Healthcare Business Formation (S-Corp, Professional Corporation, Partnerships)
Healthcare ventures can benefit from seasoned legal advice about the type of entity and making corporate formation issues work for the healthcare entrepreneur.
Often, healthcare startups or practitioners (such as MDs) come to us, having received advice from their accountant or corporate attorney, and formed the wrong kind of entity. We have expertise in general corporate law as well as the specialized areas within healthcare law. As such, our advice goes deeper than the usual corporate lawyer’s advice about business structure.
Choice of Entity: Corporation vs. Partnership vs. LLC
Within our corporate and healthcare law expertise, we advise healthcare practices and businesses on the best legal structure to form their enterprise.
We will advise on the choice of business entity, including:
- S Corporation
- C Corporation
- Close Corporation
- Limited Liability Company (LLC)
- Limited Liability Partnership (LLP)
- Professional Corporation (PC) or (depending on the state (Professional Limited Liability Partnership (PLLP) for:
- Accountants and CPAs
- Medical Doctors
- Naturopathic Medical Doctors
- Real Estate and Mortgage Brokers
- Social Workers
- Other Licensed Professionals.
An important concept to remember is that a professional entity must be formed whenever the goal is the delivery of professional healthcare services. For example:
- A physician can deliver medical services individually, or through a Professional Medical Corporation or PLLP (depending on state law).
- A general business corporation cannot deliver medical services. In a “strong” corporate practice of medicine state, the general business corporation or an LLC cannot hire a medical doctor, naturopathic medical doctor, psychologist, or certain other licensed healthcare professionals.
- If the physician is contemplating building up a business side, across sites (for example, through an MSO), then that MSO should be a general corporation or an LLC, but not a professional corporation or professional LLC.
Regulatory authorities take these legal rules very seriously. Corporate practice of medicine enforcement, as well as regulatory scrutiny for kickbacks and fee-splitting, can be fierce.
Formation Agreements and Other Documents
Forming the legal entity requires certain documents, including:
- Articles of Incorporation (Inc.) or Articles of Organization (LLC)
- Bylaws (corporations) or Operating Agreement (LLC)
- Buy-Sell Agreement with exit provisions that protect your rights in the event one partner or shareholder must leave the business entity.
- Employee or Consultant Agreement
- Partnership Agreement
- Proprietary Inventions Agreement
- Stockholder Agreement
- Vendor Contracts
- Other Agreements
We can help with corporate governance dissolution and wind-up, purchase, sale, merger, and conversion of corporations, LLCs or LLPs.
As we have said, our health care lawyers will help advise clients when they need a professional corporation, such as a Professional Medical Corporation or a Professional Psychology Corporation. And, in many states, the corporate practice of medicine doctrine prohibits lay, non-professional entities (such as general corporations and LLCs) from providing professional services, and requires that professionals who wish to operate through a corporate entity, do so via a professional corporation.
Professional corporations can have several legal advantages.
For example, in many states it is advisable to have a medical doctor form a professional medical corporation to help insulate the physician against liability. The professional medical corporation itself can then contract with the medical spa or medical clinic to provide services, and contract internally with the physician and nurse, physician assistant or other medical staff to provide services to the other entity.
This kind of legal structure can potentially help with the corporate practice of medicine doctrine, as it means that licensed medical rather than unlicensed professionals are providing medical services to patients. Unlicensed practice can result in significant penalties. For example, in New York, Education Law Section 6512 makes it a felony for an unlicensed person to practice medicine. Section 6513 makes the unauthorized practice of medicine a crime.
In addition, use of the professional corporation comes into play in helping to mitigate Stark, anti-kickback and fee-splitting concerns in the medical spa or integrative medicine and wellness clinic. We preview this more in our discussion of the MSO Model.
Nuanced Regulatory Issues When Dealing with Professional and General Corporations
The cross-fertilization between the medical domain and the healthcare venture can create unique legal issues that go beyond the typical corporate lawyer’s expertise.
For example: legal challenges can arise when physicians also take an equity stake in an MSO formed by non-physicians. This sets up a conflict of interest and the legal landscape is ambiguous, as best. Because we have such a diverse range of clients, we are well positioned to guide clients in making business decisions where healthcare laws and regulations, and industry practice, might point in opposite directions.
As another example, legal complications can arise when the MSO is the brand and driving force behind building the medical part of the venture and the execution and implementation of the overall business strategy. Here as well issues of corporate practice of medicine and fee-splitting can require specialized knowledge and the ability to assess risk and deploy legal strategies to mitigate risk.
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