Navigating the complexities of business structures can be a significant challenge, especially in a state with regulations as specific as California. For licensed physicians, understanding the right way to incorporate is crucial. The California Professional Medical Corporation offers a unique structure designed to meet the legal and professional requirements for the practice of medicine. However, the path to establishing and maintaining a California Professional Medical Corporation is lined with questions.

This article answers some of the most frequently asked questions about California Professional Medical Corporations. From what a California Professional Medical Corporation is, who can form one, the benefits it offers, and the specific rules that govern its operation under California law. By understanding these key details, California physicians can make an informed decision about whether a California Professional Medical Corporation is the right choice for a medical practice and ensure compliance with the California Corporations Code and California Business and Professions Code.

What is a California Professional Medical Corporation?

A California Professional Medical Corporation is a special type of business entity created for licensed physicians who provide state-licensed medical services. Under California law, these licensed physicians are often prohibited from forming a standard corporation, such as a California Corporation or California S-Corp, or a California Limited Liability Company (California LLC) for their medical practice. Instead, they must form a California Professional Medical Corporation if they wish to practice medicine in corporate form.

The primary purpose of a California Professional Medical Corporation is to allow physicians to gain the liability protections and tax advantages of a corporate structure while still being held personally accountable for their professional conduct. The California Professional Medical Corporation structure is governed by the Moscone-Knox Professional Corporation Act, which is part of the California Corporations Code as well as the California Business and Professions Code, which set out the specific rules for forming, owning, and operating a California Professional Medical Corporation.

Essentially, a California Professional Medical Corporation functions much like a traditional corporation but with key differences related to ownership and liability specifically tailored for California physicians.

Who is Required to Form a California Professional Medical Corporation?

In California, certain professions are mandated by law to form a California Professional Corporation if they wish to incorporate their practice. They cannot form a standard S Corporation, C Corporation, or LLC to render their professional services.

The list of professions required to use a California Professional Corporation structure is extensive, and includes medicine under California Business and Professions Code §§ 2400–2417.5.

Attempting to practice medicine through an incorrect business entity can lead to disciplinary action from the Medical Board of California and other legal complications.

What are the Benefits of a California Professional Medical Corporation?

Choosing to form a California Professional Medical Corporation offers several significant advantages for a medical practice. Some of these advantages are as follows.

Liability Protection of California Professional Medical Corporations

While a California Professional Medical Corporation does not shield a California physician from malpractice claims related to their own professional negligence, it does protect them from the malpractice of their business partners or fellow shareholders. In a California General Partnership, each partner has joint and several personal liable for the business debts and the professional negligence of all other partners. A California Professional Medical Corporation creates a corporate shield, limiting the personal liability of a shareholder to their own actions or inactions. Personal assets are also protected from general business debts, liabilities, obligations, and legal judgments against the California Professional Medical Corporation itself.

Tax Efficiency of California Professional Medical Corporations

A California Professional Medical Corporation can elect to be taxed as an S Corporation. This “pass-through” taxation allows the profits and losses of the California Professional Medical Corporation to be passed directly to the personal income tax returns of shareholders, avoiding the double taxation that occurs with a standard C Corporation, for California Professional Medical Corporations referred to as personal service corporations or professional services corporations (where income is taxed at the corporate level and again when distributed as dividends). This can result in significant tax savings.

The primary advantage of an S-Corp election is the potential savings on self-employment taxes, which currently total 15.3% (12.4% for Social Security and 2.9% for Medicare).

Here is how it works: Say a California medical practice generates $100,000 in net profit annually. As a Sole Proprietor or partner in a California General Partnership, the California physician would pay self-employment taxes on the entire $100,000, or $15,300 in self-employment taxes. With an S-Corp election for a California Professional Medical Corporation, the California physician might pay themself a reasonable salary of $50,000 (subject to employer and employee payroll taxes of 15.3% combined) and take the remaining $50,000 as a distribution (not subject to self-employment taxes or payroll taxes). This could potentially save the California physician over $7,500 annually in self-employment taxes on these example numbers.

Credibility and Permanence

Operating as a California Professional Medical Corporation can enhance the credibility and professional image of a medical practice. The corporate structure of a California Professional Medical Corporation suggests stability and permanence to patients, partners, employees, and financial institutions. Unlike a sole proprietorship, which dissolves upon the death of its owner, a California Professional Medical Corporation has a perpetual existence and can continue operating through changes in ownership.

What are the Naming Requirements for a California Professional Medical Corporation?

California has strict naming rules for California Professional Medical Corporations. The name of the California Professional Medical Corporation must comply with both the California Corporations Code and the regulations of the specific licensing board governing the profession.

Generally, the name restrictions are as follows:

The Articles of Incorporation must include the name of the California Professional Medical Corporation. California Corporations Code 202(a).

The Secretary of State shall not file articles setting forth a name in which “bank,” “trust,” “trustee,” or related words appear, unless the certificate of approval of the Commissioner of Financial Protection and Innovation is attached thereto. California Corporations Code Section 201(a).

The name of a California Professional Medical Corporation shall not be a name that the Secretary of State determines is likely to mislead the public and shall be distinguishable in the records of the Secretary of State. California Corporations Code Section 201(b). This requires that names are not likely to mislead the public and be distinguishable from all other corporations in the records of the California Secretary of State that are in good standing, including names of foreign corporations qualified to transact interstate business in California.

The name of a California Professional Medical Corporation shall not include the word “cooperative,” any abbreviation of it, or any related word. California Corporations Code 12311(b).

The name of a California Professional Medical Corporation shall not include the words “Olympic” or “Olympiad,” or related phrases. 36 USC §220506.

The name of a California Professional Medical Corporation shall not include the words “national,” “federal,” “United States,” “reserve,” or “deposit insurance,” and certain words and phrases referring to credit unions. 18 USC §709.

California Professional Medical Corporations also have profession-specific requirements in addition to the general name restrictions as follows:

“The use of any fictitious, false, or assumed name, or any name other than his or her own by a licensee either alone, in conjunction with a partnership or group, or as the name of a professional corporation, in any public communication, advertisement, sign, or announcement of his or her practice without a fictitious-name permit obtained pursuant to Section 2415 constitutes unprofessional conduct. This section shall not apply to the following: (a) Licensees who are employed by a partnership, a group, or a professional corporation that holds a fictitious name permit. (b) Licensees who contract with, are employed by, or are on the staff of, any clinic licensed by the State Department of Health Services under Chapter 1 (commencing with Section 1200) of Division 2 of the Health and Safety Code. (c) An outpatient surgery setting granted a certificate of accreditation from an accreditation agency approved by the medical board. (d) Any medical school approved by the division or a faculty practice plan connected with the medical school.” California Business and Professions Code Section 2285.

“(a) Any physician and surgeon or any doctor of podiatric medicine, as the case may be, who as a sole proprietor, or in a partnership, group, or professional corporation, desires to practice under any name that would otherwise be a violation of Section 2285 may practice under that name if the proprietor, partnership, group, or corporation obtains and maintains in current status a fictitious-name permit issued by the Division of Licensing, or, in the case of doctors of podiatric medicine, the California Board of Podiatric Medicine, under the provisions of this section. (b) The division or the board shall issue a fictitious-name permit authorizing the holder thereof to use the name specified in the permit in connection with his, her, or its practice if the division or the board finds to its satisfaction that: (1) The applicant or applicants or shareholders of the professional corporation hold valid and current licenses as physicians and surgeons or doctors of podiatric medicine, as the case may be. (2) The professional practice of the applicant or applicants is wholly owned and entirely controlled by the applicant or applicants. (3) The name under which the applicant or applicants propose to practice is not deceptive, misleading, or confusing. (c) Each permit shall be accompanied by a notice that shall be displayed in a location readily visible to patients and staff. The notice shall be displayed at each place of business identified in the permit. (d) This section shall not apply to licensees who contract with, are employed by, or are on the staff of, any clinic licensed by the State Department of Health Care Services under Chapter 1 (commencing with Section 1200) of Division 2 of the Health and Safety Code or any medical school approved by the division or a faculty practice plan connected with that medical school. (e) Fictitious-name permits issued under this section shall be subject to Article 19 (commencing with Section 2421) pertaining to renewal of licenses. (f) The division or the board may revoke or suspend any permit issued if it finds that the holder or holders of the permit are not in compliance with the provisions of this section or any regulations adopted pursuant to this section. A proceeding to revoke or suspend a fictitious-name permit shall be conducted in accordance with Section 2230. (g) A fictitious-name permit issued to any licensee in a sole practice is automatically revoked in the event the licensee’s certificate to practice medicine or podiatric medicine is revoked. (h) The division or the board may delegate to the executive director, or to another official of the board, its authority to review and approve applications for fictitious-name permits and to issue those permits. (i) The California Board of Podiatric Medicine shall administer and enforce this section as to doctors of podiatric medicine and shall adopt and administer regulations specifying appropriate podiatric medical name designations.” California Business and Professions Code Section 2415.

It is crucial to check the Medical Board of California for any additional naming restrictions or requirements. The proposed name must also be available and not be misleadingly similar to an existing corporation name on file with the California Secretary of State.

Who Can Be a Shareholder in a California Professional Medical Corporation?

Ownership in a California Professional Medical Corporation is tightly restricted. According to the California Corporations Code, shares can only be issued to individuals who are licensed to practice the specific profession for which the corporation was formed.

There are a few exceptions, including per California Corporations Code Section 13401.5(a)(1)-(15), in addition to licensed physicians and medical corporations, the following other licensed persons (as defined in Section 13401 of the California Corporations Code) may also be eligible to become shareholders of a California Professional Medical Corporation:

Licensed doctors of podiatric medicine. (Section 13401.5(a)(1))

Licensed psychologists. (Section 13401.5(a)(2))

Registered nurses. (Section 13401.5(a)(3))

Licensed optometrists. (Section 13401.5(a)(4))

Licensed marriage and family therapists. (Section 13401.5(a)(5))

Licensed clinical social workers. (Section 13401.5(a)(6))

Licensed physician assistants. (Section 13401.5(a)(7))

Licensed chiropractors. (Section 13401.5(a)(8))

Licensed acupuncturists. (Section 13401.5(a)(9))

Naturopathic doctors. (Section 13401.5(a)(10))

Licensed professional clinical counselors. (Section 13401.5(a)(11))

Licensed physical therapists. (Section 13401.5(a)(12))

Licensed pharmacists. (Section 13401.5(a)(13))

Licensed midwives. (Section 13401.5(a)(14))

Licensed occupational therapists. (Section 13401.5(a)(15))

Can a California Professional Medical Corporation be an S Corp?

Yes, a California Professional Medical Corporation can elect to be taxed as an S Corporation. This is one of the most common and beneficial tax strategies for California Professional Medical Corporations.

By filing Internal Revenue Service Form 2553, “Election by a Small Business Corporation,” the California Professional Medical Corporation can opt for S-Corp tax status. This means the California Professional Medical Corporation itself does not pay federal income tax. Instead, the income, losses, deductions, and credits are “passed through” to the shareholders, who report them on their personal tax returns. This structure avoids the double taxation associated with C Corporations.

To qualify for S-Corp status, the California Professional Medical Corporation must meet certain IRS requirements, including:

Be a domestic corporation.

Have only allowable shareholders (individuals, certain trusts, and estates).

Have no more than 100 shareholders.

Have only one class of stock.

Choosing S-Corp status can provide significant tax advantages, but it also comes with complexities, such as the requirement to pay reasonable salaries to shareholder-employees. Consulting with a tax professional is essential to determine if this is the right choice for your practice.

Can a California LLC Register as a Professional Medical Corporation in California?

No, a California LLC cannot register to do business as a Professional Medical Corporation in California, nor may a California LLC provide the services of a California Professional Medical Corporation. The California Corporations Code has specific rules that prevent licensed physicians from using a California LLC structure for their medical practice, most notably California Corporations Code Section 17701.04(e) which reads in full as follows:

“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.”

Licensed physicians cannot operate as a California LLC or a similar entity from another state to provide medical services. Instead, they would typically need to form a California Professional Medical Corporation to conduct their professional practice in California in corporate form.

Can a Foreign LLC Register as a Professional Medical Corporation in California?

No, a foreign limited liability company (foreign LLC) cannot register to do business as a Professional Medical Corporation in California, nor may a foreign LLC provide the services of a California Professional Medical Corporation. The California Corporations Code has specific rules that prevent licensed physicians from using a foreign LLC structure for their medical practice, most notably California Corporations Code Section 17701.04(e) which reads in full as follows:

“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.”

If a group of licensed physicians operate as an LLC or a similar entity in another state, they cannot simply register that entity in California to provide medical services in California. Instead, they would typically need to form a new, separate California Professional Medical Corporation to conduct their professional practice in California in corporate form.

This area of California law can be complex, especially when dealing with multi-state practices. The rules are in place to ensure that all professionals practicing in California adhere to California’s strict liability and oversight standards, which are tied to the California Professional Medical Corporation structure. If a practice operates across state lines, seeking legal advice is critical to ensure compliance.

What Happens if a Shareholder Dies or Becomes Disqualified?

The California Corporations Code has specific provisions for what happens when a shareholder in a California Professional Medical Corporation passes away or loses their license (becomes “disqualified”).

Because ownership is restricted to licensed physicians and certain other licensed professionals, the shares of a deceased or disqualified shareholder of a California Professional Medical Corporation cannot be transferred to an unlicensed person, such as a family member or an heir. The California Professional Medical Corporation or its remaining shareholders are legally obligated to repurchase the shares from the deceased shareholder’s estate or from the disqualified individual, and California law sets a timeframe for this repurchase.

The price and terms are often negotiated after death or disqualification, but may be set forth in advance in a separate shareholder agreement such as a Buy-Sell Agreement. Having a clear, pre-negotiated Buy-Sell Agreement in place is vital to prevent disputes and ensure a smooth transition. Without one, the parties may have to rely on the default provisions of the law, which could lead to complications and significant legal expenses.

Make an Informed Decision for Your Practice

Forming and maintaining a California Professional Medical Corporation involves navigating a unique set of legal and regulatory requirements. While the structure offers significant benefits in terms of liability protection and tax flexibility, compliance with the California Corporations Code and the Medical Board of California is paramount.

From understanding who can be a shareholder to adhering to strict naming conventions, the details matter. Taking the time to get it right from the beginning can save you from potential legal issues, financial penalties, and even disciplinary action down the road.

If you have more questions or need guidance on setting up a California Professional Medical Corporation for your practice, the experienced corporate attorneys at San Diego Corporate Law are here to help. We can provide the clarity and support you need to build a solid legal foundation for your business.

Schedule a consultation today to discuss your specific needs and learn how we can assist you in navigating the complexities of California corporate law for California Professional Medical Corporations.