by Zach Javdan
October 2, 2016
California Medical corporations offers several advantages for California licensed physicians who want to maximize their liability protection and save on taxes. Specific advantages include tax savings, liability protection, and continuity.
If you are a California physician that is starting a medical practice or works as an independent contractor, you should consider the advantages afforded by forming a California professional medical corporation.
What is a Medical Corporation?
A medical corporation is a corporation that is formed for the purpose of engaging in the practice of medicine. When you form the corporation, it becomes a separate legal entity. Whenever you conduct business or see patients, you act on behalf of the corporation. Contracts are signed between others and the corporation instead of others in you. You then sign the contracts on behalf of the corporation.
Professional medical corporations must be owned by one or more physicians.
Non-physicians can even have ownership interests in a professional medical corporation. However, the physician(s) must have a majority ownership stake in the corporation.
When a doctor engages in the practice of medicine, without a corporation, he or she is characterized as a sole proprietorship, by default.
If a doctor is working with one or more additional doctors, he or she is part of a partnership.
Sole proprietors are 100% liable for any of the debts involved with a business. Partners are jointly and severally liable for the debts of the partnerships. This means that if one partner does something wrong, the other partners could be held completely liable.
One of the main benefits of medical corporations are added liability protection.
Although California professional corporations do not provide malpractice protection, which can be accounted for via malpractice insurance, they can protect physicians from liabilities and lawsuits that are not related to the practice of medicine.
For example, a medical corporation could provide liability protection in case of a contract dispute, employee lawsuit or office lease dispute.
This added protection makes professional corporations very appealing.
The liability protection offered by professional corporations is even more appealing when multiple physicians are working together. Specifically, a medical corporation can protect one doctor from the malpractice committed by another physician.
For example, let’s assume your fellow physician performs a medical procedure that you are not involved in. Something goes wrong with the procedure due to a mistake made by the doctor. The patient sues the doctor that performed the procedure and you. Without a corporation, you could be held personally liable for the other doctor’s negligence. The professional corporation would help limit your liability since you were not involved.
The designation as a medical corporation is filed with the California Sec. of State. Tax status is designated with the Internal Revenue Service. California medical corporations are taxed as C corporations by default. C corporations are subject to double taxation. This means they are taxed once at the corporate level. The shareholder(s) are taxed again at the individual level when the receive income from the corporation.
However, California medical corporations have the option of being taxed as S corporations. S corporations are “pass-through” entities. This means that there is no corporate level income tax owed. The income tax is only paid by the owners of the corporation.
S corporations also provide additional tax savings.
California medical corporations that are also taxes as S corporations can save money on “self-employment taxes,” which include Social Security, Medicare and FICA. This can result in significant tax savings for physicians. These tax savings are not eligible to physicians who operate as sole proprietors.
Consult with an accountant regarding the tax savings available to a California medical corporation that is also taxed as an S corporation.
S corporations are also eligible for tax savings via tax deductions that are available to corporations.
Another advantage of a California Professional Medical corporation is continuity. When a sole proprietor or doctor that is part of a partnership dies, the practice is basically over. However, when a corporation is used, it can continue it’s existence, uninterrupted.
This is especially important to spouses of physicians.
For example, let’s assume 2 doctors own a medical practice together. One of them suddenly dies in an accident. If they had formed a medical corporation, the corporation still continues on. If the doctors executed a buy-sell agreement upon formation of the medical corporation, they could have dictated what the wife receives and how matters are handled upon the death of one of the doctors. This makes things much smoother and seamless.
Medical corporations are also eligible for retirement plans and 401(k) plans which allow for higher contribution limits than those available to physicians practicing as sole proprietorships or in partnerships.
California medical corporations can also offer tax deductible health insurance, disability insurance and life insurance.
Be sure to consult with a California attorney if you are thinking about forming a California medical corporation, to ensure it is formed properly.
If you are a California physician, it may be the right move for you. Especially if you are working with other physicians.
Topics: California Corporations