In the world of business formation, the term Medical PLLC, or Medical Professional Limited Liability Company, refers to a special legal business entity that is designed for licensed physicians for rendering professional services. However, navigating the specifics of using a Medical PLLC can be a challenge, particularly as business structure regulations vary from state to state. This article discusses the permissibility of utilizing Medical PLLCs in California, and the alternatives for medical practice owners.

Spoiler Alert: Medicine Cannot Be Practiced Using Any LLC in California

If you are already practicing medicine in California as a California LLC or an LLC or PLLC from a state other than California, you should also read this article which includes information about how to get into compliance with California law for your medical practice and avoid disciplinary action from the Medical Board of California.

The California Revised Uniform Limited Liability Company Act of the California Corporations Code Prohibits the Use of LLCs for the Provision of Professional Medical Services by Licensed Physicians in California

Use of a California LLC to Render Professional Medical Services in California

Neither a foreign nor a California limited liability company (LLC) may be used to render professional medical services in California. This comes as a surprise to many licensed physicians, as Medical Professional Limited Liability Companies are commonly used to render professional medical services in other states. However, California Corporations Code Section 17701.04(e) answers the question clearly regarding the use of a foreign or California LLC as a business entity for licensed physicians in California:

“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”

Thus, licensed physicians may not use or form limited liability companies for the provision of professional medical services in California.

Use of a California PLLC to Render Professional Medical Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC to render professional medical services, because nothing in the California Corporations Code differentiates the idea of a California Medical PLLC from the California LLC, there is nothing in California law regarding LLC formation for the provision of professional medical services, and nothing establishes a California Medical PLLC as a business entity that may be formed under California law.

In short, there is no California Medical PLLC as the law currently stands at the time of this writing in 2024, and thus licensed physicians are unable to form a California Medical PLLC for their professional medical services. This is a significant departure from the norm in many other states, where Medical PLLCs are a commonly used business entities for licensed physicians.

Use of a Foreign Medical PLLC to Render Professional Medical Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC by licensed physicians to render professional medical services, and because the California Corporations Code does not differentiate between a between a foreign LLC or foreign PLLC for purposes of California Corporations Code Section 17701.04(e), neither a foreign LLC nor a foreign PLLC may be used by licensed physicians to render professional medical services in California.

Professional practices that are structured as Medical PLLCs in other states need to exercise extreme caution when offering professional medical services in California. The prohibition set forth in California Corporations Code Section 17701.04(e) means that out-of-state medical practices operating as Medical PLLCs in their home state may encounter legal restrictions if they wish to offer their professional medical services in California. Therefore, the licensed physicians practicing under these Medical PLLCs in their home states must not use their Medical PLLCs when rendering professional medical services in California and must do so either as a California Sole Proprietorship or California General Partnership by default, or by establishing a California Professional Medical Corporation, as will be discussed below.

What Business Structure Options Do Physicians Have in California?

As California does not allow the use of California LLCs, foreign LLCs, or foreign Medical PLLCs (and there is no such thing as a California PLLC!) for the provision of professional medical services in the State of California, California licensed physicians seeking to practice medicine in California must explore choose one of the permissible business structures, as discussed below.

Selecting the best permissible business structure option will depend on the specific professional medical services to be offered and the regulations governing those medical services. In the following subsections, we will introduce the various business entities that are permitted to render professional medical services in California, including Sole Proprietorships, General Partnerships, and Professional Medical Corporations, each of which comes with its own set of advantages and limitations.

A California Licensed Physician May Practice as a Sole Proprietorship in California

A Sole Proprietorship is a straightforward and uncomplicated business structure that may be utilized by licensed physicians in California. In a Sole Proprietorship, the individual physician is the sole owner and operator of the medical practice.

Liability Protection for Licensed Physician Sole Proprietors in California

Sole Proprietorships do not provide their owners with liability protection in California. In this type of business structure, the licensed physician is personally responsible for all business debts, liabilities, obligations, and all legal judgments against the medical practice. This means that if the medical practice incurs a debt or is sued, the personal assets of the licensed physician, such as their home, car, and personal bank accounts, can be used to settle these obligations.

The lack of liability protection is a significant disadvantage of operating a medical practice as a Sole Proprietorship and is a critical factor that a licensed physician should consider when deciding on the most appropriate business structure for their medical practice in California.

Taxation of Licensed Physician Sole Proprietors in California

In California, Physician Sole Proprietorships are subject to pass-through taxation, meaning the business itself is not separately taxed. Instead, the income or loss of the business is passed through to the licensed physician. The licensed physician reports business income and expenses on Schedule C of their personal federal income tax return (Form 1040). The net profit or loss is then reported on the personal tax return of the licensed physician and taxed at individual income tax rates.

In addition to income taxes, a licensed physician practicing as a Sole Proprietorship in California is also subject to self-employment taxes, which cover Social Security and Medicare taxes. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

At the state level, California has one of the highest state income tax rates in the country, and these rates apply to business income that passes through to the personal tax returns of the licensed physician practicing as a Sole Proprietorship.

When Should a California Licensed Physician Practice as a Sole Proprietorship in California?

A California licensed physician should only consider practicing as a Sole Proprietorship in California when they are starting their medical practice and have limited financial resources, will not have employees, do not expect to grow their practice beyond just a few patients, and have substantial insurance coverage for the liabilities and risks associated with their medical practice.

However, as the medical practice grows, the licensed physician should reconsider the use of a Sole Proprietorship for their medical practice as revenue increases, before hiring employees, or as professional liabilities increase. Upon the first to occur of increasing revenue, hiring employees, or increases in professional liability, it will be advantageous for the licensed physician to explore other business structures that offer tax benefits and liability protection.

Two or More California Licensed Physicians Professionals May Practice as a General Partnership in California

A California General Partnership used for a medical practice is a business entity in which two or more licensed physicians join together to provide professional medical services in California. In such a setup, all physician partners share equal rights and responsibilities in managing the business of the medical practice.

Liability Protection for Physician General Partners in a California General Partnership

General Partnerships in California do not provide physician partners with liability protection. This means each physician partner has joint and several personal liability for all business debts, liabilities, obligations, and all legal judgments against the medical practice, including those incurred by other physician partners which includes acts of malpractice by the other physician partners. If the California General Partnership providing professional medical services is sued or incurs debt, the personal assets of each physician partner, such as their home, vehicles, and personal savings, could be at risk, even if they are not found personally at fault for incurring the debt or committing the act of malpractice.

This lack of liability protection is a considerable drawback for California General Partnerships rendering professional medical services and something California licensed physicians should seriously factor into their decision when considering a California General Partnership for their medical practice in California.

Taxation of General Partnership Medical Practices in California

In California, medical practices structured as General Partnerships are taxed under the pass-through taxation system. This means the California General Partnership itself does not pay income taxes. Instead, the share of the profits or losses of the California General Partnership allocated to each physician partner passes through to their personal income tax return. The individual physician partners are responsible for paying federal and state income taxes on their allocated share of the profits of the California General Partnership at their individual income tax rates.

Each physician partner is also required to pay self-employment taxes, which are Social Security and Medicare taxes for self-employed individuals. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

California General Partnership earnings are also subject to the California state income tax. The state has a progressive income tax system with rates ranging from 1% to 13.3%, depending on the income of the taxpayer. These rates apply to the allocated share of the California General Partnership income allocated to each physician partner and passed through to their personal tax returns.

When Should California Licensed Physicians Practice as a General Partnership in California?

Based upon the unlimited liability and tax structure of a California General Partnership, a California General Partnership should probably not be considered by licensed physicians practicing medical in California, as there are superior options for a professional practice in California that provide more personal liability protection than a California General Partnership for medical practices.

One or More California Licensed Physicians May Practice Medicine as a California Professional Medical Corporation in California

California Professional Medical Corporations are a specialized form of professional corporation for the practice of medicine designed specifically for licensed physicians who seek personal liability protection and tax benefits for their medical practice. A California Professional Medical Corporation is a separate legal entity distinct from its licensed physicians owner(s) and permitted non-physician owner(s), referred to collectively as licensed shareholders, which distinguishes it from a California Sole Proprietorship (which is an individual licensed physician personally practicing medicine) or a California General Partnership (which is a group of licensed physicians practicing medicine together).

Liability Protection from a Professional Medical Corporation in California

In a California Professional Medical Corporation, the personal assets of the licensed shareholders are generally protected from business debts, liabilities, obligations, and legal judgments against the California Professional Medical Corporation. This means that in most instances, if the California Medical Corporation is sued or incurs debt, the personal assets of the licensed physician owner(s) and other licensed shareholders (such as their home, vehicles, and personal savings) are shielded from creditors.

It is essential to note that this liability protection does not extend to professional malpractice claims against a licensed physician. The personal asset protection applies only to debts and obligations incurred by the California Professional Medical Corporation, not to the individual actions of a licensed physician. However, when two or more licensed physicians are practicing medicine in a California Professional Medical Corporation, a malpractice claim against one licensed physician is not a malpractice claim against all the other licensed physicians and other licensed shareholders, which is a significant increase in personal liability protection for professional malpractice compared to a California General Partnership.

While the use of a California Professional Medical Corporation provides liability protection, it does not eliminate the requirement for individual professionals to maintain adequate malpractice insurance coverage or for the California Professional Medical Corporation to otherwise secure liability insurance for indemnification of its liabilities.

Taxation of Professional Medical Corporations in California

Professional Medical Corporations in California can opt to be taxed as personal service corporations subject to double taxation or S Corporations, which alters the tax landscape for these entities. As the vast majority of California Professional Medical Corporations elect S Corporation taxation, this article will focus on S Corporation taxation of California Professional Medical Corporations.

With S Corporation status, the California Professional Medical Corporation itself does not pay income tax. Instead, the income and losses of the California Professional Medical Corporation pass through to the personal income tax returns of the licensed shareholders.

To qualify for S Corporation status, the California Professional Medical Corporation must meet certain requirements including having no more than 100 shareholders, all of whom must be U.S. citizens or residents, and having only one class of stock.

One of the key advantages of S Corporation status for a California Professional Medical Corporation lies in the area of self-employment taxes. Salaries and wages paid to licensed shareholder-employees are subject to payroll taxes (Social Security and Medicare). However, any additional profits distributed to licensed shareholders are not subject to either payroll taxes or self-employment taxes. This can result in significant tax savings.

In terms of state taxes, California taxes S Corporations at a rate of 1.5% of their net income, with a minimum tax of $800 paid annually to the California Franchise Tax Board. Licensed shareholders in a California Professional Medical Corporation taxed as an S Corporation are also required to pay state income tax on their allocated share of the income of the California Professional Medical Corporation.

When Should California Licensed Physicians Practice Using a Professional Medical Corporation in California?

A California licensed physician should consider practicing as a Professional Medical Corporation in California when seeking personal liability protection and tax benefits for their medical practice. This structure is particularly advantageous if the physician wishes to shield their personal assets from business debts, liabilities, and obligations while also shielding themselves from legal judgments against the California Professional Medical Corporation, with the exception of individual professional malpractice claims against the licensed physician personally.

If the licensed physician can meet the requirements necessary to qualify for S Corporation status, they can enjoy significant tax advantages. This includes the potential for tax savings through the having no self-employment tax liability on profits distributed to licensed shareholders, and only payroll tax liabilities on a reasonable salary paid to them as an employee of the California Professional Medical Corporation.

Based upon the availability of both limited liability and tax benefits for the licensed physician, the California Professional Medical Corporation should be the go-to business entity for California licensed physicians.

Secure Your Future with Legal Services from Experts in California Professional Business Structures: Let San Diego Corporate Law Guide Your Business Structure Selection

Choosing the right business structure for your medical practice in California is a critical step for every California licensed physician. It can significantly influence your tax obligations, personal liability, and the overall success of your medical practice. At San Diego Corporate Law, our experienced legal team is well-versed in California business laws and can help you navigate the complexities of forming California Medical Corporations for medical professionals. Whether you are considering a California Professional Medical Corporation or other structure for your medical practice, we can provide the guidance necessary to make an informed decision. Contact us today to schedule a consultation and ensure your medical practice starts in California on solid legal footing.