What do you do, if you’re an investor in a company that provides medical, psychological, physical therapy, or other clinical services to patients or customers—but you’re not a medical doctor, psychologist, physical therapist, nurse, or other licensed healthcare practitioner?

In today’s video, we discuss how investors can profit from businesses that deliver clinical services—and where they get themselves in trouble.

I’m Michael H. Cohen, founding attorney of the Cohen Healthcare Law Group. We help healthcare industry clients navigate healthcare and FDA legal issues so they can launch or successfully grow their health and wellness product or service.

Two psychologists and an investor walked into a bar. Well, they walked into a conference room.  The three decided to form a company that would offer mental healthcare counseling services. The counseling company leased space and the two therapists started seeing patients and customers for behavioral health. Some of the mental healthcare counseling was done online, via telehealth and telepsychology, and some it was done in person.

About a year later, the investor read an article on the prohibition against the corporate of medicine.  He wondered whether he should sell his shares in the company.

Whether the company itself was practicing medicine, psychology, chiropractic, or physical therapy, the legal analysis would be somewhat similar.  There are three legal rules you need to know.

First, in most states, in order to provide professional clinical services, an individual must be licensed.  For example, a licensed medical doctor (MD), chiropractor, psychologist, or physical therapist, acupuncturist, and so on.

Second, the licensed practitioner, nurse, whatever healthcare provider we’re talking about can practice either as a solo practitioner, or through a professional corporation or PC.

Putting these two rules together, the investor cannot be a shareholder in a professional enterprise.  And, the two clinical providers should be providing healthcare services through a professional corporation, not through a partnership, not through a general corporation, not through an LLC.  Further, general corporations or LLCs cannot practice professional service.

To be sure, having the wrong entity is a technical violation, which potentially can be cured by amending the Articles of Incorporation.  But it’s also possible that regulators will seize on having the wrong corporate entity, as proof of a violation of the prohibition against corporate practice.

The third rule to know about is that, some states allow professional corporations to “mix and match” healthcare providers.  So, for example, in California, under the Moscone-Knox Professional Corporations Act, a nurse can be a shareholder in a professional medical corporation.  This rule creates a lot of strategic possibilities, but you have to watch for potential power plays, like one we’re witnessing right now, and legal challenges by the minority shareholders.

In our practice, we’ve seen clients come in with entities formed by corporate lawyers who know nothing about healthcare law.  So they might say: form a Delaware corporation, it’s the best; or, form a Nevada C corporation, it’s absolutely the way to go.  With this kind of thinking they typically go awry.

If you have more questions, give us a waive, pull my ear, contact us at cohenhealthcarelaw.com/contact, to send us a message or book an appointment. Here’s to the success of your healthcare venture, we look forward to speaking with you soon.