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Doctor Llc Operating Agreement by zqu34709


Doctor Llc Operating Agreement document sample

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									    Do Not Lose Control
    of Your Assets
            Dangerous Assets do
            NOT mix well with safe

1/20/2011                            1
               The Ptrshp can be sued
               Each Doctor can be named
                in the suit
               A Doctor can be sued for
                an unrelated event and
                involve the GP
               Someone related to the
                Doctor can be sued, if that
                person (i.e. a spouse) has a
                joint share of Ptrshp there
                is a problem.
               YOUR GP interest is a
                Dangerous Asset

1/20/2011                                      2
            Topics of

                  What are Dangerous and
                   Safe Assets? What is a
                   Charging Order?
                  Can dangers be
                   transferred from one
                   Doctor to another?
                  Can the GP be named in
                   a lawsuit not related to
                   Ptrshp Rental business?

1/20/2011                                 3
       Dangerous Assets

               Dangerous assets are
                assets that include any
                type of significant risk.
               Rental property includes
                risks of personal injury,
                environmental problems,
                and many others.
               Gen Ptrshp is rental

1/20/2011                                   4
      Safe Assets
               Safe assets do not carry
                a significant amount of
               An example is a bank
                account, common stock
                of a NYSE company, a
                Government Bond, etc.
               You want to keep your
                safe assets and you do
                not want to feed them to
                the sharks, nor do you
                want them to be bait for a
                shark or lawsuit.

1/20/2011                                    5
            What is a
            Charging Order?

                  A charging order is the
                   method a person granted
                   a judgement against
                   someone can use to take
                   over an interest in a
                  This can be very
                   destructive if the person
                   is a GP!
               “A statutorily created means for a creditor of a
                   judgement debtor who is a partner of others
                   to reach the debtor’s beneficial interest in the
                   partnership, without risking dissolution of the

1/20/2011                                                        6
    Can dangers be
    transferred from one
    Doctor to Another?
               YES ! ---
               Within Ptrshp rental -
                Directly, only by an
                incident directly related to
                the property
               Outside Ptrshp - by an
                adverse party using what
                is called a “Charging

1/20/2011                                  7
        Can an Ptrshp GP be named in
        a lawsuit against another
        Ptrshp GP for which suit is not
        related to Ptrshp business?

                  NO - not generally
                  Can Ptrshp get involved
                   inadvertently - YES YES
                  IF one of the GP’s is
                   involved in litigation - the
                   opposing counsel can get
                   a charging order
                  This means that you may
                   have an adverse party
                   join in Ptrshp

1/20/2011                                     8
       Real Life
               Whatever can go wrong -
                will go wrong
               Plan for the worst and
                hope for the best
               Build trust/goodwill within
                Ptrshp by providing
                firewalls of protection
               Protect more of what you
                earn by building firewalls
               Protect more of what you
                earn by living modestly
                and not flaunting wealth
                like shark bait
               Lawsuits are costly and
                juries and courts award
                outrageous sums
1/20/2011                                     9
       What This Means
               A lawsuit against Ptrshp could
                literally destroy your assets
               A lawsuit against one of the
                Doctors for a premises problem
                could literally destroy your assets.
               A lawsuit against a GP for an event
                not remotely related to Ptrshp can
                involve Ptrshp because of the GP
               There might be a joint ownership
                via community property or other law
               Insurance coverage may not cover
                the entire amount of the claim
               Insurance Carriers enjoy
                disallowing claims - PLAN for it to
                happen, and hope for the best

1/20/2011                                              10
            Next Steps
                  Limit the liability at the
                   organization level
                  Limit the potential for any
                   tortuous, negligent or
                   other action of a member
                   to create an adverse
                   party as a GP or involved
                   in management decisions
                  Limit the potential for any
                   action against Ptrshp to
                   involve the Safe Assets
                   of the individual
                  Insure the losses

1/20/2011                                   11
            Consider the LLC
             Limit the Risk At The Organization Level

                Caution: The LLC Veil can be
                pierced by establishing negligence
                and other “tricks” by attorneys!

                           See the pages at the end
                            explaining the LLC
                           The LLC is like your current
                            partnership - except ALL
                            members have limited
                            liability (refer to the cautions
                            in the LLC Intro at the end)

1/20/2011                                                  12
 Make all Physicians members of the LLC and
 change how each owns the LLC

                          Keep the Safe Assets Separate !

Limit the potential for any tortuous, negligent or other action of a
member to create an adverse party as a GP or involved in management
decisions AND Limit the potential for any action against GP to
involve the Safe Assets of the individual investors/physicians

                  If the LLC membership is owned
                   by an entity that does NOT own
                   Safe Assets, the Physician has
                   segregated the Dangerous Asset
                  Segregating the Dangerous
                   Asset will help to place a firewall
                   between it and your Safe Assets
                  Having each Physician hold the
                   LLC interest in a separate entity
                   will isolate the LLC from legal
                   action against the Physician

1/20/2011                                                              13
       •Insurance is a necessity- you will
       need multi-peril and liability

       • Buy all the coverage you can afford

       • Insurance is an “open-end” cost --
       that is you are obligating yourself to
       a cost that will run “forever”, have
       price escalations,
       possible future restrictions on
       coverage, and you do not know the
       total future cost.

       • Insurance disappears the moment
       you stop paying the cost - there is no

1/20/2011                                       14
            Insurance – Continued
            Insurance Coverage Will
            Always Have Gaps - There
            Will Usually Be a Maximum
            Amount of Coverage
            Insurance Companies Do Not
            Enjoy Paying Large Claims,
            but Do Enjoy Disallowing
            Them. The Fine Print in the
            Contract Is There to
            Protect the Insurance
            Company - Not         You!

1/20/2011                               15
               “Do Not Place All Your Eggs In
               One Basket”
   The next page will explain what can happen when the
   DANGEROUS asset is owned in the same name as your safe assets
   and the DANGEROUS asset is a General Partnership.
                                            Dr A Egg Basket

    PtrShp-rental - A General Partnership
    This is a Dangerous Asset !!!             Dr B Egg Basket

                                                   Dr.C Egg Basket

                                            Dr. D Egg Basket

1/20/2011                                                            16
    This will happen

  A General Partnership is a business arrangement where
  each of you share liabilities, lawsuits against the
  partnership, etc. FURTHERMORE, ANY kind of action
  against any of you as an individual not acting in effort
  with the others can effect the other Doctors.
  FURTHERMORE, any liability, lawsuit etc. involving the
  use of the Ptrshp property will effect all the others in the
  GP. Here are some examples:

  • A person slips and injures themselves in one office.
  ALL of you will be named as defendants. If one does not
  or cannot pay, then any one or ALL of you can be left
  with the bill.

1/20/2011                                                    17
            This Will Happen Continued
            •   One of the Doctors gets stuck with a
                lawsuit and the lawsuit is more than the
                insurance coverage. The judgement
                creditor could get a charging order against
                the GP interest. This would then allow the
                plaintiff or the plaintiff’s legal counsel to
                stand in the place of a general partner. This
                could at the least be inconvenient.

            •   A spouse gets sued - the Doctor and
                therefore the other doctors might get
                involved because of the GP status and the
                fact the Doctor currently owns this as an
                individual - possibly considered community
                property. Lawsuits are numerous - usually
                the insurance will not cover the entire
                amount. Any GAP or SHORTFALL will
                come from the assets of the person/entity
                which is the defendant. I will reiterate this:

            •   Insurance may not be adequate!

            •   You must build firewalls - read on,

1/20/2011                                                   18
            The importance of shielding one self cannot be

            It may seem complex or confusing. However,
            to help simplify the analysis, list everything
            you own and whose name it is in. Make a
            separate page for each ownership. For
                 If you have a PA - that will be one page
                 If you have a Limited Family Partnership
                 – that will be a page
                 If you have a Children’s Trust for
                 equipment – that will be on a page
                 If you have a Living Trust - that MUST
                 be on the same page as your individual
                 and your spouse’s individual name (is
                 that a surprise?)

1/20/2011                                                    19
            Firewalls, continued
            If your list shows assets that are dangerous
                listed with safe assets and/or assets you
                want to keep, then there are problems.

            Here are some styles of ownership (keep in
               mind you want control and the method
               to keep control may be to put some
               assets in an entity other than your name
               - placing in another entity does not
               mean giving up control!

                •   Family Limited Partnership
                •   Child’s Trust
                •   Limited Liability Company
                •   Professional Association
                •   Limited Partnership

            These are the preferred forms - watch out
               for others.

1/20/2011                                             20
     Firewalls - continued
        Currently the sharks are in the same tank as your safe
        assets. You will probably want to keep your safe
        assets. You probably do not want to feed them to the
        sharks. (Sometimes one will make an analogy of legal
        and sharks - my pun is not intended!)

        I had an occasion to know of the conversation between
        two attorneys. One attorney was showing convincing
        evidence, facts, law and case law that the other
        attorney had absolutely no chance of winning the

        "Well, I think there is a case. At the least, I believe
        you and I can get a trial out of this!"
        In other words, the two attorneys could target
        parties that would be willing to pay legal fees. The
        two attorneys will collect their fees. Someone will
        win and someone will loose. The two attorneys do
        not care. They want the fees.
        Even if you believe you are invincible - do you
        want to be a target for those two attorneys?
        How many times have you heard stories about
        juries awarding outrageous sums of money for
        anything from personal injury to negligence?
        Make yourself look like a "Little Fish". If you look
        like you have money, someone will want it.
1/20/2011                                                         21
               Firewalls, continued
            Here is a story from an attorney:
            "We performed an asset search to look for any
              personal assets that would make the case
              worth taking on a contingency fee basis. The
              search revealed that the contractor owned a
              million dollar home with about a $600,000
              equity - several sports cars and other
              attractive assets. We took the case."
            The target was incorporated. The law firm
               convinced the court and jury the contractor
               had consented to being sued personally and
               waived any argument that he should not be
               sued as an individual. The corporation shell
               was then pierced. The next hurdle -
               overcoming the contractual limit which
               placed the limit on the liability of the target to
               the amount of the contract. The lawyer got
               around this by arguing it should not be public
               policy and is not in the interest of society to
               permit rich negligent contractors to take
               money from helpless consumers, completely
               demolish a home and claim that the liability
               should be limited to the amounts of damages
               or limited by a "limitation of damages "
            Do not give away your protection - keep your
               corporation: use the FLP, the LLC and
               Trusts, Carry the correct insurance; Keep a
               low profile; DO NOT FEED SAFE ASSETS
               TO THE SHARKS!
1/20/2011                                                      22
            One or more of the following will need to be
            completed. You will need to inform me what asset
            protection strategies you are currently using. In all
            probability the most desirable course will be to use
            more than one of the following. The first part is a
            summary of the three steps and the following show
            more detail - but is far from a complete analysis.

            1. Convert the Rental Ptrshp GP to a Rental Ptrshp LLC
            2. Form an [Dr’s Name] Investments, LLC for each physician
               to hold the Rental LLC - and other Dangerous Assets at
               the will of each physician independently.
            3. Consider Ptrshp, LLC insurance coverage AND/OR each
               member keeping policies and showing proof of insurance.

            •Consider making Ptrshp a LLC - I am in the process
            of gathering facts to determine what tax impact there
            is of changing from a GP to an LLC. A tax-free
            conversion is presumed to be a must.

1/20/2011                                                                23
            Recommendations continued

                 • Purchase a liability policy in the name of
                   the GP or LLC (depending upon which
                   form is chosen) which will cover the
                   members for personal injury, torts,
                   property management decisions and other
                   coverage recommended by other members,
                   your insurance adviser or others (do not
                   forget liens or judgements against a GP
                   can impact the Partnership)

                 • Require all physicians to keep liability
                   policies current which will cover all
                   foreseeable risks and to furnish proof of
                   coverage to the GP or LLC.

                 • Change the ownership from that of the
                   individual physicians to to a separate
                   entity. Some of you are currently using the
                   FLP. It is not advised to place this
                   Dangerous Asset into that FLP. Setup a
                   separate entity to hold the LLC. Permitted
                   LLC members can be another LLC, and
                   most other entity types.

1/20/2011                                                      24
     Converting to the LLC
                        Converting partnerships to the LLC:

            The conversion of a partnership into an LLC is
            treated as a partnership to partnership transaction
            for federal income tax purposes. The IRS has
            ruled that the conversion of general and limited
            partnerships into LLCs classified as partnerships
            for federal tax purposes does not result in a
            termination of the partnership or the closing of
            the partnership tax year. 94 No liquidation is
            deemed to occur and the LLC retains all the
            partnership elections previously made. 95 In
            addition, there is no change in the holding
            period of the member's interest in the LLC. The
            holding period in the former partnership interest
            is tacked on to the holding period of the LLC
            interest. 96

            /Footnote/ 94 Rev. Rul. 95-37, 1995-1 C.B. 130
            (relating to domestic partnerships and LLCs),
            amplifying Rev. Rul. 84-52, 1984-1 C.B. 157.
            See also PLRs 9623016, 9618021 - 9618023,
            9607006, 9525058, 9422034, 9417009,
            9415005, and 9412030.

1/20/2011                                                         25
            Law, continued

                   /Footnote/ 95 For example, the rulings
                      provide that the LLC retains the
                      method of accounting elected under
                      §446, which in these rulings was the
                      cash method. See PLRs 9535036 (LLC
                      may retain cash method; former active
                      members are not considered limited
                      partners or limited
                      entrepreneurs);9422034 (general
                      accounting partnership allowed to
                      retain cash method on LLC conversion)
                      and 9415005 (similar ruling on law
                      partnership conversion).

                   /Footnote/ 96 PLRs 9422034, 9417009,
                      9415005, and 9412030. In addition, the
                      IRS has ruled that a domestic partnership
                      converting to a domestic LLC does not
                      need to obtain a new taxpayer identification
                      number 97

1/20/2011                                                       26
                Law, Continued
            /Footnote/ 97 Rev. Rul. 95-37, 1995-1
               C.B. 130. See also PLR 9525065

            The conversion of a general partnership
               into an LLC may result in additional
               tax, however, to any general partner
               who is relieved of liability in the
               conversion process. This is because a
               reduction in a partner's liabilities is
               treated as a distribution of cash to the
               partner which will result in taxable
               income if it exceeds the partner's basis
               in the partnership interest. 98

            /Footnote/ 98 § 752(b). See McKee,
               Whitmire, and Nelson, Federal
               Taxation of Partnerships and Partners,
               (2d ed. 1990) 15.05.

1/20/2011                                                 27
             LLC General Information

The following is in response to your inquiry regarding
the formation of a limited liability company (LLC) for
your proposed new business.             The first LLC
legislation in the United States was enacted in 1977.
However, it was not until the IRS ruled in 1988
The LLC is the newest of the forms of business
entity, and as a result there are some unanswered
questions concerning its use. All states now have
enacted LLC statutes which provide that members of
an entity incorporating under that state statute will
not be personally liable for the debts of the entity.
The entity will be treated as a partnership for
federal, and generally state, tax purposes unless the
entity elects taxation as a corporation.
The biggest advantage of an LLC is its flexibility.
LLCs are hybrid entities which combine the flow-
through attributes of partnerships with the corporate
characteristic of limited liability. Therefore, like a
corporation, the LLC offers limited liability to its
members. Members of an LLC are only at risk to the
extent of their investment and cannot be sued for
actions of the LLC. The maximum amount a member
can lose is the value of his investment in the LLC.
His personal assets are protected.
1/20/2011                                                28
                 LLC, Continued

   Like general partners in a partnership, LLC
   members may participate in the management of
   the LLC.      However, unlike limited partners,
   participation in management will not cause the
   member to lose his limited liability protection.
   Unlike a corporation, an LLC is not subject to two
   levels of tax. Income or loss from the LLC flows
   from the LLC to the members and is recorded on
   the members' individual returns. The LLC
   operating agreement can provide for an allocation
   of most items of income and deduction in any
   manner in which the members see fit. The LLC is,
   however, required to file a partnership return.

1/20/2011                                               29
                       LLC, Continued

      LLCs are similar to S corporations in that they
      provide limited liability but are not subject to tax
      at the corporate level.        However, unlike S
      corporations, an LLC is not subject to any
      limitation on the number and type of members it
      may have. In addition, the one class of stock
      restrictions and the complex regulations
      governing S corporation status do not apply to
      LLCs, thereby allowing flexibility in planning
      distributions and special allocations. The LLC
      operating agreement can provide for special
      allocation of most items of income and
      An LLC is created by filing articles of
      organization with the state in which it is
      incorporating. Thus, certain filing fees will be
      incurred. Although an operating agreement is
      not required, it is an important document for
      setting forth the members' understanding of the
      procedures and formula for distributing profits
      and losses, as well as various other operational

1/20/2011                                                30
                     LLC, Continued

Generally, a domestic entity with more than one
member that is formed as an LLC, will default to
partnership entity classification and nothing is
required on the taxpayer's part to ensure such
The main drawback to forming an LLC is the limited
guidance available concerning their use. Because
they are relatively new, there is limited case law and
few IRS rulings and procedures to guide taxpayers as
to the consequences of certain transactions. Most of
the uncertainty stems from the fact that members of
an LLC are not designated as limited or general
partners as they are in a partnership. Therefore, it is
unclear how various statutes which govern the
consequences of limited partners versus general
partners apply to LLC members.
In determining whether the LLC is the best choice of
entity for operating your business, the advantages of
limited liability and pass-through treatment must be
carefully weighed against the disadvantages of the
uncertainties which exist surrounding this type of
entity. Only an overall examination of your objectives
and the requirements of your business will yield the
answer as to whether this is the best entity to use
when starting your business.
1/20/2011                                                 31
                      LLC, Continued

   A member of an LLC who is not acting as a
   manager cannot bind the LLC.

   All members of an LLC have limited liability,
   regardless of whether they actively participate in
   management of the LLC's business.
   Members, or owners, of an LLC have limited
   liability protection similar to shareholders of a
   corporation. However, it is possible to "pierce the
   corporate veil" of an LLC and hold a member
   personally liable for a LLC debt. As with
   corporations, it must be demonstrated that the LLC
   disregarded its LLC formalities to pierce the veil.
   Just as the PA, PC or any other entity is not a
   magic limitation to risk, neither is the LLC a cure
   for the disease of litigation and contingent fees.

   Bob Parrish CPA PC
   For the firm,
   By Bob Parrish CPA (drafted in late 1996)
1/20/2011                                                32

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