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

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

If you are already practicing osteopathic medicine in California as a California LLC or an LLC or Professional LLC 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 osteopathy practice.

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

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

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

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

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

Use of a Foreign Osteopathic Medicine PLLC to Render Professional Osteopathic 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 osteopathic doctors to render professional osteopathy 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 osteopathic doctors to render professional osteopathy services in California.

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

What Business Structure Options Do Osteopaths Have in California?

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

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

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

Liability Protection for Licensed Osteopath Sole Proprietors in California

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

Taxation of Licensed Osteopath Sole Proprietors in California

In California, Osteopath 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 osteopathic doctor. The licensed osteopathic doctor 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 osteopathic doctor and taxed at individual income tax rates.

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

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

A California licensed osteopathic doctor should only consider practicing as a Sole Proprietorship in California when they are starting their osteopathy 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 osteopathy practice.

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

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

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

Liability Protection for Osteopath General Partners in a California General Partnership

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

Taxation of General Partnership Osteopathic Medicine Practices in California

In California, osteopathy 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 osteopathic doctor partner passes through to their personal income tax return. The individual osteopathic doctor 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 osteopathic doctor 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 osteopathic doctor partner and passed through to their personal tax returns.

When Should California Licensed Osteopaths 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 osteopathic doctors practicing osteopathy 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 osteopathy practices.

One or More California Licensed Osteopaths May Practice Osteopathic Medicine as a California Professional Osteopathic Medicine Corporation in California

California Professional Osteopathic Medicine Corporations are a specialized form of California professional corporation pursuant to the California Business and Professions Code designed specifically for licensed osteopathic doctors who seek personal liability protection and tax benefits for their osteopathy practice. A California Professional Osteopathic Medicine Corporation is a separate legal entity distinct from its licensed osteopathic doctors owner(s) who may be shareholders, referred to collectively as licensed shareholders, which distinguishes it from a California Sole Proprietorship (which is an individual licensed osteopathic doctor personally practicing osteopathic medicine) or a California General Partnership (which is a group of licensed osteopathic doctors practicing osteopathic medicine together).

Liability Protection from a Professional Osteopathic Medicine Corporation in California

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

Taxation of Professional Osteopathic Medicine Corporations in California

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

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

To qualify for S Corporation status, the California Professional Osteopathic Medicine 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 Osteopathic Medicine 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 Osteopathic Medicine 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 Osteopathic Medicine Corporation.

When Should California Licensed Osteopaths Practice Using a Professional Osteopathic Medicine Corporation in California?

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

If the licensed osteopathic doctor 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 Osteopathic Medicine Corporation.

Based upon the availability of both limited liability and tax benefits for the licensed osteopathic doctor, the California Professional Osteopathic Medicine Corporation should be the go-to business entity for California licensed osteopathic doctors.

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