A Guide to Professional Medical Corporations in California

In California, there are many potential advantages to incorporating a professional service corporation (professional corporation) as opposed to operating as an individual (sole proprietor) whether alone or in a partnership. However, incorporating a professional corporation is not simple and requires strict compliance with state and federal laws, rules and regulations. 

Our firm has  developed this short guide to provide an overview of the process to incorporate a professional corporation, and to identify the mistakes to avoid and key advantages to be enjoyed. These principles are readily transferable to other jurisdictions in the United States, but the rules of each state should be reviewed and understood before taking action. 

Professional Medical Corporations: What Are They?

California state law permits the creation of professional medical corporations for the purpose of practicing medicine. There are several legal requirements that must be observed by California professional medical corporations including the federal laws governing the taxation of corporations, the Moscone-Knox Professional Corporation Act, the Medical Practice Act, the Corporations Code, and regulations promulgated by the Medical Board of California.

What Are the Benefits of Forming a Professional Medical Corporation?

• Protecting Personal Assets from Lawsuits and Creditors – A professional medical corporation allows an individual to protect his or her personal assets from the claims of business creditors. 

Professional corporations cannot protect an individual doctor’s personal assets from malpractice claims (professional liability), but the corporation will typically shield a doctor’s personal assets from claims arising from malpractice rendered by colleagues, commercial claims, and employee-related lawsuits. For doctors who run their own practices, professional entities are essential to protecting personal and family assets. 

• Building Business Credit – A professional medical corporation provides opportunities to build business credit that may prove useful for future business opportunities like obtaining financing at favorable rates, maximizing partnership and joint venture opportunities or selling the business. 

• Tax Efficiency – Professional medical corporations can reduce a doctor’s tax liability as well. If certain requirements are met, the corporation can make an election to become a S-Corporation under federal law. S-Corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Moreover, shareholders who receive distributions from S-Corporations are also subject to a reduced self-employment tax. Finally, doctors may deduct their business expenses from their income thereby reducing tax liability. 

The Consequences of an Improperly formed Professional Medical Corporation

The creation of a Professional Medical Corporation is complex, and there are many consequences associated with improperly establishing one of these corporations. This can include:

• Missing out on business protections and benefits.
• Not filing as an S-Corporation within the applicable timeframe. 
• Losing protections due to non-compliance.
• Financial penalties. 
• De facto corporation determination. 

So, How Do You Form a Professional Medical Corporation?

A professional medical corporation must be formed in California in accordance with several steps. 

First, to be approved by the California Secretary of State, professional corporations must meet certain naming restrictions. In addition to choosing a compliant name, the articles of incorporation must be drafted and filed with the Secretary of State. The articles of incorporation must contain several mandatory provisions. 

The next step is to prepare corporate by-laws, which establish the structure and operating rules of the corporation. 

In addition to these initial actions, you will need to:

• Organize the first corporate meeting to issue shares and elect directors and officers. 
• Obtain an IRS EIN number.
• Establish a corporate bank account.
• Elect to be an S-Corp with the IRS (if applicable). 
• Provide the Secretary of State with a statement of information.
• Get a business license. 
• Create a fictitious business name (if applicable).
• Ensure other tax elections are made. 

Professional Medical Corporation Constraints & Restrictions

Professional medical corporations in California may only provide medical services and in California, shareholders of  professional medical corporations  must be licensed medical professionals. 

A California medical corporation may include other licensed professionals as shareholders, officers, directors, or employees, provided that: 

• The other licensed professional(s) does not own more than 49% of the total shares; and  
• There are more licensed medical doctor shareholders than non-doctor shareholders. 

In California, professional medical corporations are permitted to have the following shareholders and directors (California Corporations Code 13401.5(a)):

• Licensed podiatrists.
• Licensed psychologists.
• Registered nurses.
• Licensed optometrists.
• Licensed marriage and family therapists.
• Licensed clinical social workers.
• Licensed physician assistants.
• Licensed chiropractors.
• Licensed acupuncturists.

If a medical corporation is solely owned by a medical doctor, there may only be one director and that shareholder must serve as both the president and treasurer. If a medical corporation is owned by more than one shareholder, there are additional rules regarding the number of directors the medical corporation may have and the positions the shareholders must hold.  

Professional Medical Corporation Taxation

In California, professional medical corporations can be classified as a C-Corporation or as an S-Corporation, each of which have different tax implications. Unless a corporation makes the  S-Corporation election, it will be classified as C-Corporation by default. 

• C-Corporations – Corporations registered in California are subject to the corporate tax rates imposed by the federal and state governments. Dividends distributed to shareholders must be reported by the shareholders, and those dividends will be subject to income tax. The taxation of dividends is commonly referred to as “double taxation” since the income is taxed once at the corporate level and again at the shareholder level. 

• S-Corporations – Professional medical corporations that elect to be taxed as S-Corporations become pass-through entities. The income of the business and its deductions, losses, and tax credits are transferred to the shareholders instead of being taxed at the corporate level, thus avoiding double taxation. 

Compliance & Management

To maintain compliance with your professional medical corporation, several steps must be taken. Observation of these corporate formalities is important to ensure the liability protections afforded for the corporate entity will be upheld in a court of law.

• Shareholders’ Meetings – Under California law, professional medical corporations are required to hold annual shareholder meetings. A variety of agenda items are presented by the chair, and the shareholders are asked to vote on them. Among the items on the agenda may be the appointment of directors to the board, the removal of directors, voting on shareholder initiatives, and board-initiated transactions that require shareholder approval, such as mergers, the sale of assets, or the dissolution of the company.    

• Board of Directors Meetings – The board of directors meets with sufficient frequency to discuss the management of the professional medical corporation. That is the board’s primary responsibility. Directors are typically responsible for establishing broad policies and objectives for the organization of the corporation, as well as selecting, supporting, and monitoring the performance of the officers, assuring adequate financial resources, and approving the annual budget.

• Minutes – Minutes should be kept for both shareholder meetings and board meetings. Keeping minutes is essential since they serve as official records of a meeting’s decisions. 

• Statement of Information – The California Secretary of State requires corporations to file an annual statement of information. It is possible to do this online, at no charge, via the Secretary of State’s website (https://businessfilings.sos.ca.gov/). 

Californians may find it difficult to form a professional medical corporation, but the result can provide many advantages over other types of corporations. Contact us today to find out how we can help you form and maintain an effective Professional Medical Corporation.