Business Formations & Incorporations: Professional Medical Corporations

In California, there is a general prohibition on the corporate practice of medicine, which includes a prohibition on operating a medical practice as a Limited Liability Partnership (“LLP”) as well.  However, there is an exception for professional medical corporations.  Professional medical corporations are growing increasingly popular as a business entity, and have become a go-to choice for both large and small practices.  For those individual practitioners who want to start their own business for their practice, but do not want to expose themselves to the liability of operating their business as an unincorporated entity, professional corporations can offer a good source of liability protection.  Professional corporations also work well for those who desire to operate their business through a more firmly structured and regulated entity as well.

Ownership Requirements

Professional corporations are only available to certain types of licensed professionals, of which physicians and certain healthcare-related practitioners are included.  Furthermore, the California Corporations Code dictates who may be shareholders in a professional corporation.  Each type of professional corporation for each different type of practitioner has a separate set of regulations for who may be a shareholder, with even more regulation on the amount of shares certain licensed professionals are allowed to own in the professional corporation.  Forming a professional corporation is more than just filing articles of incorporation with the California Secretary of State!  There are important considerations when forming your entity such as the bylaws, employment agreements if you have employees, other required documents to be submitted to the California Secretary of State, buy-sell agreements if there are multiple shareholders, and more!  Our San Diego health law attorneys are highly experienced with professional corporations and will help guide you through the difficult process of ensuring your professional corporation is in compliance with all California rules and regulations!

Protection from Liability

Liability protection is generally the same for LLPs and professional corporations.  In professional corporations, the business owners are responsible only for their own wrongful acts, and not the wrongful acts of other owners or obligations entered into contractually by the professional corporation.  However, both an LLP and professional corporation will not shield the business owner from his/her own negligent acts, or sometimes that of their employees that they supervise.  When forming your new business, you will need to take into account the many sources from which liability can arise, and as such should consult with an attorney to make sure you are choosing the right business entity for your needs and to ensure you are taking proper steps to mitigate all possible liabilities.

Tax Implications

Professional corporations provide for a doctor to practice medicine as a corporation, including being treated as a corporation for state and federal tax rules.  Historically, the corporate form provided much better tax incentives than LLPs, but most of these advantages have been eliminated over the years.  There are differences in the tax structure of the business entities, however.  Both State and Federal tax regulations require that the professional corporation file its own tax return and report its net income separate from that of the business owner/practitioner, unlike a LLP in which the partners report their individual profits/losses from the partnership on their individual tax returns.  When the business owners report their taxes on their individual tax-returns as opposed to a having to file a separate tax-return for the business, it is said that the profits and losses of the business “pass-through” to the business owners.  However, a professional corporation is not necessarily limited to being taxed as a corporation.  The business owners and shareholders can elect for the corporation to be taxed as an S-Corporation, which allows for the profits and losses of the corporation to pass-through the corporate entity and be reported on the individual business owner’s personal tax return.  It is important to discuss all possible tax ramifications with a professional to ensure you are maximizing the business entity you choose!

Our experienced health law attorneys at Lee Shome & Kennedy are ready and waiting to assist you in the formation and operation of your professional corporation.