Beyond Flying Solo: A Guide to Options in Structuring the Practice
By Clifford Stromberg and Julie Mathews Schuetze of the Law Firm of Hogan & Hartson, Washington, D.C.

Edited by Judy E. Hall, Ph.D.
Originally published in June 1997

Return to Developing Your Professional Practice

If you are like most psychologists, you have expended enormous effort in acquiring your training and professional skills - but relatively little time pondering the legal and business structure of your practice. Often, the business context of practice "just happens". But in an increasingly volatile healthcare market, many psychologists ask what are their options, and what are the legal and business implications of choosing different structures for their practice. This Update provides an outline. It is not intended to enable you to be your own lawyer; rather, it is intended to help you be prepared to make the most of professional advice and formulate your thinking about your options.

Forms of Business Organizations

The options for organizing a psychologist's practice can be divided into two basic types -- non-ownership and ownership -- although some practice structures combine features of each. "Non-ownership" forms (e.g., contracts) provide for a looser, less "formal" affiliation with more flexibility for each practitioner, while "ownership" forms (e.g., corporations) link practitioners on a more integrated basis with a centralized management structure. However, there are many ways in which to adjust those forms so that they function almost as hybrids.

Non-Ownership "Affiliations"

Sole Proprietors Sharing Space. Often, individual psychologists affiliate with each other to share office space and services (secretarial, billing). This practice structure incorporates both ownership and non-ownership characteristics. In this common scenario, each psychologist "owns" his/her practice and operates as a sole proprietor (described below). (The sharing option also is available to psychologists who practice through sole stockholder professional corporations or sole member limited liability companies.) The psychologists do not share profits with, or assume liabilities for, other psychologists in the expense-sharing group. This option does not require each psychologist to fully integrate his or her practice with other psychologists, but allows each practitioner to take advantage of lower costs that result from sharing common operational expenses. At the same time, each psychologist has the ability to manage and control his or her own practice and to terminate the arrangement relatively easily.

A key element of a successful "space-sharing" arrangement is a written expense sharing agreement. This agreement should clearly define each psychologist's responsibility for the costs that the group will share - as well as the kinds of costs that will not be shared. In life, the unexpected in fact happens with jarring regularity. It is common for psychologists to share bookkeeping and billing services, but not to share expenses of preparing personal tax returns. But what if a large and unexpected billing problem causes a tax audit? Clarity in defining obligations is helpful.

The agreement should also define the methodology for allocating costs. Costs could be allocated based on actual usage (e.g., for photocopies or other supplies) or divided equally among the group members (e.g., the cost of leasing the photocopy machine). There are, of course, good and bad features in each method. Equal or formula-based sharing works best if the relative consumption of the resources is predictable. For example, dividing office rental costs in half is fair if both Dr. Smith and Dr. Jones have equal sized offices and work thirty five hours per week. Dividing rent 2S%-7S% may be fair if Dr. Jones only works ten hours per week and Dr. Smith works thirty five hours and sometimes has her psychological assistant use Dr. Jones' unused office. But dividing billing costs in half is not fair if Dr. Smith's practice generates four times as many bills as Dr. Jones'.

Psychologists may wish to rely on their mutual sense of "fairness" in allocating costs. ("The parties will agree on a fair percentage or they will terminate the relationship") or agree to refer the decision to an accountant or other "expert."

Less obvious is the fact that the "office sharing" agreement should address issues beyond expenses - such as the psychologists' authority to do certain things (i.e., decorating or ordering furniture, firing the accountant) and their responsibilities (such as for supervision of staff). They should assume that very little "just happens" unless the parties establish clear expectations from the start.

Psychologists who opt to practice as sole proprietors and share office expenses should be careful not to operate too much like a partnership or else they will risk being treated for legal and tax purposes as a partnership. As discussed below, it is relatively easy to be deemed a partnership, without doing more than two psychologists deciding to practice together to earn a profit. Thus, the expense-sharing sole proprietors should not refer to each other as "partners" in advertising or through casual conversation or correspondence with patients or payors. (Each sole proprietor should sign his/her own managed care contracts and other documents). Likewise, stationery should not indicate that the group is a partnership or that the psychologists are partners. Such actions could cause the group to be treated as a partnership and also could raise liability, ethics and other issues. Sole proprietor psychologists who share expenses should not share profits in fact or enter into a written profit-sharing agreement. Profit­sharing among psychologists is more suitable for other types of business organizations, such as partnerships or professional corporations.

Employment and Independent Contractor Relationships. Psychologists also have the option to practice as employees of, or independent contractors to, a psychology practice. Practicing psychology as an employee or independent contractor (without "ownership") allows the psychologist to focus on clinical practice without worrying as much about management of the practice.

To complicate matters, there is no litmus test used for all purposes (liability, taxes, etc.) to define who is an employee versus who is an independent contractor. Although non­lawyers may find it surprising, in fact, it is quite possible for someone to be treated as an independent contractor for tax purposes, but an employee for liability purposes, and either for "anti-fraud and abuse" purposes. The Internal Revenue Service has adopted a specific "20 factor test" that enumerates criteria to evaluate whether a worker is an employee or independent contractor. For anti-fraud and abuse law purposes, reference often is made to "bona fide employment relationships" without further explanation. The important point is for the psychologist to (1) consult with advisors to determine what status is best for him/her and then (2) explicitly to arrange his/her legal relationships so as to preserve that status.

A common misunderstanding is that the terminology used to describe a relationship (e.g., a written agreement stating that the psychologist is an independent contractor) will surely govern how the relationship will be treated legally. This is simply incorrect. Nomenclature will be secondary, and the actual operating relationship will be determinative.

A critical factor in determining whether an employment relationship exists is the degree of supervision and control over the psychologist exercised by the individual or entity for whom the psychologist provides services. Direct supervision customarily indicates an employment relationship, while in­dependence and discretion bespeak an independent contractor arrangement. Many factors typically suggest an employment relationship, such as paying the psychologist a "salary," providing the psychologist with office space, billing on the psychologist's behalf, requiring the psychologist to work a full work week, and providing the psychologist with insurance, support staff, and supplies. In contrast, an independent contractor tends to furnish his/her own office space, purchase-necessary supplies and insurance, conduct his/her own billing, and provide services to a client on a part-time basis so that he/she is free to serve others as well. Generally, employees are paid on a predetermined basis --- although they can receive a bonus based on productivity and financial results. Generally, an independent contractor is paid on a "piece work" or percentage of revenue basis, although this can be reduced to an hourly wage. In any event, it is important clearly to structure a relationship as either an employee or an independent contractor, to avoid unintended legal consequences.

A psychologist may notice little difference in his/her day-­to-day practice based on whether he/she practices as an employee or as an independent contractors and employees relate to taxes, benefits and malpractice liability. With respect to taxes, the entity engaging the psychologist as an employee is responsible for withholding social security, income, and unemployment taxes for the employee, while an independent contractor psychologist has the sole responsibility for ensuring that these taxes are paid. Employers usually do, and sometimes are obligated, to provide fringe benefits (such as health insurance) to employees but not to independent con­tractors.

Potential malpractice liability also is affected by the employee/independent contractor distinction. A person ordinarily is responsible for the negligent acts of his/her employees, but not for those of independent contractors. But recently, this distinction has become less important as plaintiffs have sued health care entities for negligent selection of practitioners, negligent supervision, negligent record keeping, or negligent management which apply to all practitioners they utilize.

Practicing psychology as an employee versus an independent contractor also could have ramifications with respect to federal and state anti-kickback and self-referral2 laws. Generally, unless an exception or "safe harbor," applies, these laws restrict the types of financial relationships (such as ownership interests and compensation arrangements) that certain health care providers may have with other providers if they are in a position to refer patients to, or order ancillary services from, each other. The laws usually contain broader exceptions or safe harbors for relationships among employees or members of the same legal group practice, than for those who are more loosely affiliated. Employment relationships or partnerships also allow for a greater range of permissible compensation arrangements, such as payment of incentive compensation based upon a percentage of revenues or profits.

The psychologist also should be aware of what type of corporation -- general business or professional -- seeks to engage the psychologist. Many states continue to adhere to the antiquated "corporate practice of medicine" doctrine. This doctrine prohibits a general business corporation from employing (and, in some states, engaging as independent con­tractors) physicians, or certain other licensed professionals, to provides services for the corporation. The doctrine is based on the rationale that a corporation can only act through its employees and agents, that a corporation cannot qualify to obtain a license to be a doctor or another licensed health professional, and, therefore, that a corporation acting through licensed employees or agents really is practicing without a license.

Psychologists may, however, practice their profession as employees of, or independent contractors to, a variety of health care entities (private practices, hospitals, nursing homes, HMOs). Most states carve out of the licensure laws employment for such entities, but sometimes only if they are non­profit.

Employment and independent contractor relationships may be coupled with the "ownership" relationships discussed below. For example, the professional corporation in which a psychologist is a stockholder also may (and probably will) employ the psychologist to provide services for the professional corporation.

IPA and PHO Affiliations. A combination of ownership and non-ownership affiliations with other psychologists also may be achieved through an independent practice association ("IPA") or physician-hospital organization ("PHO"). These alliances integrate a large number of practitioners (who may practice as sole proprietors or through one of the other forms of business organizations discussed below) to combine bar­gaining strength with third-party payors. Essentially, IPAs and PHOs provide a forum for payors to access a group of providers through one contracting agent, which has the authority to negotiate (and sometimes bind) its member practitioners.

With the importance today of managed care contracting, joining an IPA or PHO may be a useful step for psychologists who wish to remain autonomous in their own practice, but who need negotiating power with payors. Since the IPA/PHO affiliation is a contractual relationship, a psychologist retains relative flexibility to discontinue his/her affiliation.

Ownership of a Practice

Sole Proprietorships. A sole proprietorship is an unincorporate business and, as such, is the simplest form of conducting business. By definition, "sole proprietor" means that only one psychologist "owns" the business. Unlike the other structures discussed below, very few "formal" steps are required to begin conducting (or terminating) business as a sole proprietor or begin seeing patients. The psychologist need not file any organizational documents (such as articles of incorporation) with the state before he or she can conduct business. However, the psychologist should inquire whether there are specific business permits or licenses that the state, county, or city may require for any type of profession or business operating in that area. Additionally, if a psychologist desires to conduct his or her practice under a name other than his or her own name, some states require that the psychologist register to use a "fictitious" or "trade" name.

A principal characteristic of sole proprietorships is that the revenues from the psychologist's practice are treated as personal income to the psychologist and are taxed at the psychologist's individual income tax rate. However, the psychologist's income will not be subject to "double taxation", as is income to some corporations (see below). How­ever, some of the tax savings may be lost due to the psychologist's self-employment tax liability.

Not only do sole proprietorships offer psychologists tax benefits and simplicity of form, but they also preserve full management authority and control over the practice's operations. As a sole proprietor, the psychologist answers only to himself/herself, and does not need to obtain the agreement of other psychologists concerning practice operations.

Despite these benefits, sole proprietorships carry a substantial risk -- virtually unlimited personal liability of the sole proprietor for the obligations of the sole proprietorship. Because there is no separate legal entity distinct from the sole proprietor-owner, the assets of the sole proprietorship are treated as the owner's assets. Thus, aside from insurance coverage, the sole proprietor is personally liable for obligations of the sole proprietorship and stands to lose his/her investment in the sole proprietorship, as well as personal assets (e.g., house, automobile, savings) to satisfy liabilities and obligations (e.g., debts) incurred by the practice.

Sole proprietors may limit this personal liability some­what by purchasing malpractice, general liability, and other forms of business insurance. Nevertheless, there is always the risk that a claim will exceed coverage limits or will be excluded from coverage altogether because of any of the many exclusions in the policy. Thus, a sole proprietor cannot be certain that insurance will fully protect him or her from claims against personal assets.

Terminating business as a sole proprietor also is an easy process that does not require state filings or approval: the sole proprietor just decides to stop conducting business. Of course, the sole proprietor would be responsible for all unpaid bills and other practice obligations, and for winding up the clinical obligations of the practice in an ethical and responsible manner. Alternatively, the sole proprietor psychologist could decide to sell the practice assets to another psychology practice.

Partnerships. Commencing business as a partnership is relatively straightforward, without formal requirements of filing documents or obtaining approval from the state. Partnerships differ from sole proprietorships, however, in that at least two "persons" (typically individuals, corporations, or other types of business organizations) must form the partner­ship. A partnership is commonly defined as "an association of two or more persons to carry on as co-owners of a business for profit." This means only that at least two professionals decide to practice together and intend to make a profit; it does not require that the partnership actually earn a profit right away. A partnership practice could operate at a loss, but that does not change the fact that the practice is legally organized as a partnership.

Even though forming a partnership does not require writ­ten documentation, it is highly recommended that the partners enter into a written partnership agreement, a private document that does not need to be filed with the state. It should describe each partner's rights and responsibilities. If there is no partnership agreement, a state's partnership laws define the partners' relationship. These laws set forth certain "default" rules that would decide (since there is no written agreement), how the partners will share profits, make decisions concerning the partnership's operations, and handle disputes, as well as what events cause termination of the partnership. But it is almost always wise to have a written partnership agreement so that the partners may tailor their specific relationship to suit their needs, as well as to guard against the impact of future unknown or undesirable changes in state partnership laws.

Partnerships are characterized either as general partnerships or as limited partnerships. All partnerships are subject to "pass-through" tax treatment meaning that unlike a corporation (which is a separate taxable legal entity), a partnership is not separately taxed. Therefore, all income or loss is passed through to the personal tax return of each partner. Another way to say this is that in a partnership, there is only one level of taxation -at the individual partner level. In a corporation, profits are taxed twice - first as corporate net income, and then again when the profits are distributed as dividends and received as personal income by the stockholders.

In general partnerships, each partner is a general partner and, as such, has unlimited liability for the obligations of the partnership. Often, one general partner is designated to manage the partnership and bind the partnership. But unless a partnership agreement provides otherwise, each general partner may bind the partnership, which can lead to operational problems (such as who can hire or fire staff, or sign contracts). Thus, the partners should discuss which partner will have responsibility for the different management aspects of the practice, and describe the division of management duties in the partnership agreement.

In limited partnerships, there are limited partners and at least one general partner. The general partner's) manage the partnership's business and have unlimited personal liability in the same manner as if they were general partners of a general­partnership. The limited partners are essentially investors whose liability is limited to the amount of their financial investment in the limited partnership. Limited partners forfeit their limited liability, however, if they participate in any significant way in the management of the practice. As a practical matter, limited partnerships are not feasible practice structures for professionals, because many state laws prohibit professionals from forming limited partnerships. (The theory behind this prohibition is that professionals should be responsible for their practice.) Furthermore, it is not practical to form a professional limited partnership because the limited partners cannot actively participate in the practice's management.

Typically, under state partnership laws, both general partnerships and limited partnerships dissolve automatically when a partner withdraws or dies. Partners may agree in the partnership agreement, however, that the partnership will continue despite such an event unless the remaining partners agree to dissolve the partnership. Similarly, partnership interests generally are not transferable to other people, and transfer (or attempted transfer) of a partnership interest dissolves the partnership.

Partnerships, like sole proprietorships, can sell their assets to another person or business organization. In some states, partnership laws provide that a sale of substantially all of the partnership's assets constitutes dissolution of the partnership.  As with most general rules governing partnerships, the partners can "contract around" this rule in the partnership agreement.

Corporations. The corporation, and for professionals such as psychologists, the professional corporation (some­times called a "professional association"), is the paradigm form of business organization. It offers psychologists many benefits that often outweigh its disadvantages.

A professional corporation, like a general corporation, is a legal entity that is distinct from the stockholders. To organize a professional corporation, the "organizers" must file articles of incorporation with the state and obtain the state's approval to conduct business. State law will indicate what information the articles need to include. It is important to stress that in order to maintain the legal status of the corporation and the insulation from liability it provides for the shareholders, a professional corporation must in fact perform corporate formalities, such as holding stockholder and board of directors meetings, adopting bylaws, and issuing shares of stock in exchange for something of value (i.e., "consideration"). If these requirements are ignored and it is operated simply from the "hip pocket" of the key shareholder, the corporate protection may be lost.

A professional corporation's stockholders, unlike stock­holders in a general corporation, may be only licensed professionals. In addition, with few exceptions (e.g., Maryland), the stockholders must be licensed to practice their profession in the state in which the professional corporation conducts business. Most professional corporation statutes, including those in New York and Florida, also require that all stockholders in a professional corporation practice within a single profession or be authorized to provide the same professional service. With the exception of a few states (e.g., CA), a psychologist and a physician may not both own stock in the same professional corporation. In an era of growing interdisciplinary practice, this restriction may seem antiquated, but it remains in the law. The theory underlying it is that if different professions subject to different licensing statutes were combined in one corporation, it would be unclear whether the corporation itself would be held responsible for fulfilling the duty of care applicable to doctors, or psychologists, or social workers, for example. Similarly, many states require that a professional corporation's directors and at least some of its officers be licensed in the same profession as the corporation's stockholders. However, a professional corporation still may employ, or engage as independent contractors, individuals who hold other professional licenses (e.g., nurses).

Articles of incorporation and bylaws define a professional corporation's governance structure and certain operational issues. These documents generally set forth when stockholder and director meetings will take place, notice, quorum and voting requirements for those meetings, and descriptions of the professional corporation's officers and their responsibilities.  Articles of incorporation are filed with the state and, thus, become public documents. Bylaws do not need to be filed with the state and tend to contain more specific details concerning how the professional corporation will operate.

In addition, stockholders in a professional corporation often enter into a stockholders agreement. A stockholders agreement, like bylaws, is a private document that need not be filed with the state. This agreement specifies restrictions concerning who may own stock (i.e., only a licensed psychologist), what happens when a stockholder dies or loses his/her license, and how a stockholder may transfer his/her ownership in the professional corporation. In many cases, stockholders agreements require all stockholders to consent to one stockholder's sale of his/her stock in the professional corporation (to prevent transfer to an unwelcome, new member).

The main benefit of the corporate form is limited personal liability of the corporation 's stockholders for claims against the corporation. Generally, corporate stockholders are not responsible for the corporation's obligations. If the corporation defaults on those obligations, only the corporation's assets -not the personal assets of the stockholders -would be used to satisfy claims against the corporation. In this case, stockholders stand to lose only the amount of their investment in the corporation (i.e., the amount that the stockholders paid in exchange for their stock); the stockholders' personal assets (house, car, savings account) are not at risk.

It is essential to be aware, however, that in most states a professional corporation's stockholders (as well as agents and employees) remain personally liable (to the extent not covered by malpractice insurance) for their own negligent or wrongful acts or misconduct, as well as for the malpractice of other employees or supervisees whom the psychologist personally supervises. In this way, stockholders' personal liability is only partially limited. As a matter of public policy, states thought it imprudent to permit professionals to rely upon the corporate form to protect themselves from negligence claims but not if their own conduct gave rise to the claim. However, the corporate form does protect them from liability for the conduct of the corporation's other professional stockholders and employees.

It is also important to obtaining this protection of the corporate form to advise the public (i.e., patients) that the psychologist is practicing his/her profession through a professional corporation. Psychologists should be careful to use the full "official" corporate name of the professional corporation. For instance, advertisements and stationery should refer to "Jane Smith, Ph.D. & John Doe, Ph.D., P.A." rather than only "Jane Smith, Ph.D." As a related matter, some states require that professional corporations obtain approval from a professional licensing board prior to operating under any name (i.e., a fictitious or trade name) not containing the surname of one or more of the corporation's stockholders.  Psychologists operating under the name "Psychology Associates of Centreville" thus would need to seek state approval. Often, the state still requires that a professional corporation's fictitious/trade name contain designation as to professional corporation status such as "P.A." or "P.C." (e.g., "Psychology Associates of Centreville, P.C.").

As noted above, operating your psychology practice as a professional corporation also results in the "double taxation" problem that is characteristic of corporations. When the professional corporation earns revenue through the psychologists' treatment of patients, the corporation is taxed on that revenue (at a corporate income tax rate which could be higher than personal income tax rates). Also, when the professional corporation distributes the professional corporation's revenue to its stockholders as dividends, the stockholders again are taxed on the revenue (this time at the stockholders' personal income tax rate).

However, practices also may enjoy the corporate form's benefits by electing "S corporation" status under the Internal Revenue Code. Tax differences distinguish between S corporations, which are pass-through tax entities like partnerships, and "C corporations," which are subject to the double tax dilemma. The Internal Revenue Code places certain restrictions on S corporations -- for example, S corporations may have no more than 35 stockholders and may have only one class of stock (although this stock may have different voting rights) -- but allows S corporation revenues to be taxed at the personal income tax rate of the corporation's stockholders. Organizing an S corporation requires the same steps as forming a C corporation, with one additional filing with the Internal Revenue Service to opt for ("elect") S corporation status.

Other benefits of a corporate form are that the corporation does not need to be reformed (and have documents prepared) every time a shareholder leaves or joins-which is required in a partnership. Another advantage is the ease of transferring a stockholder's interest in a professional corporation. Once formed by filing articles of incorporation with the state, corporations exist in perpetuity until dissolved by filing articles of dissolution with the state. Thus, a psychology practice organized as a professional corporation may endure even if the psychologist who originally founded the practice has retired or moved to another geographic area.

A professional corporation's longevity also results from the ease with which ownership in the corporation may be transferred to a new owner. Transferring a psychologist's ownership interest in a professional corporation is accomplished simply by transferring stock. Of course, the stock­holder who desires to transfer his or her stock needs to satisfy any requirements in a stockholders agreement or under state law, such as transferring the stock only to another licensed psychologist.

Limited Liability Companies/Partnerships. Limited liability companies and professional limited liability companies (collectively, "LLCs") are hybrid legal entities that possess characteristics of both partnerships and corporations. Close cousins to LLCs are limited liability partnerships and professional limited liability partnerships (collectively "LLPs").3 In recent years, these types of business organizations have offered health care professionals, including psychologists, new ways to organize their practice that present greater flexibility than professional corporations.

The LLC provides a vehicle for psychologists to take advantage of the best features of both corporations and partnerships. An LLC's owners -- called its members -- like a professional corporation's stockholders, have limited personal liability for the LLC's debts and other liabilities, provided that the members operate the LLC as required. As with professional corporations, members are responsible (to the extent not covered by insurance) for their own malpractice and the malpractice of those professionals under their personal supervision. Moreover, management of an LLC is more flexible than management of a professional corporation: an LLC may be managed by its members or a board of managers similar to a board of directors. This permits hired professionals business managers or financial people to be in board positions if desired.

For tax purposes, an LLC may elect to be treated as a partnership, so that the LLC's members may benefit from pass-through tax treatment and avoid the double taxation of corporations. With respect to federal taxation, the Internal Revenue Service recently adopted the position that any LLC that elects partnership tax treatment will be taxed as a partnership. The new federal tax rules also provide that LLCs with two or more members automatically will be taxed as partner­ships, unless the majority request to be taxed as corporation. Previously, the Internal Revenue Service treated an LLC as a corporation for tax purposes, regardless of whether the LLC wanted to be taxed as a partnership, if it possessed three or more of the following four "corporate" attributes, (1) continuity of life; (2) centralization of management; (3) limited Liability of the members; and (4) free transferability of owner­ship interests. Often, LLCs simply would include provisions in their organizational documents to limit the LLC's existence to thirty years and to restrict the member's ability to transfer their membership interests to the LLC. Despite the change in federal law, some states still may follow the four factor test noted above; therefore, psychologists desiring to form LLCs should consult with an attorney or an accountant to determine the tax rules for LLCs followed by the state in which the LLC wishes to conduct business.

Forming an LLC is largely the same as forming a professional corporation; articles of organization (as opposed to articles of incorporation) must be filed with and approved by the state. Instead of bylaws, an LLC's members enter into an operating agreement, which is a private contract similar to a partnership agreement. Like state partnership laws, state LLC laws set forth the rules that will govern the LLC's operations unless there is an agreement to the contrary. It is recommended that psychologists forming an LLC enter into a detailed operating agreement to delineate each member's rights and responsibilities.

Organizing a psychology practice as an LLC may avoid the limitation in most states that all members of a professional corporation must belong to a single profession. For example, in Maryland, orthopaedic physicians and physical therapists are forming LLCs comprised of members of both professions; Maryland law prohibits two types of professionals from owning stock in a professional corporation, but permits it for LLC ownership.

Membership interests in an LLC generally are considered personal property that the member may transfer to a third party in the manner set forth in the operating agreement. Often, members include a provision in the operating agreement that requires consent to the transfer by all of the LLC's members. This is, naturally, to prevent the members from waking up one morning to find that a colleague has sold his/her interest to a professional with whom they would not feel comfortable practicing. Additionally, any restrictions under state law or the operating agreement concerning who may hold the membership interest (e.g., only a licensed psychologist) need to be satisfied before the transfer may lawfully occur.

Dissolving an LLC must satisfy both partnership and corporation-type rules. Just as a professional corporation and an LLC are formed by filing organizational documents with the state, these entities both are dissolved by filing articles of dissolution with the state. Certain events listed in the operating agreement or state law -- such as death, retirement, resignation, or bankruptcy of member, or reaching the expiration date of the LLC's "life" -- could trigger an obligation for the members to dissolve the LLC.

Some states, however, do not permit professionals to establish practices as LLCs. Such states generally rely upon the same public policy rationale discussed above with respect to professional corporations -- by operating their practice as an LLC, professionals should not be allowed to enjoy limited liability for their own malpractice, or the malpractice of those professionals that they personally supervise. This has lead to the creation of LLPs and/or PLLPs.

LLPs are a hybrid of LLCs and limited partnerships. Like members of LLCs and limited partners, an LLP's partners all enjoy personal limited liability, except in the malpractice context. Partners of an LLP, however, may participate in managing the LLP without losing their personal liability limitation. Moreover, an LLP is considered a partnership for tax purposes, thus giving an LLP's partners pass-through tax benefits.

Forming an LLP is similar to forming a general partnership and forming a professional corporation or LLC -- the partners should enter into a partnership agreement and must file a registration statement with the state. State LLP laws prescribe how to govern the LLP's operations, including how to transfer partnership interests.

Key Features to Consider in Choosing a Type of Practice

As you can see, psychologists have a wide range of alternatives from which to choose in structuring their practice. Often, more than one form of business organization will suit the psychologist's overall needs. It may be, however, that one type of business entity possesses a specific trait that is important to a given psychologist while not to another. Many factors can affect the choice, including financial ambition (e.g., do you want to be a sole stockholder and just employ others as salaried employees); choice of colleagues (e.g., experienced peers, or more junior); nature of practice (e.g., high risk counseling of dangerous patients or low risk occupational counseling); and so on. In general, risk-averse psychologists probably would prefer business organizations that offer limited personal liability, such as professional corporations or limited liability companies, rather than sole proprietorships. Therefore, in selecting the best option for organizing their psychology practice, psychologists should identify the features that they care most about from a business as well as practice culture standpoint. Carefully assessing your expectations ahead of time can prevent later disappointment.

Who's the Boss? Management and control features of business organizations range from complete autonomy in decision-making (sole proprietorship, sole stockholder professional corporation), to acceptance of supervision and control by the entity for which the psychologist provides services (employment relationship), to governance by democracy (professional corporation with many stockholders that acts through its board of directors). Thus, gauging the amount of control the psychologist wishes to exercise over decisions affecting his/her practice is an important factor in choosing a practice form.

Those psychologists who prefer greater authority to direct their practice should naturally consider operating as a sole proprietor, rather than as an employee of another individual or entity. An employee psychologist gives up authority to direct some aspects of his/her own practice -- for example, setting work hours or scheduling vacations. As a sole proprietor, the psychologist is his/her own boss and, thus, has full control concerning how to operate his/her practice. The psychologist still may retain most of this authority by practicing as a sole proprietor who has an expense-sharing arrangement with other sole proprietor psychologists. The cost-savings generated by such an arrangement may outweigh loss of some autonomy over practice support services.

Depending upon the number of member psychologists, a professional corporation provides a vehicle for centralized management and control. Many states (e.g., Illinois) allow a professional corporation to have only one stockholder and one director. Thus, a single psychologist may take advantage of the corporate form and still be his/her own boss. As discussed above, however, the psychologist still must operate the practice as a professional corporation and adhere to corporate formalities. Running a practice organized as a professional corporation as if it were a sole proprietorship (e.g., by advertising without using the corporate "P.A." or "P.C." distinction) could lead to loss of corporate protections and unlimited personal liability for the psychologist stockholder.

Moreover, some states (e.g., New York) allow one person to organize, manage, and be a member of a limited liability company or professional limited liability company. Consequently, for those psychologists who prefer the organizational and operational flexibility of an LLC, an LLC may provide for a better "centralized management" option than a professional corporation, because both provide for limited personal liability, but the LLC avoids having two levels of taxation.

Financial Risk, Naturally, having partners or other corporate shareholders spreads the risk of raising initial funds to establish a practice, and the risk of operating losses or sub optimal income. But it may also result in cross-subsidization of less productive colleagues in good times.

Taxes. A solo practitioner psychologist may not wish to incur double taxation by practicing through a professional corporation rather than practicing as a sole proprietor. Several psychologists practicing together and sharing employees might decide to withstand the greater tax liability of a professional corporation in exchange for greater assurance of limited personal liability, or to utilize the LLP form. These factors must always be balanced.

Liability. Limiting personal liability for claims is an especially important factor to consider when deciding how to structure your psychology practice. As all health professionals are acutely aware, we live in a litigious society where plaintiffs sue frequently, and seek the deepest pocket available. A psychologist's favorite patient today may be his/her nightmare plaintiff tomorrow.

Usually liability is not a big concern for employees of a practice, or of a hospital or other institution. Liability is covered by insurance or corporate indemnity. However, employees should carefully review employee policies. It may well be that there are relevant exclusions. For example, protection might not apply if the psychologist is found to have engaged in unethical conduct (e.g., a dual relationship) or to have performed outside the scope of his/her duties (e.g., seeing private patients in her hospital office after hours). For psychologists who do not find the employment option attractive, LLCs and professional corporations provide relatively strong personal liability limitations, except for personal misconduct.

Number of Psychologists in the Practice. The practice "structure that a psychologist chooses also may be affected by the projected number of practitioners with whom the psychologist wishes to practice. If the practice is to be comprised of many practitioners, some legal forms may prove unmanageable. From a practical, operational perspective, a large number of psychologists may find it more difficult to practice as sole proprietors sharing space or as a partnership, than practicing through a professional corporation or an LLC, which can be efficiently managed by a board of directors or managers.

Moving From Solo Practice to Group Practice – Practical Considerations

Once the psychologist decides to go beyond solo practice and affiliate with a group of psychologists, in whatever fashion, he or she must contemplate the "nuts and bolts" aspects of that affiliation. What must be done to consummate the relationship and plan for the future? Here is a brief outline.

The Written Agreement. Aside from inter-professional compatibility and aligned interests, the most important element of a transaction is the written agreement. It is a rare circumstance where two people have a complex conversation, and there is not some miscommunication between them.

Reducing an oral understanding to a clear, written document is the best way to avoid future conflicts. Employment contract, operating agreement, stock purchase agreement, merger agreement, expense-sharing agreement, or partnership agreement -- these written documents will provide the foundation for the relationship between the parties. While no two employment agreements or merger agreements are exactly the same, there are some general concepts common to most agreements.

For example, an employment agreement between a psychologist and a hospital would set forth the psychologist's specific tasks, scope of responsibility, reporting relationships, and process for advancement, as well as the salary and benefits that the hospital will pay the psychologist. Similarly, for asset purchases, it is important for the agreement to specify what assets the seller is selling, what is excluded, what liabilities (e.g., debts, contracts) the buyer is assuming, whether there are non-competition obligations, what happens to accounts receivable, and so on.

More subtle issues, such as dispute resolution procedures, termination rights, and non-compete restrictions, also should be addressed in the written agreement. Although it seems rather pessimistic to negotiate these terms at the beginning of what both parties may hope to be a long, mutually beneficial relationship, the beginning actually is the best time to discuss these issues. At this time, the parties are more likely to be objective about controversial topics, rather than viewing them through the distorted lens of a specific dispute.

Structuring the Initial Transaction. As discussed in the first section of this Update, the "ownership" affiliations of a psychology practice, can be accomplished in several ways. For the most part, the transaction's structure will depend upon whether the psychologist seeks to join an established practice or whether a group of psychologists seeks to unite to form a new practice. Additionally, it will be relevant whether the psychologist already has his/her own practice or is just beginning to practice psychology. This general description of transaction structures is no substitute, however, for consulting an accountant and attorney to analyze what type of transaction best suits your practice.

Psychologists with an established psychology practice who wish to "sell" that practice essentially have two options to consider: a sale of assets or a transfer of stock, the latter of which may be accomplished by a variety of means. The asset sale option is available whether the psychology practice operates as a professional corporation, LLC, LLP, or partnership, and is the only option available for sole proprietorships (since there is no "stock" to sell). While owners of LLCs, LLPs and partnerships may elect to transfer their ownership interest in such organizations, often buyers of practices organized as LLCs, LLPs, and partnerships prefer entering into an asset deal instead. Although it is beyond the scope of this Update to describe in detail asset deals and stock deals, the following paragraphs illustrate generally the characteristics of these two transactions.

Asset sales provide an attractive option to buyers because the buyer purchases only hard assets (e.g., equipment) and liabilities that the buyer chooses to assume. In contrast, in a stock deal, all liabilities go with the sale. Thus, the buyer may be assuming unknown or undesired liabilities. There are some legal ways to limit, but not eliminate, this risk. Some sellers dislike asset deals because the purchase price may be slightly lower than in a stock deal. Typically, an asset's value depreciates over time and, thus, it is difficult to attribute a high value to the book value of practice assets. For this reason, the purchase price in an asset deal often contains a payment for “goodwill," which represents the value of the practice's relationship with other members of the health care community (patients, payors, practitioners). Some sellers disfavor asset sales because they likely will pay more tax on the proceeds of the asset sale than the proceeds of a stock deal, due to complex tax issues that are beyond the scope of this paper.

Unlike an asset deal, "stock" type transactions (which, for the purposes of this Update include purchasing a non-stock ownership interest in a partnership, LLC, or LLP) involve acquiring both assets and all liabilities of a practice. Such transactions can occur when employees mature into meriting an ownership interest or after one psychologist buys out the practice of a retiring colleague. These types of transactions involve exchanging stock for something of value such as cash, property or an interest in a large practice entity. For instance, a psychologist stockholder of a professional corporation may sell her stock in that professional corporation by merging the professional corporation into another professional corporation or by accepting cash for the stock's value. The difference between these two options is that with a merger, the selling stockholder still will have an ownership interest in another (larger) professional corporation, while with a cash-for-stock sale, the selling stockholder ends up with cash but no ownership interest in a practice.

Limiting Liability. In all the types of transactions discussed above, buyers and sellers and employers and employees worry about limiting their responsibility for the other party's acts prior to the transaction's effective date. As discussed above, one way to limit the purchaser's liability is to structure the transaction as an asset deal instead of a stock deal. There are additional ways, however, to limit somewhat the potential liability.

The "due diligence" process is one such way. Parties to a transaction involving the sale of a psychology practice often conduct "due diligence," a formal review of financials, records and legal factors affecting the other practice - with the other party's cooperation and under a written confidentiality agreement. This may seem odd to psychologists, but it is a routine in the commercial transaction world. The due diligence process, usually conducted by accountants and attorneys, involves analyzing the practice's business by reviewing documents (such as articles, bylaws, leases, managed care contracts, and licenses) and interviewing key personnel. To purchase a car, you would look at the car, drive the car, and kick the tires to make sure that you actually are buying a functioning automobile. Similarly, purchasers of a business want to ensure that the business does not have some substantial problem (e.g., a multi-million dollar lawsuit) for which the purchaser could be liable, or which could impair the ongoing "goodwill" value of the practice. In fact, it generally is a condition to closing most transactions that each side have sufficient opportunity to conduct, and be satisfied with the outcome of, due diligence.

If, during the due diligence process, one party discovers or suspects a potential liability with the other, the parties can allocate risk for the liability in the transaction's written agreement. This may be accomplished by including indemnification provisions (where the seller remains liable to "make good" the costs of specified events if they occur), as well as representations and warranties (i.e., promises that certain facts are true), in the agreement.

In an indemnification (hold harmless) provision, one party (the "indemnitor") agrees to compensate the other (the "indemnitee") for certain damages or losses that the indemnitee suffers as a result of the indemnitor's acts. These acts usually include a breach of the agreement by the indemnitor and negligent acts by the indemnitor, as well as its agents and employees. Frequently, indemnification provisions contain a "basket," a dollar figure that must be reached before the indemnitor's indemnification obligation is triggered. By including a basket, the indemnitee essentially takes the view that it will accept the risk for claims below or equal to but not above - a specific dollar amount. An indemnification provision also generally includes an obligation to notify the indemnitor in writing if the indemnitee becomes aware of potential claims that could give rise to indemnification.

Besides indemnification provisions, most agreements contain representations and warranties of each party to the agreement. In these, each party promises to the other that certain facts are true. For example, the psychologist would represent and warrant that he is not subject to any pending, actual, or threatened action for recovery of fees by third party payors. A professional corporation purchasing the psychologist's practice would represent and warrant that it is validly existing and in good standing in the jurisdiction in which the professional corporation conducts business. Breach of a representation and warranty leads to indemnification.

Anti-Fraud and Abuse Laws.  The "anti-fraud and abuse laws" include federal laws (the "anti-kickback law" and the "Stark" law, 42 U.S.C. §§ 1320a-7b(b) and 1395nn) as well as state laws which restrict (a) compensation, ownership and other financial arrangements between parties that may result' in payments to induce, or as compensation for, referrals of patients or (b) financial arrangements between parties who refer patients. These laws are complex, contain several statutory exceptions and "safe harbors", and are beyond the scope of this Update. However, several generalizations may be helpful to bear in mind: (I) compensation arrangements may be more freely structured among employees or members of a bona fide group practice, than among independent contractors or those who are loosely affiliated in some "group"; (2) purchases of practices will have finite limits on compensation that can be paid, which should be fair market value, determined largely prior to closing, and not reflecting the actual rate of future referrals; and (3) prohibited conduct under these federal laws is different than what is understood and enforced as impermissible "fee splitting" under state laws (Handbook § 4.14).

Ethical Constraints on the Deal. While the marketplace may permit all sorts of transactions and terms to be negotiated, ethics rules governing psychology may limit the terms that are permissible. For example, the American Psychological Association's Ethical Principles of Psychologists and Code of. Conduct ("the Ethics Code") which has in effect been incorporated into the licensure laws of most states, contains many provisions which affect the permissible structure of professional practice relationships. For example:

• Standard 1.22 requires that psychologists only delegate to “employees or supervisees" those "responsibilities that such person could reasonably be expected to perform competently."

• Standard 1.27 requires that division of fees be based on the services provided and "not based on the referral itself."

• Standard 3 requires, among other things, that psychologists not misrepresent their relationships with other professionals.

• Standard 4.01(b) requires that supervisory relationships be disclosed to patients.

• Standard 4.09 requires that upon termination of a patient, the psychologist take "reasonable steps to facilitate transfer of responsibility to another provider if the patient or client needs one immediately."

• Standard 5.04 contains requirements for maintaining records.

• Standard 5.10 states that "recognizing that ownership of records and data is governed by legal principals, psychologists take reasonable and lawful steps so that records and data remain available to the extent needed to serve the best interests of the patient or others." This could make it improper, for example, to enforce a legal provision denying access to records by a formerly-employed therapist if the therapist desires the records to serve a patient who needs immediate therapy.

Ensuring a Smooth Transition. Naturally, affiliating with another psychologist or psychology practice -- in what­ever fashion -- will disrupt the psychologist's current practice to some extent. To minimize this disruption, and ensure that any legal requirements are satisfied, psychologists should be aware of certain issues.

Continuity of patient care is a priority. Every day, patients learn about health care practitioners who sell their practices or change affiliations. Patients wonder: Will I still be helped? Will I have to travel farther for my appointments? Will this change affect my insurance coverage? The psychologist must reassure them.

Communication is crucial in allaying patient fears. Once the psychologist is relatively certain that he or she will enter into an affiliation transaction (e.g., become a hospital employee or join a new group practice), he/she should announce this change to his/her patients. As a first step, the psychologist could send a letter to his/her patients explaining the psychologist’s new affiliation and assuring patients that the change will not erode services to them. (This encouragement to continue with the practice may be one of the “deliverables” that is required when selling a practice to another.) After the patients receive this letter, the psychologist might post a sign in his or her office to remind patients when the change will be effective.  State professional licensing laws sometimes require that psychologists notify (e.g. by letter, newspaper advertisement, posted sign) their patients about the sale of a practice or change in name.

State law may include requirements relating to transferring patient records to the psychologist's new practice. Many states have adopted medical record confidentiality restrictions that affect access to such records by psychologists who practice with, or by employees of, the psychologist's new practice. In addition, states often stipulate a minimum length of time that health care providers must retain their records. Just because a patient does not follow the psychologist to his/ her new practice does not mean that the psychologist can destroy records. Arrangements must be made for maintenance of the records at an appropriate site in light of contractual agreements and state law.

In addition to patients, the psychologist's employees -­secretaries, billing clerks -- also will be affected by the psychologist's affiliation with other providers. Staff members often know about the proposed transaction (from phone calls and faxes) long before either party has decided to proceed. Frequently, psychologists will confide in staff members and "keep them in the loop" about general issues related to the affiliation to maintain a good atmosphere in the office and to calm fears that they may lose their jobs. More­over, telling staff members may be beneficial to the psychologist because the psychologist may rely on the staff to handle tasks related to the transaction (e.g., resolving billing issues with patients). However, you should be circumspect about what "promises" are made to employees. A psychologist should not say "I' m sure the practice will want to keep you on" if he/she will be unable to fulfill this promise. Likewise, efforts to "bad mouth" the practice one is leaving, or to solicit employees to leave, could create legal liability.

A psychologist who changes practice settings or structures also should review his/her existing contracts (including real and personal property leases, managed care and indemnity payor contracts, and insurance coverages) to make sure that they are fully transferable or assignable to the psychologist's new practice, or that the psychologist may terminate those contracts upon the effective date of the psychologist's new affiliation, or that the new affiliation does not result in a breach of the contract for which the provider is responsible.

Contracts with third-party payors often have provisions triggering a responsibility of the psychologist to give the payor notice or changes in practice structure. Often, these agreements state that the psychologist may not assign (transfer) the contract to a third party (e.g., the psychologist's newly formed professional corporation) without the payor's prior written consent. Sometimes, managed care or indemnity contracts provide that a "change of control" or a "change of ownership" -- such as if the professional corporation merges with another, or the owners of a certain percentage (often 50%) of stock change -- will terminate the contract. Thus, the psychologist should contact the payor as soon as practicable to obtain the payor's consent to assign the contract to the psychologist's new practice, or to have the payor waive the contract's breach. Frequently, payors are willing to consent, especially if the psychologist's new practice already has a contract with the payor. In addition, health care providers often will affiliate with anew practice but keep payor contracts in their individual name, thus not requiring assignment of the contract. Nevertheless, it is important to review payor contracts for events that could trigger the payor's right to receive notice of a certain event, such as a change in the provider's address, phone number, or practice name.

Termination of Relationship, As mentioned in an earlier section of this Update, it is important for the parties to discuss each party's rights to terminate their relationship, including the process for effecting such termination, as well as the “penalties" (financial or otherwise) for such termination.

Termination Rights. There are two basic types of contract termination: "without cause" termination and "for cause" termination.

Without cause termination provisions allow a party to terminate the relationship, usually upon a certain number of days prior written notice to the other party, for any reason or for no reason at all (which really means that you have a reason, but would rather not formally express it). For those psychologists who seek some long term security in a relationship, it would be wise to negotiate an agreement that does not contain a without cause termination right. Conversely, psychologists who may be ambivalent about a deal may wish to include such a termination right for themselves. It is important to remember, however, that rarely does an agreement have a one-sided without cause termination right -- that is, for the sake of fairness, both sides to a transaction would usually have such a right. Therefore, if a psychologist wishes to have a right to terminate a relationship without cause, she should be prepared also to give the other side that right.

"With cause" termination provisions specify particular conditions that give rise to a party's right to terminate the agreement. The most obvious condition is if one party defaults or breaches its key obligations (e.g., fails to pay or provide services) under the agreement. Other typical "with cause" bases for termination include filing a petition in bankruptcy, intentionally misrepresenting a material fact in a representation or warranty in the original contract, and the psychologist having his/her professional license revoked or suspended. Typically, before a party may terminate the agreement with cause, the "nonbreaching" party must give the "breaching" party written notice of the event giving rise with the cause termination right, and allow the breaching party a certain number of days to "cure" the breach. Agreements also may require that the parties pursue a dispute resolution process (e.g. mediation or arbitration) before terminating the agreement. There is no standard reason to terminate an agreement "with cause." Accordingly, the parties may tailor their arrangement to the specific situations that they deem serious enough to warrant termination of the agreement.

Restrictive Covenants. Many agreements between competitors include restrictive covenants. Restrictive covenants -- noncompete and nonsolicitation clauses -- often carry a greater sting than financial penalties because they limit how a terminating party may compete with the nonterminating party after they go their separate ways. These provisions typically are found in employment or independent contractor agreements.

Noncompete clauses restrict the activities that a psychologist may undertake once the psychologist no longer practices with the practice. When assessing a noncompete clause, it is important to bear three factors in mind. First, what will the noncompete obligation prevent the psychologist from doing post-termination? As a rule of thumb, the obligation should restrict the psychologist from providing only the same type of services that he/she rendered during the relationship's term. To illustrate, a psychologist who treated patients in private practice during the relationship's term should not also be prohibited from teaching psychology after the relationship ends.

Second, is the geographic scope of the restrictive covenant reasonable? In general, a noncompete provision should restrict a psychologist from competing within a specific radius {e.g., 3 or 5 miles} of the office(s) from which the psychologist provided services during the time that the relationship was effective. The appropriate radius will differ depending upon the community where the psychologist practices. For example, in less-populated areas, a wider noncompete area (10 miles) is likely reasonable whereas the same radius probably would be considered overly broad in a densely populated city.

The third factor to consider is how long post-termination restrictive covenant will be effective? As with geographic scope, the length of time that the psychologist is prohibited from practicing psychology must be reasonable. Typically, noncompete provisions are binding from six months to two years following a relationship's termination. The rationale is that a restrictive covenant should not prevent a person from earning his/her livelihood indefinitely.

It is most important to stress that employees should resist - and employers should seek - non-compete clauses whenever possible. However, they should be aware that courts will only enforce them to the extent that they are deemed reasonable in time, scope, and burdensomeness.

Nonsolicitation clauses restrict a psychologist's ability to "solicit" employees and/or patients of the psychologist's former affiliate. In other words, the psychologist may not encourage in any way patients -- even the psychologist's own patients -- or employees to leave their current practice and become a patient or employee of the psychologist. However, patients and employees may exercise their own free will and choose to follow the departing psychologist. A very fine line distinguishes between freely deciding to follow the psychologist (although the psychologist's patients probably will remain with him/her) and the psychologist indirectly soliciting the individual. Thus, psychologists subject to nonsolicitation clauses who plan to end a relationship should be careful to avoid any evidence of impropriety that could be interpreted as prohibited solicitation.

A principal consideration with respect to noncompete and nonsolicitation clauses is whether the state in which the psychologist practices even will enforce such obligations. Many states maintain strict standards concerning what types of noncompete and nonsolicitation clauses, if any, are enforceable. Some states give courts a "blue pencil" power to rewrite a restrictive covenant's overly broad geographic or temporal scope, while other jurisdictions declare totally invalid any restrictive agreement that is too broad.

As a baseline principle, a psychologist should be bound by a noncompete or nonsolicitation obligation if: (1) the psychologist terminates the relationship without cause, or (2) the employer/entity engaging the psychologist as an independent contractor terminates the relationship with cause. As a matter of fairness, however, noncompete provisions should not apply if (1) the employer/entity engaging the psychologist as an independent contractor terminates the relationship without cause (i.e., the psychologist still is ready, willing and able to perform his/her part of the bargain), or (2) the psychologist terminates the relationship for cause (i.e., the employer is at fault, so the employee should not be penalized).

Finally, it is possible for the psychologist to negotiate a financial penalty that the psychologist could pay to earn release from noncompete and/or nonsolicitation provisions. A common method of calculating the amount required for this release is a percentage (such as 30% or 50%) of the psychologist's salary, or billings, for the year prior to the termination.

Obligation/Option to Repurchase Assets. Psychologists who sell their practice's assets as part of their affiliation with other psychologists may wish to negotiate an option to repurchase those assets should the deal later go sour. Two negotiation points concerning asset repurchase are commonly en­countered: (1) does the psychologist have the option or the obligation to repurchase the assets; and (2) what must the psychologist pay to repurchase the assets (and/or goodwill).

Just as there are certain situations in which restrictive covenants should terminate, there are instances in which a psychologist should have the option rather than the obligation to repurchase assets. The "option" situations tend to be those in which the psychologist terminates the relationship with cause, or the other party ends the relationship without cause.

With respect to the amount that the psychologist must pay to repurchase the assets (and/or goodwill), the following methodologies are common: (a) book value (the asset's value depreciated over time), which is typically a low figure; (b) fair market value (what the asset would cost on the open market), which is frequently a higher amount than book value; or (c) the median between, or average of, book value and fair market value. In valuing psychologists' practices' book value is likely to be very law since there is usually little in the way of fixed assets. "Goodwill" usually is represented by a low figure. The principal assets are accounts receivable, patient records, and certain payor contract rights. Once again, ethics rules and anti-fraud and abuse rules may constrain the negotiations.

 

NOTE: This Update discusses legal, financial, business, and operational issues, which often becomes intertwined. However, readers should bear in mind certain qualifications. First, most of the issues discussed in this chapter are dependent on state laws, which vary. While this Update notes general points, the situations in particular states may vary in significant ways. Second, a particular psychologist's individual circumstances may make a course of action advisable which differs from that generally indicated here. Third, nothing in this chapter should be viewed as providing business, financial, accounting, or legal advice. On these issues, psychologists should consult with competent accountants, financial advisors and attorneys.

NOTES TO LEGAL UPDATE #10:
BEYOND FLYING SOLO: A GUIDE TO OPTIONS IN STRUCTURING THE PRACTICE

I This Update supplements the discussion in Chapter 2 of the Handbook on Business Issues in Psychology Practice, particularly sections 2.01-2.Q3 and 2.06.

2 At the federal level, the self-referral or "Stark" law restricts patient referrals only if made by physicians. Some states, however, such as Maryland, maintain broader self referral prohibitions that apply to a variety of licensed health care practitioners, including psychologists.

3 Some states allow professionals to form LLCs or LLPs, while other states maintain that professionals are eligible only to form professional limited . liability companies ("PLLCs") or professional limited liability partnerships ("PLLPs"). Other than this difference, LLCs and PLLCs (and LLPs and PLLPs) are formed in largely the same manner and share the same characteristics.

 

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