By: Martin Merritt, esq.
Past President, Texas Health Lawyers Association
Past Chair, DBA Health Law Section
martin@martinmerritt.com
“Please Tell Me you Didn’t. . . How to Keep Clients Out of the Jailhouse, Poorhouse and Lawyers Out of the Nuthouse” -Blog
As you can tell, I love talking about health law issues, if you have any health law questions or better yet, need to refer a case, just call or drop me an email and I will happily talk.
“It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so. –Mark Twain
At least once a week, I have a client who isn’t a doctor, who has begun setting up an aesthetic medical clinic (weight loss, Botox & Fillers, or an IV Drip Bar). Often, they have attended a seminar where they were told, “all you need is to pay $1,500” and using special “smoke and mirrors,” they will be delivered their own bouncing baby “MedSpa, LLC.”
What could possibly go wrong? It takes a special kind of idiot to try to answer in a 600-word blog, what’s wrong with this? (including tax advice) Or, “which federal agency with three letters on a blue blazer is going to get to them first,” but here we go: (1) why does an LLC need to be a PLLC? (2) why do we elect a Subchapter S-Corp when forming a company like a MedSpa? (3) what happens if we screw this up?
Sole Proprietors, C-Corp’s, Partnerships and LLC’s. If you open a lemonade stand, you are the sole proprietor, or if you get a friend to go in with you, you are a partnership. If anyone chokes on a pip, you and your partner are both personally liable for the claim. There is no limit to your liability. This is how 23 million companies in America operate.
However, if you don’t want to be “stupid for a living,” you can limit your liability as do the 21.6 million people who have formed LLC’s and 1.7 million who operate as C-Corporations.
The formation of a “limited” liability company creates a separate legal entity from the owners. The “limited” part in a name like “Fred & Sons, Ltd.,” doesn’t mean “fancy.” It is a warning: If you do business with them, the owners of Fred & Sons, aren’t liable to pay the debts of the LLC. The reason for this is to encourage people to take risks. You get to follow your dreams, but if the business fails, the dream dies, not the dreamer. Otherwise, no one would try. This creates jobs, at a risk to creditors. Hence, the warning: “Ltd.”
Why do we elect a Subchapter S? When you form an LLC, which limits liability for debts, you still have taxes to deal with. If you don’t elect to be taxed as a Subchapter S, the LLC owner pays income tax plus FICA 15.3% payroll taxes on all of an LLC’s net income up to a maximum limit. You make $100,000, all of it is taxed with FICA.
A Subchapter S election allows the owner to split income into (1) a reasonable wage for active work by the owner, which is subject to income tax and the FICA 15.3% tax, and (2) distributions, which are subject to income tax but not subject to the 15.3% FICA tax. The idea here is that not all of an LLC’s income is due to the active labor of the owner. It is only right that you pay the FICA on your reasonable salary for active involvement but not on the part that is passive income from your investment.
Why do we put the “P” in front of “PLLC”. There is a difference between operating a lemonade stand and practicing a profession. If the company performs a professional service, in states like Texas owners are required to form a “PLLC.” If you click the wrong box and put it on your website, at a minimum, you announce to the world, “you don’t know what you are doing.” Regulators might want to take a look.
How big a screw up this is, depends. It is a “tiny no, no” if the correct type of professionals clicked the wrong “LLC” box when they should have clicked “PLLC.” At worst, they need to correct it.
A middle-sized screw up arises where the “wrong type of person” has gotten it into their heads that they can own a medical practice. In Texas (and some other states), the corporate practice of medicine doctrine (CPoM) forbids anyone who is not a doctor (or mid-level N.P.s or P.A.s) from owning a medical clinic.
If ownership is wrong, everything you do from that point forward is illegal. But, if you do everything else right, hire the correct medical personnel and haven’t killed anyone yet, the medical board doesn’t really have jurisdiction over a license a layperson owner doesn’t posses. Instead, you will likely get a “cease and desist” letter followed up by an injunctive lawsuit by the AG. Any doctor (who got paid to be a Medical director) that talked you into owning your own business named “I Can’t Believe It’s a Med Spa,” does have a license that the TMB can have fun with. And they will!
The “Unauthorized Practice of Medicine” is a big, big screw up because it is a felony. This is where nobody with a proper license evaluated the patient and ordered treatment. First, understand, “what precisely is the practice of medicine” is determined by “what goes on” inside a business, not by “what you call it.” This sometimes gets tricky, as can be seen in the United States” Supreme Court case over “teeth whitening,” in North Carolina Board of Dental Examiners v. FTC. 574 U.S. 494 (2015).
Almost all MedSpa’s (including weight loss clinics, Botox centers and injectable filler spas) would qualify as “practicing medicine.” Even though you can train a monkey to use a syringe, that’s not where the problem is. It is in the “medical judgment” that must happen before the needle goes in—in determining whether the patient is healthy enough to receive an injection of a prescription drug–that requires a medical evaluation by a doctor or at least a mid-level N.P or P.A. In this case, it is a felony both for the injector to treat a patient without a medical exam and the person “aiding and abetting” the unauthorized practice of medicine.
A set of laws somewhat “observed in the breach.” It isn’t until something goes wrong, or a complaint is filed by a competitor, disgruntled employee, (or patient who was trying to get freebie extra treatment she felt she was owed), that the Medical Board gets involved. The first sign you are doing it wrong, which is a beacon to a competitor trolling for complaints, is the “LLC” structure when it should be a PLLC. You are just asking for it. But understand, it doesn’t matter that the motive of the complaining party might be, if you get any of this wrong, you will still be just as screwed.