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Medical Corporations
Should you incorporate your medical practice?
This article gives you a quick roadmap. The first factor is whether you want limited liability, which is the primary benefit of forming a medical corporation. Next you determine the costs of forming and maintaining a medical corporation. Then you delve into the tax advantages and disadvantages of forming a corporation. Last, you weigh the factors and make a decision. BENEFIT - LIMITED LIABILITY Limited liability is the primary benefit of incorporating your medical practice. A solo doctor is personally liable for all general debts and liabilities of the practice, including vendor contracts and real property and equipment leases. On the other hand, a shareholder of a corporation is not personally liable for the corporation’s debts (except payroll taxes, workers compensation premiums and related obligations imposed by the government). There is one big exception, however: the doctor is always liable for his or her own professional negligence and the negligence of employees under the doctor’s supervision. Only insurance can mitigate such liability. For more on limited liability, read Reduce your personal liability from your business. PARTNERS NEED A CORPORATION Practices with more than one physician should use a medical corporation. The medical corporation not only shields each physician from general liabilities of the medical corporation (discussed above), but also shields each physician from liabilities arising from the acts of other physicians in the group. Although two or more doctors can work together as a partnership, this is not your best choice. Partnerships are risky because each doctor is liable for the acts of each other doctor. Incorporation mitigates this risk by protecting against liability from other doctors in the group. COSTS You want the benefits of limited liability. But it costs money – corporations pay franchise taxes and require legal and accounting costs for their organization and maintenance. Worse yet, because physicians are subject to special regulation, you need specialized legal advice. A physician probably will incur more legal fees than the run-of-the-mill service corporation. TAX FACTORS Disclaimer: Consult your accountant about all tax matters. I do not give tax advice. If your accountant disagrees with my opinions below, listen to your accountant, not me. Tax analysis causes a lot of confusion. The various and sundry tax advantages and disadvantages of forming a medical corporation all depend on your circumstances, which change from year to year, not to mention the endless changes in tax law. Worse, sometimes you find that after weighing the tax advantages and disadvantages, they all seem to cancel one another out, leaving you with no clear-cut decision. To sum it up quickly, there are few remaining tax benefits for incorporating a medical practice. Moreover, the few remaining tax benefits work only for “C” corporations (not for “S” corporations). In brief, forming a professional C corporation helps a little with fringe benefits (most notably health insurance) and life insurance, but not much else. On the other hand, incorporation means you must pay the annual franchise tax (explained above). If after all this analysis you decide to incorporate your medical practice, go to my next article, Legal compliance checklist for a medical corporation. This article only gives a short roadmap of the issues involved in deciding whether or not to incorporate your medical practice. There is a lot more to this topic than introduced here. Please get competent legal and tax counsel before you form a medical corporation.
Legal compliance checklist for a medical corporation
In this article, I give you a legal compliance checklist for your medical corporation. Incorporating a medical practice can feel overwhelming. There are so many unknowns to cause you anxiety. I write this checklist to fill in the unknown. This checklist gives you a bird’s eye view of legal compliance for your start-up medical corporation. Let’s start at the beginning – incorporation. FORM THE MEDICAL CORPORATION Your basic choices are a C corporation or an S corporation (you may not use an LLC for a medical practice). The law is tricky for medical corporations, so use an attorney who knows medical corporation law to draft your corporate documents (articles, bylaws, stock certificates, etc.). For related information on who can own a medical corporation, see my article, How a non-licensed person can work with a medical practice, including the use of an administrative / management service company. SHAREHOLDERS / BUY-SELL AGREEMENT If your practice has more than one owner / doctor, seriously consider getting a shareholders / buy-sell agreement to govern your relationship with your partners. These agreements save you a lot of money if partner relations go bad. A buy-sell agreement resolves disputes between the partners, including exit provisions if the partners can’t work together anymore. I call this the partners’ economic divorce. For more info, read Shareholder buy-sell agreements for medical corporations. CHOOSE A LOCATION First decide on a general location, then check local zoning requirements to be sure you can operate a medical practice there. Visit your local planning / permits department for this and other local requirements for your location. REAL PROPERTY LEASE One of the most important contracts you’ll sign is the lease for your offices. The lease will bind you for years to come, and you’ll have to continue paying rent even if the practice doesn’t perform well. This is another area where you need a lawyer. Read Understanding Commercial Leases. FICTITIOUS NAME PERMIT A fictitious name is a dba or some name other than the medical corporation’s legal name. In most cases, you must obtain a fictitious name permit from the Medical Board / Division of Licensing. You also might need a separate fictitious name filing with your local county recorder’s office. TRADEMARKS If your medical practice will rely on a special business name or trademark (as is the case for med spas, for example), find out if anyone else has prior rights to use the business name. Search the internet to see if anyone is using your name for medical practices within your geographic scope. Your geographic scope relates to how far you look for patients. If your internet searches come up clean, consider getting a trademark on your name. If your searches show problems, talk to a lawyer about what to do next. Get a Federal Employer Identification Number (EIN). You can call the IRS for your EIN or get it from the IRS’ website. Bank Accounts. Once you have the articles of incorporation plus EIN, you can open bank accounts. Local Business License. Get a license to do business from your city. Seller’s Permit. If you sell merchandise, get a seller’s permit from the California State Board of Equalization. Employer Filings and Withholdings. If you have employees, file form DE-1 with California EDD. This starts the never-ending process of employment law compliance. Hire a payroll company to handle your employee wage withholdings. Workers Compensation and Other Insurance. Once you have employees, get an insurance broker for workers compensation insurance. Workers comp is required by law. Use an experienced broker to purchase your professional malpractice insurance. Finally, read Reduce your personal liability from your business to learn how to protect your personal assets from business risks.
Corporate structure - Levels of legal control over a group medical practice
LEVELS OF LEGAL CONTROL Level #1: Shareholders / Partners The shareholders elect the directors. The shareholders should meet at least once a year to do so. By controlling the composition of the board of directors, the shareholders can control the corporation. In most other respects, however, the shareholders (in their capacity as shareholders) have no control over the corporation, with exception for a handful of required votes on dissolution and the like. *** In a partnership, the partners are akin to the shareholders. The partners as a group elect the managing committee. Level #2: Board of Directors / Managing Committee The board of directors controls over matters of general operating policy. These include, for example, the hiring and firing of officers, setting compensation, declaring bonuses, issuing stock, corporate borrowing and other big decisions. The board should not micro-manage the practice. Directors set the corporation’s policies, and they should leave to the officers the implementation of those policies. *** A partnership might have a managing committee, which is akin to a board of directors. Level #3: Officers / Managing Partner The officers run the business. In CA, the corporation must have at least the following officers: president/CEO, corporate secretary and treasurer/CFO. One person can serve simultaneously in all 3 positions. The officers oversee the rest of the practice’s employees. *** A partnership might have a managing partner, who is akin to the CEO, CFO and corporate secretary all rolled into one. Level #4: Employees The rank-and-file employees do the day-to-day work. Practice administrators usually are at this level. CEO / MANAGING PARTNER Many practices have a managing partner, who is akin to the CEO, CFO and corporate secretary all rolled into one. In many practices, the doctors don’t want to be bothered with management. Instead they prefer to focus on their individual practices. If that’s the case, the practice should provide special compensation to the managing partner, otherwise no one will do the job. It’s no fun managing other doctors. POWER If no one wants to be bothered with management, the managing partner by default has great power. Sometimes the other doctors don’t pay attention to management. Over time, management can carve out little fiefdoms for itself. For example, a managing partner can be the sole signer on bank accounts, the sole contact for accountants, bookkeepers and lawyers, the sole person to whom employees report, and more. If the managing partner leaves for any reason, or if the practice develops a split between warring factions, it will take time and effort for the other partners to pick up the pieces and keep the practice running. We all know the quote “power corrupts; absolute power corrupts absolutely.” I think it more accurate to say that power deludes. It’s good to put boundaries around the exercise of power, to keep it realistic, transparent, and within the bounds of common sense. The board or managing committee should actively and regularly examine the management of the practice. The CEO / managing partner should regularly report to the board or other shareholders or partners, including the delivery of quarterly financial statements. Oversight is the best way to keep things under control. In some practices, the doctors might choose to have the corporate documents set forth in detail the limits on the powers and duties of the CEO / managing partner. For example, the CEO might have the unilateral right to incur expenses only up to $5,000, or enter into contracts with a maximum term of 1 year. To exceed those limits, the CEO would need the approval of the board of directors. In many cases, it’s good to rotate the position of CEO every couple of years.