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

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

If you are already practicing midwifery 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 midwifery practice. Having invested time and money into completing a midwifery education program, practicing in the wrong business structure risks that investment and your professional license.

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

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

Neither a foreign nor a California limited liability company (LLC) may be used to render professional midwifery services in California. This comes as a surprise to many licensed midwives, as Midwifery Professional Limited Liability Companies are commonly used to render professional midwifery 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 midwives 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 midwives may not use or form limited liability companies for the provision of professional midwifery services in California.

Use of a California PLLC to Render Professional Midwifery 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 midwifery services, because nothing in the California Corporations Code differentiates the idea of a California Midwifery PLLC from the California LLC, there is nothing in California law regarding LLC formation for the provision of professional midwifery services, and nothing establishes a California Midwifery PLLC as a business entity that may be formed under California law.

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

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

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC by licensed midwives to render professional midwifery 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 midwives to render professional midwifery services in California.

Professional practices that are structured as Midwifery PLLCs in other states need to exercise extreme caution when offering professional midwifery services in California. The prohibition set forth in California Corporations Code Section 17701.04(e) means that out-of-state midwifery practices operating as Midwifery PLLCs in their home state may encounter legal restrictions if they wish to offer their professional midwifery services in California. Therefore, the licensed midwives practicing under these Midwifery PLLCs in their home states must not use their Midwifery PLLCs when rendering professional midwifery 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 Midwifery Corporation, as will be discussed below.

What Business Structure Options Do Midwives Have in California?

As California does not allow the use of California LLCs, foreign LLCs, or foreign Midwifery PLLCs (and there is no such thing as a California PLLC!) for the provision of professional midwifery services in the State of California, California licensed midwives seeking to practice midwifery 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 midwifery services to be offered and the regulations governing those midwifery services. In the following subsections, we will introduce the various business entities that are permitted to render professional midwifery services in California, including Sole Proprietorships, General Partnerships, and Professional Midwifery Corporations, each of which comes with its own set of advantages and limitations.

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

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

Liability Protection for Licensed Midwife Sole Proprietors in California

Sole Proprietorships do not provide their owners with liability protection in California. In this type of business structure, the licensed midwife is personally responsible for all business debts, liabilities, obligations, and all legal judgments against the midwifery practice. This means that if the midwifery practice incurs a debt or is sued, the personal assets of the licensed midwife, 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 midwifery practice as a Sole Proprietorship and is a critical factor that a licensed midwife should consider when deciding on the most appropriate business structure for their midwifery practice in California.

Taxation of Licensed Midwife Sole Proprietors in California

In California, Midwife 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 midwife. The licensed midwife 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 midwife and taxed at individual income tax rates.

In addition to income taxes, a licensed midwife 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 midwife practicing as a Sole Proprietorship.

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

A California licensed midwife should only consider practicing as a Sole Proprietorship in California when they are starting their midwifery 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 midwifery practice.

However, as the midwifery practice grows, the licensed midwife should reconsider the use of a Sole Proprietorship for their midwifery 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 midwife to explore other business structures that offer tax benefits and liability protection.

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

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

Liability Protection for Midwife General Partners in a California General Partnership

General Partnerships in California do not provide midwife partners with liability protection. This means each midwife partner has joint and several personal liability for all business debts, liabilities, obligations, and all legal judgments against the midwifery practice, including those incurred by other midwife partners which includes acts of malpractice by the other midwife partners. If the California General Partnership providing professional midwifery services is sued or incurs debt, the personal assets of each midwife 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 midwifery services and something California licensed midwives should seriously factor into their decision when considering a California General Partnership for their midwifery practice in California.

Taxation of General Partnership Midwifery Practices in California

In California, midwifery 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 midwife partner passes through to their personal income tax return. The individual midwife 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 midwife 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 midwife partner and passed through to their personal tax returns.

When Should California Licensed Midwives 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 midwives practicing midwifery 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 midwifery practices.

One or More California Licensed Midwives May Practice Midwifery as a California Professional Midwifery Corporation in California

California Professional Midwifery Corporations are a specialized form of corporate business structure designed specifically for licensed midwives who seek personal liability protection and tax benefits for their midwifery practice. A California Professional Midwifery Corporation is a separate legal entity distinct from its licensed midwives owner(s) and permitted non-midwife owner(s) who are licensed persons such as licensed physicians, licensed physician assistants, licensed psychologists, licensed chiropractors, licensed professional clinical counselors, and licensed clinical social workers, referred to collectively as licensed shareholders, which distinguishes it from a California Sole Proprietorship (which is an individual licensed midwife personally practicing midwifery) or a California General Partnership (which is a group of licensed midwives practicing midwifery together).

Liability Protection from a Professional Midwifery Corporation in California

In a California Professional Midwifery Corporation, the personal assets of the licensed shareholders are generally protected from business debts, liabilities, obligations, and legal judgments against the California Professional Midwifery Corporation. This means that in most instances, if the California Professional Midwifery Corporation is sued or incurs debt, the personal assets of the licensed midwife 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 midwife. The personal asset protection applies only to debts and obligations incurred by the California Professional Midwifery Corporation, not to the individual actions of a licensed midwife. However, when two or more licensed midwives are practicing midwifery in a California Professional Midwifery Corporation, a malpractice claim against one licensed midwife is not a malpractice claim against all the other licensed midwives 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 Midwifery Corporation provides liability protection, it does not eliminate the requirement for individual professionals to maintain adequate malpractice insurance coverage or for the California Professional Midwifery Corporation to otherwise secure liability insurance for indemnification of its liabilities.

Taxation of Professional Midwifery Corporations in California

Professional Midwifery 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 Midwifery Corporations elect S Corporation taxation, this article will focus on S Corporation taxation of California Professional Midwifery Corporations.

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

To qualify for S Corporation status, the California Professional Midwifery 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 Midwifery 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 Midwifery 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 Midwifery Corporation.

When Should California Licensed Midwives Practice Using a Professional Midwifery Corporation in California?

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

If the licensed midwife 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 Midwifery Corporation.

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

A Note Regarding Certified Nurse Midwives

It is worth noting that certified nurse midwives who are licensed to provide professional services in the profession of registered nursing and as a certified nurse midwife may form either a California Professional Midwifery Corporation pursuant to the California Business and Professions Code, the California Licensed Midwifery Practice Act, and the Medical Board of California, or a California Professional Nursing Corporation pursuant to the California Business and Professions Code and the California Board of Registered Nursing, as such persons are both California licensed midwives and California licensed registered nurses, and thus may have either of these professional corporations. An experienced corporate attorney with expertise in healthcare law can aid in the decision regarding which entity will be the most appropriate.

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 midwifery practice in California is a critical step for every California licensed midwife. It can significantly influence your tax obligations, personal liability, and the overall success of your midwifery 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 a California professional corporation. Whether you are considering a California Professional Midwifery Corporation or other structure for your midwifery practice, we can provide the guidance necessary to make an informed decision. Contact us today to schedule a consultation and ensure your midwifery practice starts in California on solid legal footing.