Shielding Your Practice: The Physician’s Guide to Structuring a California Medical Corporation

Key Structural Requirements

Ownership Restrictions

• Majority Ownership: At least 51% must be owned by licensed physicians
• Minority Ownership: Up to 49% can be owned by other licensed healthcare professionals, including:
  • Registered nurses
  • Psychologists
  • Physician assistants
  • Licensed clinical social workers
  • Midwives
  • Optometrists

Shareholder Composition

• More physician shareholders must be exist than non-physician shareholders
• Single-shareholder corporations require the sole shareholder to serve as president and treasurer
• Two-shareholder corporations must have shareholders serve as president, vice president, secretary, and treasurer

Formation Process: Comprehensive Steps

Name Selection

• Must include corporate designations like “Corporation” or “Inc.”
• Requires compliance with California Secretary of State naming restrictions
• California Medical Board Fictitious Name Permit if not using physician’s name

Articles of Incorporation

• File with California Secretary of State
• Include specific purpose statement about medical practice
• Current filing fee: $100
• Must comply with:
  • Moscone-Knox Professional Corporation Act
  • California Corporations Code
  • California Business and Professions Code
  • Medical Board of California regulations

Corporate Bylaws

• Establish operational rules
• Define governance structure
• Outline professional conduct standards

Additional Required Actions

• Apply for Employer Identification Number (EIN)
• File Statement of Information
• Register with Medical Board of California if using Fictitious Business Name
• Potentially file S-Corporation tax election
• Comply with the Corporate Transparency Act

Taxation Strategies

Default Structure: C-Corporation

• Corporate income taxed at federal and state levels
• Potential for “double taxation” on dividends

Recommended Strategy: S-Corporation Election

• Pass-through taxation
• Avoid double taxation
• Allows physicians to:
  • Pay themselves a salary
  • Take remaining income as owner distributions
  • Reduce self-employment taxes

Critical Legal Protections

Liability Limitations

• Shields personal assets from:
  • Business-related lawsuits
  • Employment disputes
  • Regulatory fines
  • Creditor claims
• Important Caveat: Does not protect against individual malpractice claims

Prohibited Structures

• California explicitly prohibits:
  • Non-physicians owning medical service businesses
  • Physicians operating medical practices as:
    • LLC
    • LLP
    • General corporation
  • Management service organizations controlling medical services
  • Physicians serving as medical directors without practice ownership

Ongoing Compliance Requirements

• Annual shareholders’ meetings
• Board of directors meetings
• Maintaining accurate corporate minutes
• Filing annual Statement of Information
• Ensuring all shareholders remain licensed professionals

Strategic Advantages

• Asset Protection
• Tax Optimization
• Business Continuity
• Enhanced Fringe Benefits
  • Higher retirement plan contribution limits
  • Tax-deductible health insurance
  • Disability and life insurance options

Potential Consequences of Improper Formation

• Loss of legal protections
• Financial penalties
• Potential “de facto corporation” determination
• Regulatory non-compliance

Recommended Professional Support

• Consult healthcare business attorneys
• Work with experienced corporate formation specialists
• Ensure strict compliance with California regulations