This is the sixth article of a multi-part series on the process of healthcare transitions prepared by Samuel N. Klewans and Michael Skerritt.
Selecting the Appropriate Purchase Entity and Purchasing/Selling Assets vs. Stock
Selection of the Appropriate Healthcare Entity
There is no agreement among attorneys and accountants as to whether a Chapter S corporation or a limited liability company is the preferred entity when purchasing the assets of a professional healthcare practice.
If you are an associate in an existing practice and are buying into that practice, you will, in all likelihood, purchase stock from the seller if it is a corporation, or membership interest from the seller if it is a limited liability company1. However, if you are not an associate in the practice, then you should form your own entity to purchase the professional practice.
Chapter S corporations and limited liability companies have their own advantages and disadvantages. However, as a purchaser you will not be at a disadvantage by choosing one over the other. S corporations cost more to set up than a limited liability company and have annual corporate minutes requirements by statute, whereas limited liability companies cost less to set up and do not have the statutorily imposed minutes requirement. However, these additional costs for corporations may be more than offset by the fact that, for an S corporation, ownership distribution does not require the owner to pay the Medicare payroll tax.
So, what do you do? We recommend that you discuss your individual situation with your attorney and/or your accountant to determine which of the two entities is best for you. From the seller’s point of view, the type of entity the purchaser selects is almost inconsequential because the seller will obtain the virtually the same amount of money either way. The ultimate question for the seller is: How will the sales proceeds be allocated between personal goodwill, furniture fixtures and equipment, and other assets?
Purchasing/Selling Assets vs. Stock Membership Interest
Regardless of the type of interest the seller owns, as a purchaser who is not currently an associate in the practice in question, the purchaser will purchase the assets of the seller’s entity, not the entity itself. If you were to purchase the entity itself, your purchase would include all of the entity’s assets as well as its liabilities. By purchasing only the seller’s assets, any liabilities attributable to the selling entity (or made by that entity after the closing), as purchaser you would have no liability or any outstanding obligations of the selling entity.
As a seller, of course, you will want to maximize capital gains as much as possible. In rare instances there may be a reason for a purchaser to purchase the stock of a corporation or the membership interest of a limited liability company, or it may simply be that the purchaser accedes to the demands of a seller. However, in most cases purchasers will purchase assets, not equity interests. As stated above, a seller can normally secure a substantial amount of the purchase price allocated to personal goodwill, giving the seller capital gains treatment.
1 In some instances an associate in an existing practice will purchase all or part of the assets of the existing practice. However, that is beyond the scope of this article.
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