Private consultation in forensic pathology, part 3 — insurance and incorporation

In this third installment, I’m going to talk about two of the more contentious topics that come up when we private practice folk talk about what we do.  Insurance and incorporation.- and doing your own taxes.  I’m a little hesitant to write this post because I’m not an expert on either of these issues, and I’m only doing this post for completeness and due diligence, and because younger forensic pathologists who ask me always bring it up.  So, here are my opinions. Caveat emptor.

You really should:

1. Talk to your colleagues in your jurisdiction and see what works for them with respect to insurance.  My personal experience is that things vary by location, particularly state, a lot.  My only usefulness here it to point out a couple of “gotchas” that I was hit with.
2. Talk to a lawyer when it comes to incorporation.  We all know the old saw that if you are ever stuck in the position of having a “real” interview with the police, you should not say a word until you get your lawyer — even if you are innocent.  The reason is that you don’t know what you don’ t know, and our ability to say something stupid is almost at superpower levels.  The same thing is true here.  I have never incorporated and I am confident there are a zillion things that I don’t know about it.  And… talking to other ignorant people doesn’t help.  Knowing the experience of your colleagues is good, but when it comes to “real” legal issues, talk to a legal person.

I’ll first talk about insurance.  The consensus back when I started many years ago was that we really didn’t need malpractice insurance because we never got sued.  I didn’t have malpractice insurance until later in my career when I needed it in order to get privileges at an academic hospital I worked with.  So, I got it for that, but not because I thought I really needed it.

Now I’m glad I have it.  I don’t have a horror story from my own practice, but in the past few years a few of my colleagues have ended up in court.  It was devastating for one of them because he did not have insurance, and it was mostly just an irritation for another, because he did.  I think that in today’s world, it’s a good idea.   The problem is that, as they say “the process is the punishment.”  My friend who did not have malpractice insurance won his case (of course), but the litigation costs completely ate up his retirement savings.  Malpractice insurance for forensic pathologists is pretty cheap, so not having it is being penny wise and pound foolish.

My malpractice insurance runs just under $3000, which, basically, is one simple indigent case.  At that cost, it’s a no-brainer, to me.  There are a couple of things to think about, though.   The first is that the malpractice insurance that your friend the ophthalmologist gets may not be what you need. For the past eight years, my malpractice carrier has been the largest in my state, and is used by almost everybody I know.  Just recently, I was informed that, in fact, my insurance didn’t cover what I thought it did. Because it is a state-level “mutual” insurance company (the people who get insurance are nominal stakeholders), the company only insures for medical practice in the state, and excludes practice out of state.  I thought that consultations for out-of-state jurisdictions that I did while sitting in my office in Tennessee would count as in-state — sorta like telemedicine.  Nope, they said, that’s not the case.  So, for the past couple of years I wasn’t covered like I thought I was.

When you look for a provider, then, you need to make sure that you really are getting the coverage you need.  For me, the big issues that have come up are:

1. It covers consultations, and it covers out of state consultations.
2. It covers forensic pathology consultations explicitly.  I have heard stories of colleagues who thought they were covered, but the company claimed that forensic pathology consultation was not clinical medicine and thus not covered.
3. It has a decent “tail.”   A tail is provision that will extend your coverage after your insurance is no longer active.  In other words, let’s say you practiced from 2000 until 2005 with insurance from company A.   In 2010, you get sued for something you did in 2003.  You no longer have insurance with company A, and your new company will likely not cover stuff from before you signed up with them.  Thus you are not covered.  If you bought a “tail” then company A will still cover you.   I haven’t found a company that will provide a “tail” for stuff from *before* you signed up with them.
4. Check on “spoilage” and “loss” insurance, and other non-medical stuff.  A couple of folk I know have been sued not because of some wacky diagnosis or whatever, but because they lost or misplaced microscope slides or evidence that had been sent to them.  There’s also the possibility that someone will hack into your computer and get protected information from a case. I work out of my home,  but my homeowner’s insurance excludes this stuff.  Medical malpractice insurance often doesn’t cover this kind of stuff.   A general business liability insurance package will cover this, and for folk like us it’s relatively cheap.  Mine costs $500 per year.

So, for me, I pay about $3500 per year total for both packages.  It’s worth the peace of mind to me, and it’s a hell of a lot cheaper than paying $400/hr for 500 hours of lawyer time.

Where to get it?  Once again, ask your colleagues for recommendations. My impression is that provider options are very different from state to state.

So now on to incorporation.

Incorporation is a little like insurance.  Some folk think it’s absolutely necessary, and some folk think it’s useless.  There are some distinct advantages to incorporation, and they should be considered.  There are some hassles as well.  Personally, I’m not incorporated.  A lot of my colleagues think I’m an idiot for that.  They may be right — but for my level of practice it seems to be too much of a hassle.

First, the advantages of being incorporated:

1. It limits your liability.   One of the big purposes of incorporating is to separate the assets of your business from your personal assets.  If you get sued for a zillion bucks and you are not incorporated, they can come after your house and car and retirement savings.  If you are incorporated, they (theoretically) can only come after the assets of the business.  Your personal assets — house, car, etc — are safe (or safer).  This is the big argument for incorporation for me.
2. It provides tax benefits.  Or so they say.  With a corporation, your corporation can pay for your licenses, can buy a car, can buy your computer, whatever, and it’s a business expense and business asset.  Thus, you can deduct the cost as a business expense.  Of course you can deduct business expenses even when you aren’t incorporated, but this makes everything easier and more clear.
3. It provides tax and regulatory *structure*.  This isn’t such a big deal if you are just sitting at home looking at cases the way I do, but if you move to the level where you hire a secretary or other employees and start building a “real” business structure, then you really do need to be incorporated because all sorts of regulatory issues arise.  You may need a business license.  You will need to do payroll taxes.  All sorts of stuff.  At that point, you need the structure of the corporation to deal with that.
4. Sometimes it makes contracting much easier.  There have been times when a client demanded a more formal business structure in order to fit into their bureaucratic system.  For instance, if you end up working for the federal government on a case (I’ve done a number of cases for the military) or some states, then they assume you are incorporated.  With the feds, you can still do it as a private person, but you have to do stuff to shoehorn in.   For the feds, for instance, you have to get a CAGE (Commercial and Government Entity) code.  Some folk require a DUNS (Data Universal Numbering System) number. A lot of the paperwork for that kind of thing assumes some corporate structure.

The disadvantages:

The biggest disadvantage is just the hassle.  The cost of incorporating isn’t that much.  But if you incorporate, you need to keep two sets of books — one for you and one for the company.  You need to keep track of what asset belongs to what.  Theoretically, you must be punctilious about using business assets only for business stuff.  Don’t drive that car to the grocery store or to take the kids to the doctor.  Almost everybody I know who is incorporated breaks though this firewall on a regular basis.

Personally, I am pretty bad at bookeeping.  I am sure that if I tried to separate my business from my private life this completely, I’d screw it up.  Because of this, I miss out on some tax deductions I know I could probably get away with.  I don’t deduct my home office or 20% of my electric bill or certain car deductions. I don’t keep every receipt from every purchase I make.

This is really a personal lifestyle issue.  I have colleagues who have what I consider a fetish about this tax stuff.  I know a guy who rents office space just so he can deduct it.  Another guy has a car that he drives 500 miles a year just for business.  This is not just a thing for forensic pathologists.  Ii know a guy who created a not-for-profit organization essentially just to have one in order to dump assets.   He bought a building and created an *ash tray* museum (there are more than on in the US).   He deducts all sorts of expenses associated with it, and his accountant says he’s solid.  To me that’s gamesmanship. Some folk might love doing ti, but it seems exhausting to me.  So, I’ll pay a little more in taxes just not to be bothered.

My attitude about this would likely be different if I made more money doing this than I do and if it were a huge business for me.  A lot of these things with respect to incorporation make more and more sense as you scale up.  But the stuff I do us supplemental to my income, not my major income, and I don’t want to deal with it.  If you are going the route of making consultation and locums work most of your income, then the benefits of incorporation go up rapidly, I think.

I also do my own taxes.  I probably miss some deductions, but with the software that’s available, it really doesn’t take me that long, and I’m done with it.  Again, that’s a personal thing.  I have folk tell me that I’m “likely” missing out on thousands of dollars in deductions.  I doubt it.  Even if an accountant told me I could deduct 10% of the cost of my car, I wouldn’t do it.  I’m already at a high risk of audit (my level of charitable donations causes TurboTax heartburn) and I don’t want the hassle.

So, my path has been not to incorporate, but I recognize important arguments to do so.

When it comes to what kind of corporation, two types seem to cover the field:  S-corp and LLC.  These are the most popular because neither pays corporate income tax.  Both pass income through to shareholders.

The LLC is a minimalist form of incorporation, and one that I would use were I to do it.  Basically, the only thing it really does is provide legal protection for assets.  Money made by the LLC is passed directly to you (usually — you can set it up differently), and you report it as regular income.  LLC owners have to pay self-employment taxes that S-corp owners don’t.   LLCs have much more limited options for doing things like selling stock and such to raise capital — though I’m not sure why a sideline-level consultant would want to do that.

The S-corporation is a little more structured.  Requirements for S-corps vary more from state to state.   S-corps have more reporting requirements and in some states have to have annual meetings and such. You have to be a US citizen or legal resident to do it.  My impression is that an S-corp becomes more useful when you get to the point of having employees.  But I don’t really know.

Interestingly, LLCs can report as S-corporations, and S-corporations can “own” LLCs.

Frankly, since I’m not incorporated at all, I’m not one to really opine about the choice between the two.  Talk to a lawyer if you get to that point.  Once again, ask your colleagues what they do.