by Zach Javdan
February 19, 2021
Forming a California medical corporation is a great way for California doctors to, among other things, save on taxes (via an S corporation) and help limit liability.
It’s important to consider every step of the process when starting a medical corporation, since missing a single step could lead to invalidation of the medical corporation in case of a lawsuit.
It’s also important to be clear that medical corporations do not provide their owners protection against malpractice suits, for their own malpractice.
However, there are other types of lawsuits where a medical corporation could provide protection (e.g., lawsuit by an employee or contractual dispute).
Consider the following if you are a California physician deciding to start a medical corporation:
Consult with a California Attorney
Doctors sometimes try to take the inexpensive route when incorporating their medical practice.
This can be very costly in the long run.
It is critical that you consult with an attorney, before starting the incorporation process for many reasons.
Timing, formalities, tax questions, liability issues, and more, are important issues to discuss when starting a California medical corporation.
Physicians often earn large incomes and face face liability exposure from multiple sources, so it’s essential to consult with a professional when forming a California medical corporation.
When forming a California medical corporation it is important to ensure that all of the owners are qualified to own the business.
Doctors often mistakenly believe they can bring on friends or family to invest in their medical practices as owners.
Specifically 51% of the California medical corporation shareholders are required to be California medical doctors/physicians.
Pursuant to California Corporations Code section 13401.5, the other 49% of shareholders are required to be a: (1) licensed doctor of podiatric medicine; (2) licensed psychologist; (3) registered nurse; (4) licensed optometrist; (5) licensed marriage and family therapist; (6) licensed clinical social worker; (7) licensed physician assistant; (8) licensed chiropractor; (9) licensed acupuncturist; or (10) naturopathic doctor.
Accordingly, unless the friend or family member holds one of these licenses, they cannot be a part owner of the California medical corporation.
Consider a Buy-Sell Agreement if Your California Medical Corporation will Have More than One Owner
An often fatal mistake when forming a medical corporation, with multiple owners, is failing to account for what happens to the corporation if one of the shareholders/owners dies, becomes incapacitated, gets a divorce or wants to sell his/her ownership interest to a third party.
Without a buy-sell agreement (also known as a shareholder agreement) these situations will not be addressed.
That is, by default, there are no provisions governing what happens to the corporation, and its shares, under such circumstances.
During the formation process, everyone is obviously getting along.
However, circumstances often change in the future and there must be an agreement, in place, which dictates what happens when the unexpected occurs.
Be sure to discuss this with an attorney.
Determine Whether You Should Form a C or S Corporation?
Confusion often arises when it comes to how California medical corporations are taxed.
There are basically two options of how to tax a medical corporation.
The first, and default, tax status is taxation as a C corporation.
C corporations are treated as separate entities for tax purposes.
This means that the corporation files its own tax return and pays its own taxes. In turn, the medical corporation’s owners file there own and separate tax returns in an individual capacity.
This results in what is commonly referred to as “double taxation.”
While not necessary problematic under all circumstance, most California medical corporation owners prefer to avoid this tax status and opt to be taxed as an S corporation.
The “S” refers to a particular subsection of the IRS internal revenue code which dictates how the corporation is taxed (26 U.S. Code Subchapter S).
S corporations are also referred to as “small business corporations.”
It is important to consider the benefits of an S corporation.
The main benefit is that you avoid the double taxation associated with C corporations. This is referred to as “pass-through” taxation.
Naming a California Professional Medical Corporation
Pursuant to California Business and Professions Code Section 2415, unless the corporation name is the full name, or last name, of the doctor (as it appears on their medical license), followed by Medical Doctor, M.D., Podiatrist, Doctor of Podiatric Medicine, D.P.M., Medical Corporation, Medical Corp., Podiatry Corporation, Podiatry Corp., Professional Corporation, Prof. Corp., Corporation, Corp., Incorporated or Inc., a Fictitious Name Permit must be obtained from the California Medical Board.
The cost is $50 and the permit obtainment process takes approximately 30 days.
The Fictitious Name Permit application requires that you provide the Medical Board with a copy of the medical corporation’s articles of incorporation.
It’s also important to check name availability, with the CA Medical Board, before forming your medical corporation.
Just because a name is available with the CA Sec. of State does not mean it is available with the CA Medical Board.
For additional information, the California Medical Board provides answers to frequently asked questions on their website.
Determine Who the Agent of Service of Process Will be
California medical corporations are required to have an agent of service of process (also known as a registered agent).
The agent is responsible for receiving official documents on behalf of the entity and must be available from 9-5, daily, at a California business address.
Failure to be present during regular business hours can result in a default judgement in case of a lawsuit.
Accordingly, it is critical that you designate someone who is available during those times.
The corporation’s shareholder, directors, or anyone can serve as agent, as long as they meet the requirements.
You can also delegate responsibility to a third party.
File Articles of Incorporation
Filing Articles of Incorporation of a Professional Corporation with the California Secretary of State is the official first step in forming a California medical corporation.
The document must include the name of the corporation, the business address, the registered agent name and address, number of shares and corporation purpose.
Prepare Organizational Corporate Minutes
The directors and officers should be appointed and documented in the corporation’s organizational corporate minutes.
Minutes are important for medical corporate to have in case of lawsuit or audit.
Minutes should also be prepared on an annual basis.
Bylaws, which are created by the directors during the corporation formation process, set forth the rules and operating procedures of the corporation.
Bylaws set forth where the offices of the corporation will be located, how the corporation is operated, the time, place and manner of shareholder meetings, stock issuance, director powers, numbers, elections and indemnification, officer types, duties and meetings, record keeping and general matters. Bylaws are an official and important part of the corporate records and should be available for review in case of an audit or lawsuit. Failure to prepare bylaws can be used as one of many factors to invalidate the corporation in case of a lawsuit.
Issue Stock to the Shareholder(s)
Shareholders are the owners of the corporation. Their ownership is documented by stock certificates. Share issuance is another critical aspect of the incorporation process. Stock certificates must include the name of the corporation, number of shares authorized, number of shares issued, shareholder, date of issuance and should be signed by the president and secretary of the corporation. California medical corporations should also include language restricting ownership of licensed individuals dictated by California Corporations Code section 13401.5. This is an often overlooked step.
Prepare a Stock Ledger
A log, known as a stock ledger, should be kept which documents the shareholders, number of shares issuance and date of issuance. The ledger should also be used to document any future share transfers stock issuance and transfers.
Obtain a Tax ID Number
A Tax ID Number (TIN), which is also known as an Employer Identification Number (EIN) is an identifying number issued by the IRS for newly created corporations. a TIN can be likened to a Social Security Number for a business.
The number is used when filing taxes and opening the corporate bank account. The form used to obtain the EIN is IRS Form SS-4. The EIN can be obtained online via the IRS website. Answers to frequently asked questions can be found via the IRS Form SS-4 instructions.
File IRS Form 2553
If the corporation will be taxed as a subchapter S corporation, IRS Form 2553 should be filed with the IRS. Form 2553 must include the corporation name, address, date of formation, TIN, representative and shareholders.
Shareholder spouse information should also be included in community property states like California. Answers to frequently asked questions can be found via the IRS Form 2553 instructions. The deadline to file is within 75 days of incorporation.
File a Statement of Information
File a Statement of Information, with the California Sec. of State, within 90 days of incorporation. The Statement of Information must include the medical corporation’s name, California Secretary of State entity number, business address, mailing address (if different), officers, directors, agent of service of process and business type.
File a Limited Offering Exemption Notice
Within 15 days of stock issuance, a Limited Offering Exemption Notice should be filed with the CA Dept. of Financial Protection and Innovation. If the value of securities is less than $25,000, the filing fee is $25.
Failure to file can result in a penalty being assessed.
The purpose of the exemption notice is to basically let the government know that you are not selling stock to third parties and to exempt you from further securities filings.
Open a Bank Account for the Medical Corporation
Shortly after the medical corporation is formed, a bank account should be opened. It is important that the corporate account be used for all future financial transactions associated with the business. Failure to do so could lead to invalidation in case of a lawsuit.
The amount of the initial deposit should be reflected in the medical corporation’s stock ledger.
Obtain a Local Business License
Obtaining a local business license is an often overlooked step. Most cities require businesses operating within their boundaries to pay local taxes and obtain a business license.
Visit the CAlGold website to help determine what licenses and permits may be required for your business.
Notify Third Parties
It is important that all parties you have a relationship know that the business is a corporation. Accordingly, anybody the business deals with should be informed about the new medical corporation. The key is to avoid an argument that they never knew you had a corporation.
Consult With Your CPA
Always keep in touch with an accountant to ensure you stay on top of all tax filing and payment deadlines.
The California Franchise Tax Board will not remind you about the $800 minimum tax payment.
Accordingly, it important to be working with a good accountant that can keep you on top of such requirements.
Failure to file and pay taxes can lead to invalidation of the corporation in case of a lawsuit.
So be sure to hire an accountant shortly after the medical corporation formation process is completed.
In order to ensure that you are afforded the liability protection and tax benefits associated with a California medical corporation, it is critical that you act like a corporation.
This means that you prepare all of the documents and submit all of the filings, associated with being a corporation.
This also means, be sure to prepare your minutes on an annual basis. Be sure to file the medical corporation’s statement of information on on an annual basis.
Mark your calendar and remain compliant.
Failing to do so can lead to suspension of the medical corporation.