How to protect yourself and your practice from secondary business ventures

August 25, 2017

Before investing in or becoming associated with any outside venture, it is critical to proactively identify and limit risks

If you are thinking of investing in a secondary business venture, you should consider the potential impact it will have on you and on your medical license and practice. Before investing in or becoming associated with any outside venture, it is critical to proactively identify and limit risks and to insulate your personal assets and your medical practice. Here are four strategies to consider to help protect yourself and your livelihood.

Corporate structure

When establishing a new business or investing in one, it is important to utilize a corporate form as the business entity. Corporate forms (e.g. corporations and limited liability companies) can provide adequate protection for you, your medical practice and your personal wealth from business liabilities. While each entity has its own advantages and disadvantages (e.g. administration and corporate governance, flexibility in structure, taxes, etc.), in most situations, both business entities are treated as separate from its owners, and only the company itself will be held responsible for its actions. That protection is often referred to as the “corporate veil.” The protection of the corporate veil is not, however, absolute. Under certain circumstances, the corporate veil can be pierced and you may be held responsible for the business’ actions and any related obligations.

Insurance

You should obtain liability insurance to protect yourself. Your insurance policy will be your first line of defense from people who may look to you personally to satisfy a claim. If you are a director on a board, you should make sure that the company has secured director’s and officer’s liability insurance that will protect your personal assets in a suit against the company. Additionally, structuring contracts with protection provisions can limit your exposure to liabilities (e.g. force majeure, indemnification, limiting representations and warranties, and accurately stating the scope of services.)

 

Personal and corporate guarantees

You should avoid signing personal or corporate guarantees and seek out alternative financing methods where possible. In short, personal guarantees expose you and your personal assets (e.g. your home) and corporate guarantees expose your primary business (e.g. your practice). There is no liability protection if you default on a personal or corporate guarantee, and lenders and creditors can pursue and seize personal and/or corporate assets to satisfy the outstanding debt as well as default interest, legal costs and other fees. 

 

Due diligence

Research your potential partners, their businesses and/or the company in which you will be investing and walk away if you sense any impropriety. If the individual/company is being investigated or prosecuted for any reason, your mere association may tarnish your reputation and negatively impact your practice, or involve you in unwarranted investigations. The corporate veil protection does not apply to fraudulent behavior.