Buying practice: Use existing S-corp or create new one?

[smallbusi_ls]

Folks,

I have been incorporated as an S-corp for a few years now while working as an associate dentist. Now I would like to buy my own practice. Should I buy the practice in my existing S-corp's name or should I form a new corporation to do so? (If I use my current S-corp, I do plan to create a DBA for this practice to suit the area)

Are there any disadvantages or pitfalls to using my existing corporation as the buyer? Which way is better (or recommended) in terms of accounting, taxes, liability, financing, etc.. One thing to note is that my S-corp has pretty sizeable assets built up over the years.

Also when applying for financing at a bank, should I obtain financing in my corporation name or should I get it in my name and then assign it to the corporation?

Thanks for your inputs.

[Freelancier]

Remember that your corporation is there as a form of liability protection. If you have liability in the existing corporation that you don't want to bleed over to your new asset (the business you're buying), then keep them separate and eventually shut the original one down when you no longer need it. But if you don't see any liability bleed issues, then go ahead and use the same one.

Your best bet, though, is to talk with a small business attorney to figure out whether a separate corporation makes sense and whether your liability protection has even been maintained for your existing corporation based on the way you've been doing things.

[Adel Landman Steyn]

Separating legal entities generally mean higher costs, but are supposed to assist in decreasing liability (it doesn't always, though), especially not for professions which may by law not limit their personal liability (usually for gross negligence).

[smallbusi_ls]

Freelancier, thanks very much for the answer. I have a follow-up question:

What about cash assets that the S-corp has prior to the purchase? Is there any possibility that someone can come after them after purchasing the practice (say malpractice suit against the clinic?). Since its an S-corp and the cash in the corporation actually belongs to me (since I already paid taxes on the revenue when earned) should I take out all the cash from the corporation prior to the purchase? Or it does not matter where the cash sits?

Thanks again.


Remember that your corporation is there as a form of liability protection. If you have liability in the existing corporation that you don't want to bleed over to your new asset (the business you're buying), then keep them separate and eventually shut the original one down when you no longer need it. But if you don't see any liability bleed issues, then go ahead and use the same one.

Your best bet, though, is to talk with a small business attorney to figure out whether a separate corporation makes sense and whether your liability protection has even been maintained for your existing corporation based on the way you've been doing things.

[Freelancier]

its an S-corp and the cash in the corporation actually belongs to meThat kind of thinking is what will allow you to do something that will get your liability protections stripped. The corporation is not your personal piggy bank, it is not you. It needs to stay separate from you and operated like it's not you even if all profits from it flow into your personal income tax return.

That said: Once the corporation owns the asset, it also owns any current and future liabilities, including future malpractice claims against past behaviors. Unless you ONLY buy the assets of the company and operate it like it's a completely new business (which is why I think you need an attorney to help you structure this deal), you can't go claiming "that wasn't my company", because your company now owns everything including past goodwill AND past "badwill".

That's something else to look into: how good was their business insurances (plural!) and can you maintain the same policies going forward for continuity?

[smallbusi_ls]

Freelancier,

Thanks very much. You gave me very valuable information to think about. I appreciate it.

I am working with a business attorney for this purchase so I will bring up these points with her and make sure everything is setup correctly.

I also spoke to a dental CPA regarding these questions but they were not willing to give any suggestions on how to set this up correctly from the start. They just said I should talk to an attorney. I thought a CPA would be able to offer good suggestions on this but I guess I was wrong. Do the CPAs only do post- work like taxes and accounting? Since I have been doing my own accounting and taxes for the last few years for the S-corp using Quickbooks/TurboTax, the CPA does not seem to add any value. Do you think a CPA may be more useful after the practice purchase because things may get more complicated (due to things like remodeling, equipment, additional employees, etc..)





That kind of thinking is what will allow you to do something that will get your liability protections stripped. The corporation is not your personal piggy bank, it is not you. It needs to stay separate from you and operated like it's not you even if all profits from it flow into your personal income tax return.

That said: Once the corporation owns the asset, it also owns any current and future liabilities, including future malpractice claims against past behaviors. Unless you ONLY buy the assets of the company and operate it like it's a completely new business (which is why I think you need an attorney to help you structure this deal), you can't go claiming "that wasn't my company", because your company now owns everything including past goodwill AND past "badwill".

That's something else to look into: how good was their business insurances (plural!) and can you maintain the same policies going forward for continuity?

[Freelancier]

CPAs are bonded/insured and are many now limit their advice to things that they know for certain about tax law and stay out of the other areas. They used to be more flexible about it. My accountant wasn't even allowed to write a letter to my potential loan company telling them that she knew for certain that my business P&L statements were correct or that my past income was indeed true. So... I'm not surprised your accountant wants to restrict her advice to that which she is bonded/insured for.

Yes, if you talk to a CPA about how to set up your books, classify expenses, reduce your taxes, decide on which retirement tax codes are best for your taxes and future income, they'll be very forthcoming. That's their area of expertise and are expected to provide that information to their clients.