Medical Doctors need to consider many factors in choosing the best legal entity for their medical practice. Some of these key factors are:
- Medical considerations
- Legal considerations
- Financial factors
- Practical factors
- Tax considerations
Before an experienced medical business formation attorney can advise you, the lawyer needs to understand you goals and concerns. The attorney will review issues of control of the daily operations of the medical practice, succession issues if you choose to leave the practice or die, the rights of other doctors in the practice, liability issues, and many other key areas.
Many business formation issues are unique to the state where your practice is located – and thus require the advice of a medical formation lawyer who can advise you about that state’s requirements.
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Types of medical formation entities
Most businesses can operate individually as a sole proprietorship, in partnership with others, or as a corporation. There are different sub-types of businesses. For example, a corporation can generally be a C Corporation or an S corporation. In some states, like California, medical practices who want to set up a corporation need to meet the requirements of the Moscone-Knox Professional Corporation Act. Other states have their own specific requirements. For example, New York requires creation of a Professional Limited Liability Corporation (PLLC) instead of a Limited Liability Corporation (LLC).
Advantages of creating a medical corporation
It is important that the owners of the corporation follow the legal formalities. This includes complying with the state business corporate laws such as filing articles of incorporation, holding regular meetings, filing yearly tax returns and other filings, paying employees properly, and more.
The financial benefits of a corporation (over a partnership or sole proprietorship) include:
- The ability to attract investors through the issuance of stock
- The ability to pay employees and entice management talent by offering stock options and bonuses
Generally, the shareholders own the corporation in proportion to the amount of shares each shareholder owns. This is in fact required for physicians in a professional medical corporation so as to avoid anti-kickback enforcement for compensation based on value or volume of patient referrals.
The management benefits of a medical corporation include:
- Clarity over who owns the corporation, who controls the corporation, and who manages the corporation
- The board of directors and corporate officers control what decisions are made about how the practice will be run, what equipment can be purchased, which employees should be hired, and the long-term and daily decisions about how the medical practice will be run and by whom. Directors generally oversee the long-term operations of the business while officers are the ones who manage the medical practice on a daily basis. Directors choose the medical corporation’s officers.
Other benefits can include:
- Lower self-employment taxes
- Benefits such as health care, IRAs, pensions, and other retirement benefits.
- Corporations generally (the law is evolving) have many similar rights to individuals including the right to free speech (unless restricted by state government).
Disadvantages of creating a medical corporation
There are some disadvantages to forming a medical corporation. The initial disadvantage is that corporations require a lot of paperwork. Corporations are required to:
- Formally incorporate usually by filing their articles of incorporation with the Secretary of State Department for their state.
- Create corporate bylaws to govern the operation of the corporation
- Publish annual reports
- Conduct regular shareholder meetings
- Provide formal notices to shareholders
- Create a board of directors
- Keep proper records of corporate activities
However, these can be managed with proper legal counsel and attention to detail.
Tax consequences of medical corporations
Generally corporate profits are taxed twice. The profits that are kept in the hands of the corporation are taxed at the corporate tax rates. Distributions to shareholders are then taxed according to the tax requirements for the individual shareholder. One way medical practices may be abele to avoid double taxation is through the creation of an “S” corporation. The new federal tax law may also allow for different tax consequences for a medical corporation that should be reviewed by experienced professionals.
Regulations for medical corporations
Corporations, including medical corporations, are subject to many laws, rules, and regulations at the federal, state, and local level. An experienced medical business formation lawyer can explain the laws that apply for your type of business in your location.
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Why a medical practice might want to create an S Corporation?
In an S corporation, the owners are the shareholders. Most S corporations have just one, two, or three owners. The benefits of an S corporation are that the owners are generally protected from liability for corporate obligations – meaning the doctor’s home and assets are usually safe from creditors (with some exceptions). Other benefits include:
- Income is not double taxed – once at the corporate level and once at the individual level. Income is reported on the shareholder’s personal income return.
- The assets of the company are separated from the assets of the owners – unlike a partnership or sole proprietorship
- It’s generally easy to transfer ownership
- It’s enticing to investors
To be eligible for an S corporation, the following conditions must usually be met:
- The S corporation must have less than 100 shareholders
- There can only be one stock class
- The practice must incorporate in the United States
- Other corporations and partnerships cannot be shareholders
- Other requirements your medical business creation lawyer can explain
Some of the disadvantages of an S Corporation are that there are restrictions on stock classes, it does require legal experience to create, it can be difficult to determine profits and losses, and other factors.
What is a C Corporation?
Most corporations are C corporations in which the business operates independently from the owners/shareholders.
The advantages of a C Corporation generally, in addition to the general benefits mentioned earlier, such as limited liability, stock options, and stock benefits, include:
- Easy to transfer ownership. Ownerships is transferred through the sale of the stock. Medical corporations do generally require though that the owners be physicians or licensed medical providers.
- Control can be managed. Control of a C Corporation can be managed through stock ownership and through issuance of different classes of stocks.
- Stock can be sold to raise capital
- Some medical advantages. For example, it may be easier to deduct medical costs in a C Corporation than in an S Corporation, a partnership, or a sole proprietorship
The disadvantages of a C Corporation are more paperwork, the likelihood of double taxation, and other disadvantages described earlier.
Pros and cons of other types of business entities
Medical practices, depending on the state, may be able to create a limited liability corporation (LLC), a general partnership, a limited liability partnership, or a sole proprietorship.
- LLC. These are generally easier to create than a standard S or C Corporation. It may be easier to control how you are taxed. Just one person normally can create an LLC. LLCs tend to have less flexibility than standard corporations, may find it harder to raise capital, and may have additional tax consequences. To see several videos by our healthcare corporate attorneys on the differences between corporations, partnerships, and LLCS – click here.
- Partnerships. Partnerships are usually created through a written partnership agreement/contract. The three main types of partnerships are limited partnerships, general partnerships, and limited liability partnerships.
- In limited partnerships, the limited partners report to a general partner. The general partner normally runs the business and makes the key decisions.
- In general partnerships, all the partners make joint decisions about the business
- In limited liability partnerships, the potential liability of a partner is usually established in the partnership agreement.
There are pros and cons to each type of partnership agreement which a trusted medical business formation lawyer can explain.
- Sole proprietorships. Here, all the benefits and risks fall on the individual doctor. It’s harder to raise capital but the doctor gets all the profits. When the doctor dies, the business ends.
Some of the medical corporate issues for California medical corporations
Physicians and anyone interested in being an owner in a medical business in California should consult with a respected medical business formation attorney. The lawyer will do more than review your options and help you create the right type of business. The lawyer will also advise you about the state and local laws you need to meet.
- Shareholders. In California, generally, a licensed medical professional must be the majority shareholder in a medical corporation. The California Corporations Code does allow the following medical provider to be minority shareholders. Licensed podiatry doctors, psychologists, optometrists, marriage and family therapists, clinical social workers, acupuncturists, chiropractors, and other listed licensed professionals. Registered nurses can also own minority shares. These medical professionals can also be employed by the medical corporation.
- Officers and directors. While shareholders must be properly licensed medical professionals, the same requirement does not old for the officers of a California medical corporation. The medical corporation does need to have the proper amount and types of officers and directors depending on its size.
- Single practitioners. Just one licensed professional can form a medical corporation provided he/she is also the shareholder, director, president and treasurer of the corporation.
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Formation of a California Medical Corporation
A medical corporation in California is formed by filing articles of Incorporation with the Secretary of State and paying the appropriate filing fees. The corporation should have its own set of bylaws. An experienced medical business formation attorney will help you draft the right set of bylaws for your type of medical practice. The shareholders can enter into an agreement which governs the sale, value, voting terms, and other shareholder factors.
Personal and Corporate Liability in California
In California, the shareholders are generally not liable for the debts of the medical corporation unless they:
- Personally guarantee the loan or investment
- Mix personal and corporate assets
- Breach a fiduciary duty
- Engage in improper conduct
- Otherwise commit conduct which would allow a creditor to pierce the corporate veil
Other California Medical Considerations
- Public record of participants. Generally, the identity of the shareholders, directors, and officers of the medical corporation are public record.
- Directors and officers. The directors are generally appointed by the shareholders, and can be removed by the shareholders. The directors then, generally, choose the corporate officers. The officers are the ones who manage the daily operations of the medical practice. The officers normally include, at a minimum:
- A president
- A secretary
- A treasurer
Taxes. Federal and state taxes must be filed and paid depending on what type of corporation was created. As mentioned, C Corporations generally pay a double federal tax (one at the corporate level and one at the shareholder level) while S Corporations, which have many restrictions, generally just pay federal taxes at the shareholder level. Shareholders must also pay California state income taxes. California also has a franchise tax (a little less than 9 %) which must be paid. Distributions that are not dividends but wages may just be subject to a single tax.
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The right type of business structure for your medical business can maximize your profits while increasing the joy of running a business. To learn more about the pros and cons of various business entities and to review which type makes sense for you, please Contact Cohen Healthcare Law Group. Our healthcare lawyers are experienced and trusted medical practice attorneys.