Business Formation for Physicians: Choosing an Entity and Structuring Your Practice

Choosing a Business Entity for a Physician Practice

Choosing a business entity is an important step when starting or restructuring a physician practice. An LLC may be appropriate for some healthcare businesses, while a professional limited liability company (PLLC), professional corporation (PC), professional association, or another professional entity may be required for a medical practice.

For physicians, liability protection is only one factor. State law may also determine what type of entity can provide medical services, who can own it, who can manage it, and how much control a separate management company can have over the practice.

LLC vs. PLLC for Physicians

An LLC is a limited liability company formed under a state’s general business-entity laws. A PLLC is a professional limited liability company intended for certain licensed professional services.

Both types of entities can provide liability protection for many business debts and obligations. Neither generally protects a physician from personal liability for the physician’s own professional negligence.

The important difference is that a PLLC is subject to additional rules governing professional services. Those rules may address who can own an interest in the entity, who can manage it, what services it can provide, and whether it must satisfy additional licensing or registration requirements.

For a physician opening a medical practice, the first question should be: “What type of entity is permitted to provide my professional services in this state?”

Professional Entity Requirements Vary by State

States treat physician-owned businesses differently. A physician practice may be required to use a professional entity because of corporate practice of medicine rules. In other circumstances, state law may permit more than one type of professional entity. For example:

• California does not permit physicians to practice medicine through an LLC, instead requiring an appropriate professional medical corporation or another permitted structure.
• Illinois permits certain physician practices to operate through a PLLC or another professional entity structure, subject to specific ownership and management requirements.
• Texas permits physicians to use professional entities such as professional associations and PLLCs.

These differences are why an entity formed for a physician in one state may not be appropriate in another.

A physician also should not assume that an ordinary LLC is automatically suitable simply because the state accepted the filing. Entity formation and authorization to provide professional services are separate questions.

What Is Corporate Practice of Medicine?

Corporate practice of medicine, commonly called CPOM, refers to state laws and legal doctrines that restrict non-physicians from practicing medicine or controlling a physician’s professional judgment.

CPOM rules vary significantly by state. Where they apply, they can affect both ownership and management. For example, CPOM rules may restrict a non-physician from controlling:

• Patient treatment decisions
• Physician hiring and termination based on clinical matters
• Medical records
• Coding and billing decisions
• Payor relationships
• Other decisions involving the practice of medicine

This does not mean that physicians must personally handle every administrative decision. A practice can have employees, administrators, vendors, and, in some structures, a separate management company. The important question is whether the arrangement preserves the physician’s required control over professional matters.

Who Can Own a Physician Practice?

Ownership restrictions are one of the most important differences between an ordinary business and a physician practice. An ordinary LLC can generally have owners who are not licensed healthcare professionals. A medical practice subject to CPOM or professional entity restrictions may not have that flexibility.

Depending on the state, ownership may be limited to physicians, certain other licensed professionals, or professional entities owned by qualifying professionals.

The rules can also affect management. A person who is permitted to hold an ownership interest is not necessarily permitted to serve in every management or officer role.

This becomes especially important when a physician wants to bring another physician into the practice, add a non-physician investor, create a multi-specialty practice, sell an ownership interest, establish an MSO relationship, or operate in more than one state.

What Happens When Multiple Physicians Own the Practice?

A practice with multiple physician owners needs formation documents and clear rules for how the practice will operate and what happens when ownership changes. An operating agreement, shareholder agreement, or other governing document may address:

• Each physician’s ownership percentage
• Voting rights
• Management responsibilities
• Profit distributions
• Capital contributions
• Admission of new physician owners
• Restrictions on transfers
• Retirement or voluntary departure
• Death or disability
• Loss or restriction of a medical license
• Termination of a physician’s employment
• Valuation and buyout procedures

These provisions are particularly important for professional entities because an ownership interest may not be transferable to anyone the physician chooses. If only certain licensed professionals may own the practice, the governing documents should establish a process for transferring an interest to an eligible owner.

A practice should also decide what happens if one physician wants to leave while the other owners want the practice to continue. Addressing these issues in advance can reduce uncertainty about ownership and the future of the practice.

Can a PLLC or LLC Be Taxed as an S-Corporation?

Yes. An LLC or PLLC can, if eligible, elect to be taxed as an S-corporation. An S-corporation is a federal tax classification, not a separate type of legal entity. Choosing an LLC or PLLC determines the legal structure of the business. An S-corporation election determines how the entity is taxed for federal income tax purposes.

The tax consequences can be significant, so physicians should discuss with their tax professional whether an S-corporation election makes sense for their practice.

How Do MSOs Fit Into Physician Practice Structures?

A management services organization, or MSO, is a separate company that provides administrative or business services to a healthcare practice. An MSO structure can allow a physician-owned professional entity to remain responsible for providing medical services while a separate company provides non-clinical services such as administrative support, technology, scheduling, marketing, or other business functions.

A typical arrangement may involve a physician-owned professional entity, a separate MSO, and a management services agreement defining the services and compensation.

An MSO arrangement does not eliminate CPOM requirements. Separating the medical practice and management company into different entities does not allow the MSO to control decisions that state law reserves to physicians.

The agreement should be reviewed for issues involving clinical control, medical records, staffing, billing, payor relationships, fees, and other regulated activities. Fee-splitting laws may also affect how the MSO is compensated.

Does a PLLC Protect a Physician From Malpractice Liability?

Generally, no. A professional entity does not eliminate a physician’s personal liability for the physician’s own professional negligence. For example, if a physician personally provides negligent medical treatment, forming a PLLC does not prevent the physician from being held personally responsible for that conduct.

The entity can provide liability protection for many business obligations and may protect one owner from certain liabilities arising from another person’s conduct, depending on applicable law. Professional liability insurance serves a different purpose and remains an important part of managing malpractice risk.

What Does It Mean to Pierce the Corporate Veil?

One benefit of forming an LLC, PLLC, or other limited-liability entity is separating the business’s obligations from the owner’s personal assets. That protection is not absolute.

“Piercing the corporate veil” refers to circumstances in which a court may disregard the separation between an entity and its owners and hold an owner personally responsible for certain business obligations. The standards vary by state.

Physicians can take steps to maintain the separation between themselves and their practice, including:

• Maintaining separate business and personal bank accounts
• Using the entity’s legal name on contracts and other business documents
• Keeping appropriate business and financial records
• Properly funding and maintaining the entity
• Avoiding commingling personal and business assets

Forming a professional entity is only part of establishing the practice’s legal structure. The owners must also maintain the entity after formation.

What If an Accountant or Online Service Already Formed My LLC?

If an LLC has already been formed, the next question is whether it is the appropriate entity for the services the practice provides.

An LLC created for a non-clinical healthcare business is different from an entity that directly provides medical services. If the existing entity is not appropriate for the practice, the business may need to restructure or establish a separate professional entity.

Address this before the practice begins providing professional services through the entity.

Do I Need a Separate Business Bank Account?

Yes. A physician-owned entity should maintain separate business finances. Using a dedicated business account helps maintain the separation between the physician and the entity and creates a clearer record of the practice’s income and expenses. Physicians should avoid using business accounts as personal accounts or routinely paying personal expenses from practice funds.

Properly maintaining the entity is an important part of preserving the liability protection it is intended to provide.

Do I Need a Healthcare Lawyer to Help Me Form an LLC or PLLC?

If you are forming a physician practice, adding physician owners, restructuring an existing practice, or considering an MSO arrangement, Jackson LLP Healthcare Lawyers can review the proposed structure and prepare the appropriate organizational documents.

We provide complimentary 15-minute consultations. Connect with our team today to get started.

Free Attorney Consultation

Book Now

Frequently Asked Questions About Physician Practice Formation