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Forming a Medical Corporation in California

Do you have plans to set up a private practice that consistently achieves success? In California, setting up a medical corporation is more advantageous than a partnership or sole proprietorship practice. 

Forming a Medical Corporation in California


Forming a Medical Corporation in California

Do you have plans to set up a private practice that consistently achieves success? In California, setting up a medical corporation is more advantageous than a partnership or sole proprietorship practice. However, the formation of medical corporations in California is governed by stringent legal requirements. Teaming up with the best legal minds can help to speed up things.

Unlimited liability partnerships are restricted in California.

If you and your business savvy buddy in the medical profession wish to venture out by yourselves, consider a medical corporation. In California, forming a limited liability partnership is not allowed for medical practitioners. These partnerships are limited to engineering, accounting, law, and other practices.

medical corporation is registered with the California Secretary of State.

California has various unique laws that govern the creation of medical corporations in the state. One must be well versed with business formation law and health care law. Your new corporation must be legally registered with the California Secretary of State before you start offering medical services.

The Medical Board of California regulates the corporation.

A medical corporation in California operates within the provisions of the:

  • Moscone-Knox Professional Corporation Act
  • Business and Professions Code
  • Professional and Vocational Regulations
  • The California Corporations Code
  • The Medical Board of California.

Forming an LLP in California is not permissible in the sense of medical practice under these laws. Instead, medical practitioners are restricted to Professional Corporation, PC, which is owned and operated only by licensed parties.

Regulations range from naming to administration.

When forming the medical corporation, whether as a physician, nursing, dentist, or chiropractic treatment center, medical experts must name and administer the businesses per every requirement in the California code section 2416.

For example, shareholders, directors, and officers must each be licensed to provide the kind of services the medical corp is registered for.

A medical corporation in California has limited liability.

Perhaps the most significant advantage of starting a medical corporation in California, as opposed to solo practice, is the extensive legal protections you get as a practitioner. Creditors cannot come after you. Lawsuits (except for malpractice) cannot be filed against you. Legally you are a separate entity from your business.

 It’s easier to build business credit with a medical LLC.

Building business credit should be easy if your medical corporation is entirely in compliance with the health and business formation law requirements. It may help you avoid personal guarantees.

Tax advantages; avoid double taxation.

By setting up your corporation as an S-Corp, you can avoid double taxation. With S-Corps, the business is not taxed. The income from the business is only taxed once when it’s passed to the individual shareholders.

Creating the corporation as a C-Corp exposes you to double taxation. When your business makes money, it pays taxes on the profits. After the income is distributed to shareholders, they pay another level of taxes.

 You get more retirement contributions and benefits.

With a medical corporation, you can double 401k contributions to more than what is allowed for sole practitioners. The corporation can similarly provide and deduct extensive employment benefits for the shareholders.

Common mistakes when forming a medical corporation in California

  • Using misleading, deceiving, confusing, or an existing name

The law states that the corporation name should be the full name or surname of one of its shareholders, a licensed medical professional.

You can use a fictitious name. Still, it should be in line with Section 2415 of the California Business and Professions Code. And you should file a Fictitious Name Permit with the Medical Board of California.

  • Having non-medical professionals as majority shareholders
  • 51 % of shares in a medical professional must belong to licensed professionals who are the business operators. In other words, licensed doctor shareholders should outnumber non-doctor shareholders.

For a fully compliant LLC structure, the director, president, vice president, secretary, and treasurer positions on the board should be reserved for the company’s doctor shareholders.

  • Registering the corporation as a conventional business

In California, corporations must be registered with the specific government agencies under which they fall. You should register your medical corporation with the Medical Board of California in full abidance of their stipulations. 

At registration, you must draft articles of incorporation with mandatory provisions and file these with the Secretary of State. You must then obtain a federal tax id for the corporation from the IRS and set up the corporation’s bank accounts.

Other registration steps include issuing shares, filing an S-Corp (Form 2553) election with the IRS, registering as an employer, and obtaining business licenses.

 After forming the corporation

  • The business should be run as a separate entity with separate bank accounts from that of its owners.
  • Payments should be made to the business and not its owners. 
  • Contravening these requirements can erode the limited liability protections of the corporation.

When managing and running the medical corporation, the law is clear on:

Shareholders meetings

The company must hold annual shareholder meetings. Shareholders must be allowed to vote on company initiatives, board appointments, and business moves such as mergers, sales, or acquisitions.

Board meetings 

 California law requires the board of directors to regularly decide on issues that revolve around the medical corporation’s management. They should set comprehensive policies, approve budgets, and review the performance of C-suite staff.

 Annual statements of information

California’s medical corporation laws require the corporation to send annual reports to the Secretary of State. This can be done online on the Secretary of State website.

 When managing and running the medical corporation, you may need an attorney to explain the law on:

  • The rights and actions of shareholders, including voting rights and profits distributions
  • Dealing with a shareholder who gets suspended from the medical board or loses their license to practice
  • Restructuring after the death or incapacitation of a board listed shareholder
  • How personal life events, such as a shareholder’s divorce or bankruptcy can affect ownership interest
  • Legal, a grey area, and forbidden practices per medical, occupational, and business laws.
  • Dealing with the client (suppliers), patient, employee, or shareholder disputes as they arise
  • Compliance with Health Insurance Portability and Accountability Act (HIPAA).

Forming a medical corporation in California is a multifaceted undertaking that must comply with many different laws. A medical corporation attorney can streamline and accelerate the process and help you manage the practice in full compliance after registration.

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