Many physicians have a strong desire to protect their PA receivables from potential future creditors. This article argues that such desire is misplaced and that exposure of PA assets to creditors is merely a "symptom" of a much larger, hidden and curable "disease."
     To begin with, Florida Statutes make it clear that a business which arranges its affairs with the intent of hindering creditors is engaging in fraud, which means the court can rearrange the debtor’s affairs and otherwise chase the money to help the creditors collect. Asset protection is all about hindering creditors. So it is very difficult to successfully argue that the financial scheme the asset protection specialist recommended was not implemented with the intent to hinder creditors. And what’s worse is that the statute of limitations does not begin to run until the scheme is discovered.
     Honest asset protection specialists admit that’s true, but assert that doing something is better than doing nothing. It all goes under the rubric of "What have you got to lose?"
     So what’s the "disease"? Simply put, it is that you see yourself as receiving income in exchange for your professional services, rather than seeing yourself as receiving income from owning a business. That distinction, it turns out, is huge.
     Think about your stockholders agreement. It probably says the PA will buy your stock on retirement for some nominal amount. So you show that value (or maybe your share of the receivables) on your personal financial statement.
     Now ask yourself how much you would earn if you went to work for someone else. Needless to say, it would be much less. That difference is what you should be thinking of as your income from being an owner. And if you think of a business as worth, say, five times earnings, well, you can quickly see that your stock is actually a very valuable asset. 

     For example, if your W-2 is $400,000, but you would only earn $200,000 if you went to work for someone else, you could view your stock as being worth $1,000,000. (Obviously, it is not that simple in a group practice).
     Once that idea settles in, you will be on your way to financial health. You’ll start wondering how the "big boys" do it, and you’ll be thinking about how to avoid leaving so much money on the table when you retire.
     But you were told that the tax consequences of buying and selling stock are a disaster because the price is not deductible. You believe it is better to lowball starting salaries and pay bonuses to the older guys than it is to buy and sell stock at high prices.
     That’s why you have a low stock price. And frankly, it’s why you think you have an asset protection problem. That’s the hidden, curable part. Because it doesn’t have to be that way.
     Imagine the quasi-religious state of nirvana you would attain if you sold your stock at a high price at the 15% capital gains rate, the buyer deducted the price against income taxed at the 35% rate, you stayed in control of both sides of the deal and there was a big lien on the assets.
     Sound too good to be true? It’s not. There are two ways to do it, and both are common arrangements with solid business reasons for entering into the transactions. (It ain’t quantum mechanics.) One is called an ESOP and the other is called a leveraged buy out. Read on…
     An ESOP is nothing more than a qualified retirement plan - which you may already have in place - except it is designed to invest primarily in the employer’s stock (instead of IBM).  A bank loan to the ESOP is secured by the corporate receivables (asset protection). The ESOP buys your stock (capital gain; the PA is converted to an Inc.) The corporation makes contributions to the ESOP (deductions), and the ESOP pays the bank. The corporate Board of Directors votes the stock owned by the ESOP (control). The stock price is high, but new physicians joining the group would not necessarily buy stock. They would earn it via the ESOP.  (In essence the corporation becomes an income tax free entity.)
     A leveraged buy-out is a seller-financed asset sale. Done properly, you get capital gains, you control the buyer and the seller, the buyer deducts the price, and the seller gets a lien to secure the installment note. The presence of the large note means that new physicians joining the group would buy stock of the buyer at a low price.
     Physician, heal thyself!

©2010 Steven M. Chamberlain. All rights reserved. Republication with attribution is permitted.