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Top Three Legal Issues Concerning Medical Corporations

California has corporate forms specifically designed for medical and healing arts professionals.

Medical corporations differ from regular corporations in many ways, and as such, some legal issues are more important when establishing and running a medical corporation. In this article, we discuss the top three issues:

  • Control issues,
  • Buy-sell agreements, and
  • Fee-sharing.

If you are thinking of setting up a medical corporation, you will need a good San Diego corporate attorney to help.

San Diego Corporate Law: Control Issues With Medical Corporations

The Moscone-Knox Professional Corporation Act (the “Act”) is the California statute that specifically authorizes medical professional corporations. Cal. Corp. Code, §§ 13400-13410. The purpose of the Act was to allow healing arts practitioners to use a corporate form that had some of the characteristics of a general partnership. Prior to enactment, most physicians and dentists and other healing arts practitioners created general partnerships to run joint businesses. The problem this created was that, in a partnership, all partners are individually liable for the business debts and obligations, including judgments resulting from professional malpractice. While malpractice insurance helped, all the partners were still potentially liable for the malpractice of one of the other partners. With a corporate form like those allowed in the Act, the corporate shield protects the professionals that have not committed malpractice.

However, because of differences in being licensed and Board Certified, the Act has some strict rules with respect to control. The State Assembly intended that only members of each profession — and certain allied professions — could be shareholders in these types of corporations. This is distinct from a normal corporation where anyone with money to invest can become a shareholder. These same rules apply to members of the board of directors, officers, and professional employees. Likewise, the Act prohibits any voting trust or share-voting agreement that gives voting authority to non-professionals. Such agreements are void. Thus, if you are planning to form a medical corporation, you should make sure that all of the potential owners are eligible.

San Diego Corporate Law: Buy-Sell Agreements

Because a medical corporation must have only the types of professionals specified in the Act, it is essential that the owners have an Owners Agreement and/or a Buy-Sell Agreement. The agreement should contain provisions that limit ownership to the professionals allowed. Most importantly, the agreement should have provisions that handle situations where one or more of the owners has lost his or her license or certification. In general, a buy-sell agreement provides the rules and procedures for buying out an owner. For normal, small, closely-held corporations, this is about death, divorce, disability, and bankruptcy. But for a medical or other professional corporation, an additional concern is loss of licensure and/or certification. Talk with your experienced San Diego corporate attorney when forming your medical corporation about the benefits of having a Buy-Sell Agreement put in place as well.

San Diego Corporate Law: No Fee Sharing With Non-Professionals

The final key legal issue involves fee sharing with non-professionals. A medical corporation can hire various non-management employees including marketing and public relations employees. The danger is with any sort of incentivized salary or bonus structure that could be construed as fee-sharing. In general, professionals cannot share their fees from patients and clients with non-professionals. The Act carries forward that idea into the rules for medical corporations. A violation of this rule about fee-sharing can result in the suspension or revocation of the certificate of registration of the professional corporation.

California Medical Corporations: Contact San Diego Corporate Law Today

If you need legal advice related to setting up your medical corporation, call your trusted business attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” for 2015, 2016, 2017, and 2018 by Contact Mr. Leonard at (858) 483-9200 or by email.

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