection-estate planning. You can reach Mathew Levy at 516-926-3320 or email: mlevy@weisszarett.com.

Stacey Lipitz Marder is an associate at Weiss Zarett Brofman Sonnenklar & Levy, PC., with experience representing healthcare providers in connection with transactional and regulatory matters including the formation and structure of business entities, negotiating and drafting contracts and commercial real estate leases, stock and asset acquisitions and general corporate counseling.  Ms. Marder also has experience advising healthcare clients on a wide range of regulatory issues including Stark, the Anti-Kickback Statute, fraud and abuse regulations, HIPAA, reimbursement and licensing matters.

Understanding Partnerships, Limited Liability Companies & Corporations

By: Mathew J. Levy, Esq.
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Opening a practice or embarking upon a new business venture can be an exciting and anxiety provoking experience.  Often professionals spend too little time considering what business structure would maximize their profit and minimize their exposure to liability.  Partnerships, limited liability companies and corporations are three of the most common types of business entities and each poses different advantages and disadvantages.

Any physician contemplating a new venture would be well advised to assess the needs of the venture and choose the structure that best suits its likely needs.  In doing so, consider how many investors will have an ownership interest in the business and the extent of their respective ownership, control, and liability.  Also, consider the time and cost associated with setting up a business entity, tax consequences, the transferability of ownership and management interest and the intended lifespan of the entity.

The Partnership

A partnership is an organization composed of two or more persons or entities that join forces for the purpose of running a business for profit.  Its owners or “partners” share the ownership and management interest of the partnership.  While a partner can freely assign her profits (ownership interest) to another, she may not assign her control (management interest) without the consent of all of the partners, unless agreed upon in writing.  Partnerships enjoy limited life and dissolve upon the death, bankruptcy or withdrawal of any partner. 

While a partnership may be formed without a written agreement, the failure to do so is a recipe for disaster.  Written partnership agreements should spell out the financial and managerial responsibilities of each partner, including the requisite capital contributions of each and how profits and losses will be apportioned.  The partnership agreement may also provide guidelines for the transfer of ownership interest and the dissolution of the business.  Despite any such agreement, New York law holds each partner liable for acts performed on behalf of the partnership by any partner or employee.  Partnership liability is unlimited and can place personal assets at risk.

Significantly, partnership income is not subject to taxation.  Rather, each partner is taxed individually for his own income.  However, by filing certain forms, a partnership can elect to be taxed like a corporation if this arrangement will create a tax savings. 

The Corporation

A corporation is a legal entity owned by one or more persons (or other business entities).  Owners are issued stock (i.e. shares of corporate ownership).  Shareholders elect directors who set corporate policy and appoint officers responsible for the actual operation of the business.  Through its officers or directors, a corporation may enter into contracts, own property, sue or be sued, pay taxes and conduct business.  Shareholders enjoy limited liability and a shareholder’s risk is generally limited to the value of his or her stock.  

Corporations have many rules associated with formation and maintenance.  A corporation must file a certificate of incorporation setting forth its name and corporate purpose.  In order to assure limited shareholder liability, corporations are required to obey a strict set of rules and maintain particular business records.  The filing of a certificate of incorporation in this state designates the secretary of state as the corporation’s agent for the receipt of legal process, such as a summons or a subpoena. 

Unlike partnerships, corporations are separate and distinct legal entities from their shareholders.  Consequentially, corporations can enjoy perpetual life and its stock may be freely transferred.  Also, corporate income is taxed twice.  A corporation is taxed on its income and its shareholders are taxed on the dividends they receive.  However, shareholders that also work for the corporation may enjoy tax free fringe benefits such as health and life insurance.  Entities known as “S” corporations are taxed like partnerships but enjoy the limited liability and other advantages of incorporation.  With some exceptions, “S” corporations cannot have more than 100 shareholders, all of which must be U.S. residents, qualifying trusts or certain tax exempt individuals.  

The LLC

A limited liability company or LLC is an entity owned by one or more natural persons or entities, known as “members” or “managers.”  It is formed by filing an article of organization with the state in conformance with the requirements of New York’s Limited Liability Company Law.  Significantly, members are not personally liable for the business debts of the company, unless specified by the articles of incorporation.  The entity may elect whether it will be treated like a corporation or a partnership for tax purposes, without being subject to the liability of a partnership or the restrictions imposed on an “S” corporation.  An LLC must adopt a written operation agreement setting forth how and by whom the company is to be managed, how ownership interests may be transferred, the obligations of the members with respect to each other and the circumstances under which it may be dissolved. 

Formation of an LLC may be expensive and technical.  New York law provides minimum requirements for a business to receive limited liability company treatment.  Like a partnership, an LLC has limited life.  The operating agreement must specify an outside date for the dissolution of the company.  Absent a contrary provision in the operating agreement, an LLC will dissolve upon the death, withdrawal or bankruptcy of a member.  Like a partnership, a member’s financial interest in the LLC is freely transferable, but her management interest is not absent the consent of the other members. 

There are many different ways to structure a business venture and the nuances of formation are rife with benefits and consequences.  As such, these considerations should first be discussed and analyzed with a knowledgeable attorney and tax advisor before going forward.  

Mathew J. Levy is a Partner of the firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has particular experience in advising health care clients with respect to contract issues, business transactions, practice formation, regulatory compliance, mergers & acquisitions, professional discipline, healthcare fraud & billing fraud, insurance carrier audits including prepay and post payment review, litigation & arbitration, and asset protection-estate planning. You can reach Mathew Levy at 516-926-3320 or email: mlevy@weisszarett.com.