Choosing the right business structure is a crucial decision for solo physicians in California. The choice of business entity determines the tax burden and how the medical practice is taxed, the extent of personal liability protection and personal asset protection available to the physician, and the administrative requirements the physician will need to manage in operating the medical practice.

A future article titled “What are the Business Structure Options for Two or More Physicians in California?” will discuss the additional options available when two or more physicians start practicing medicine together, however, for physicians practicing medicine solo in California, the options are limited to sole proprietorships and California Professional Medical Corporations.

This article provides an overview of the various business structure options available to physicians practicing medicine solo in California, helping these physicians to make an informed choice that aligns with their professional goals and liability concerns in the most tax efficient format possible.

Executive Summary: Putting the Conclusion First for Busy Physicians

Summary of Practicing Medicine as a Sole Proprietor

The primary benefit of a sole proprietorship for physicians is its simplicity. There are few legal formalities to establish a sole proprietorship and tax reporting is equally straightforward. However, a sole proprietorship is not a separate legal entity, which means that physician sole proprietors are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability) against their medical practice. The lack of a separate legal entity also means there is no distinction between personal and business finances for physician sole proprietors, so the debts, liabilities, and legal judgments for which the physician sole proprietor is liable are satisfied from the personal assets of the physician.

Summary of Practicing Medicine with a California Professional Medical Corporation

While inherently more complex than physician sole proprietorships, the complexity of a California Professional Medical Corporation may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. As a separate legal entity, California Professional Medical Corporations significantly reduce liability risks and are more tax efficient for most physicians. For physicians in high-liability practices, this reduction in risk can be substantial. The separate legal entity status of California Professional Medical Corporations also means there is a distinction between personal and professional business assets for the physician, meaning the debts, liabilities, and legal judgments against the medical practice are not generally satisfied from the personal assets of the physician.

Choosing Between a Sole Proprietorship and a California Professional Medical Corporation

For most physicians, the California Professional Medical Corporation is the right chose because the tax benefits coupled with limited liability protection and ability to separate personal assets from professional business assets far outweighs the increased administrative complexity compared to practicing medicine as a sole proprietorship.

Contact San Diego Corporate Law for Assistance Selecting and Forming the Best Business Structure for Your Medical Practice

Take the next step toward securing the ideal business structure for your medical practice, whether that is a California Professional Medical Corporation or another business structure. Contact the experienced corporate attorneys at San Diego Corporate Law today to schedule a consultation and receive personalized, expert guidance tailored to your needs. Our team is here to help you make informed decisions with confidence.

Practicing Medicine as a Sole Proprietor

Practicing medicine as a sole proprietor is the simplest and most straightforward business structure for solo physicians in California. It requires minimal paperwork to set up compared to other business entity options and offers flexibility in managing the medical practice. However, along with these advantages come distinct disadvantages that physicians must consider carefully before considering sole proprietorship as the business structure for their medical practice.

Administrative Requirements of Practicing Medicine as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing medicine is the simplicity of establishing a sole proprietorship and the continued simplicity of operating as a sole proprietor.

Sole proprietorships require minimal effort to establish, with few legal formalities involved. Typically, the initial steps of setting up a sole proprietorship include obtaining a local business license to operate legally in the municipal jurisdiction in which the practice will operate and, if applicable, registering a fictitious business name (often referred to as a d/b/a) and opening a business bank account.

Unlike other business structures, there is no need to file complex paperwork or create a formal business entity, which saves both time and money, but as discussed below, there are tradeoffs in exchange for this simplicity.

Taxation of Physician Sole Proprietors

Tax considerations are a critical aspect to be examined when planning to practice medicine as a sole proprietor. Sole proprietors are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to medical practices is essential for physicians when choosing a business structure in which to operate their medical practice.

Business Income Taxation When Practicing Medicine as a Sole Proprietor

For physician sole proprietors, business income taxation is both simple and straightforward compared to that of other business entities. Sole proprietors report their business income and expenses on Schedule C (Profit or Loss from Business) to their personal income tax return, using Internal Revenue Service Form 1040. This allows physicians to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Medicine as a Sole Proprietor

While simple and straightforward, taxation of physician sole proprietors is not tax efficient. One significant consideration for physician sole proprietors is self-employment tax. Since a sole proprietor does not receive a salary from their business, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate at the time of this writing totaling 15.3% of net profit in addition to federal and state income taxes (however, a sole proprietor can deduct half of the self-employment tax paid as an adjustment on their tax return, which provides some financial relief).

Additional Medicare Tax When Practicing Medicine as a Sole Proprietor

High-earning physician sole proprietors may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For physician sole proprietors filing as single, the threshold is $200,000, while it is $250,000 for physician sole proprietors filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Sole proprietors must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high-earning physicians to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Physician Sole Proprietors

Understanding the tax implications of a sole proprietorship is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

Personal Liability Protection and Personal Asset Protection When Practicing Medicine as a Sole Proprietor

Practicing medicine as a sole proprietor, while simple, also comes with challenges regarding personal liability protection and asset protection because a sole proprietorship is not a separate legal entity, and thus does not offer a legal distinction between the physician and the medical practice.

Personal Liability for Physicians When Practicing Medicine as a Sole Proprietor

One of the primary risks faced by physician sole proprietors is personal liability. The lack of distinction between the physician and the medical practice means that the physician sole proprietor is personally liable for all debts, liabilities, obligations, and legal judgments incurred by the medical practice personally, including claims for professional negligence, better known as malpractice, for errors and omissions.

Personal Asset Protection for Physicians When Practicing Medicine as Sole Proprietors

The lack of distinction between the physician and the medical practice that makes personal liability a primary risk to physician sole proprietors also means that all assets of the physician, be they strictly personal assets or assets used in the medical practice, are subject to claims by creditors and legal claimants against the personal assets of the physician (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Physician Sole Proprietors

The exposure to personal liability for debts, liabilities, obligations, and legal judgments (including those for professional negligence) coupled with the inability to separate personal assets from professional business assets underscores the importance for physicians choosing a business structure for their medical practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Medicine as a Sole Proprietor

When deciding whether to practice medicine as a sole proprietor, it is essential to weigh the benefits and drawbacks of this business structure. While physician sole proprietorships offer simplicity to physicians, physician sole proprietorships come with significant risks and limitations. The advantages and disadvantages of practicing medicine as a sole proprietor are compared below together with a recommendation for when a sole proprietorship is the best legal structure for practicing medicine.

Advantages of Sole Proprietorship for Physicians

The primary benefit of a sole proprietorship for practicing medicine is its simplicity. There are few legal formalities to establish a sole proprietorship and tax reporting is equally straightforward.

Disadvantages of Sole Proprietorship for Physicians

While sole proprietorships are simple to establish, they carry significant risks and are not tax efficient for most physicians.

A sole proprietorship is not a separate legal entity, which means that physician sole proprietors are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability). For physicians in high-liability medical practices, this risk can be substantial.

The lack of a separate legal entity also means there is no distinction between personal and professional business assets for physician sole proprietors, meaning the debts, liabilities, and legal judgments for which the physician sole proprietor is liable are satisfied from the personal assets of the physician.

When is a Sole Proprietorship the Right Business Structure for Practicing Medicine?

A sole proprietorship can be an ideal option for physicians starting small-scale medical practices with the expectation of low net profit and low liability risks. However, before choosing to practice medicine as a sole proprietor, it is essential to weigh the benefits of simplicity against the risks of personal liability and the future growth of the medical practice. For physicians in high-risk medical practice areas or those who anticipate growth in their medical practice may want to avoid practicing medicine as a sole proprietorship in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.

For a more detailed understanding of the differences between professional sole proprietorships and California Professional Medical Corporations and when a sole proprietorship is the best choice of business structure for medical practices, see “When Not to Use a California Professional Medical Corporation” for more information.

Practicing Medicine with a California Professional Medical Corporation

Practicing medicine with a California Professional Medical Corporation is not as simple or straightforward as practicing medicine as a sole proprietor, however, a California Professional Medical Corporation provides the tax efficiency, limited liability protection, and separation of personal assets of the physician from the professional business assets of the medical practice that physician sole proprietorships lack.

Administrative Requirements of Practicing Medicine with a California Professional Medical Corporation

In order to enjoy the tax efficiency, limited liability protection, and separation of personal assets a California Professional Medical Corporation provides, physicians are faced with the complexity of establishing a California Professional Medical Corporation. While this formation process is complex, physicians may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for the California Professional Medical Corporation, leaving physicians with essentially the same tasks they would undertake to establish a sole proprietorship. It is also worth noting that legal fees and costs of forming a California Professional Medical Corporation are usually qualified business expenses that are tax deductible.

In addition to the initial formation of a California Professional Medical Corporation, every year after the initial formation of a California Professional Medical Corporation a Statement of Information must be filed with the California Secretary of State and a shareholder and board of directors meeting must be held. Just as with the formation of a California Professional Medical Corporation, San Diego Corporate Law can assist in the annual requirements of practicing medicine with a California Professional Medical Corporation.

Despite the additional administrative requirements of practicing medicine with a California Professional Medical Corporation compared to practicing medicine as a sole proprietorship, an experienced corporate attorney can make the difference in requirements comparable.

For a more detailed understanding of the administrative requirements for forming and maintaining a California Corporation, see “The 7 Steps for Forming a California Professional Medical Corporation” for more information.

Taxation of California Professional Medical Corporations

As with physician sole proprietorships, tax considerations are a critical aspect to be examined when planning to practice medicine with a California Professional Medical Corporation. While physicians practicing medicine with a California Professional Medical Corporation are subject to business income taxation, payroll taxes for wages, and franchise taxes paid to the California Franchise Tax Board, physicians practicing medicine with a California Professional Medical Corporation are not subject to self-employment taxation or additional Medicare taxes. Understanding how these taxes apply to medical practices is essential for physicians choosing a business structure in which to operate their medical practices.

Business Income Taxation When Practicing Medicine with a California Professional Medical Corporation

A California Professional Medical Corporation is by default taxed as a personal service corporation (sometimes referred to as a professional service corporation), which is essentially a C Corporation (commonly referred to as a C-Corp) wherein corporate taxes applied to corporate profits are taxed directly at the federal and state levels at the corporate income tax rate, and any distributed dividends are subject to taxation again against the individuals receiving the dividends (referred to as “double taxation”). However, a California Professional Medical Corporation may (and almost always should) elect to be treated as an S Corporation (commonly referred to as an S-Corp), which fundamentally changes how income is taxed. This article will focus on S Corporation taxation of California Professional Medical Corporations.

Electing S Corporation status alters the tax treatment by enabling pass-through taxation. This means the profits and losses of the California Professional Medical Corporation after payment of a reasonable salary to the physician are passed directly to the physician as the shareholder who in turn reports those profits on their personal income tax returns to pay federal income tax and state income tax on the net profit of the California Professional Medical Corporation and to pay taxes as personal income tax of the net profits of the medical practice.

For more information about the election of S Corporation status for a California Professional Medical Corporation, see “Can a California Professional Medical Corporation Be an S-Corp?” for more information.

Self-Employment Tax When Practicing Medicine with a California Professional Medical Corporation

Unlike physician sole proprietorships, which require the physician sole proprietor to pay self-employment tax on the entire net profit of the professional practice, the physician-shareholder of a California Professional Medical Corporation is not subject to self-employment taxes.

Instead of self-employment taxes on the entire net profit of the medical practice, with a California Professional Medical Corporation employee and employer contributions to payroll tax are only paid on the reasonable salary of the physician. While the sum of the employee and employer contributions total 15.3% (the same percentage as self-employment tax), the calculation of the tax is based upon the reasonable salary of the physician only and not the net profit of the California Professional Medical Corporation, which may result in significant tax savings annually compared to a sole proprietorship.

Additional Medicare Tax When Practicing Medicine with a California Professional Medical Corporation

As discussed above for physician sole proprietorships, the Additional Medicare Tax is an extra 0.9% tax applied to earned income exceeding certain thresholds. However, because the Additional Medicare Tax is only applied to earned income and the net profit of a California Professional Medical Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to physicians practicing medicine with a California Professional Medical Corporation if the reasonable salary of the physician exceeded the thresholds, meaning for all intents and purposes, practicing medicine with a California Professional Medical Corporation does not subject physicians to the Additional Medicare Tax.

Annual Franchise Tax for California Professional Medical Corporations

California Professional Medical Corporations must pay an annual franchise tax that physician sole proprietorships do not pay. The franchise tax paid by a California Professional Medical Corporation taxed as an S Corporation is 1.5% of net profit with a minimum of $800 annually. While this is a tax not paid by physician sole proprietorships, the annual franchise tax is very small in comparison to self-employment taxes and the Additional Medicare Taxes paid by physician sole proprietors.

Conclusions About Taxation of California Professional Medical Corporations

Understanding the tax benefits of a California Professional Medical Corporation is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

For a more detailed understanding of the taxation of California Professional Medical Corporations, see “What Tax Benefits Does a California Professional Medical Corporation Provide?” for more information.

Personal Liability Protection and Personal Asset Protection When Practicing Medicine with a California Professional Medical Corporation

Practicing medicine with a California Professional Medical Corporation, while more complex than practicing medicine as a sole proprietorship, overcomes many of the personal liability protection and asset protection shortcomings of physician sole proprietorships. A California Professional Medical Corporation is a separate legal entity distinct from the physician, thus offering a legal distinction between the physician and the medical practice as well as personal and business assets of the physician.

Personal Liability Protection for Physicians When Practicing Medicine with a California Professional Medical Corporation

Practicing medicine with a California Professional Medical Corporation resolves most of the risks faced by physician sole proprietors for personal liability. California Professional Medical Corporations provide a separate legal entity distinct from the physician, meaning the physician is generally not personally liable for the debts, liabilities, obligations, and legal judgments incurred by the medical practice.

Under California law, claims for professional negligence, better known as malpractice, for errors and omissions of physicians are personal to the physicians and not shielded by the existence of the California Professional Medical Corporation, however, malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the physician from this risk.

Personal Asset Protection for Physicians When Practicing Medicine with a California Professional Medical Corporation

The separate legal entity and distinction between the physician and the medical practice provided by a California Professional Medical Corporation means that, unlike a sole proprietorship, the California Professional Medical Corporation separates the personal assets of the physician from professional business assets of the medical practice. Therefore, claims by creditors and legal claimants against the California Professional Medical Corporation are generally limited to the professional business assets of the California Professional Medical Corporation and are not satisfied against the personal assets (such as homes, bank accounts, investments, and other property) of the physician.

Conclusions About Personal Liability and Asset Protection When Practicing Medicine with a California Professional Medical Corporation

The limitation of personal liability for debts, liabilities, obligations, and legal judgments against the California Professional Medical Corporation coupled with the ability to separate personal assets from professional business assets makes the use of a California Professional Medical Corporation the choice for physicians who wish to limit their personal liability and protect their personal wealth and future earnings from most claims arising out of their medical practice.

For a more detailed understanding of the liability protection and asset protection of California Professional Medical Corporations, see “What Liability Protection Does a California Professional Medical Corporation Provide?” for more information.

Conclusions About Practicing Medicine with a California Professional Medical Corporation

When deciding if practicing medicine as a California Professional Medical Corporation is worth the additional cost and administrative requirements, it is essential to weigh the benefits and drawbacks of this business structure. While California Professional Medical Corporations are more complex, California Professional Medical Corporations resolve many of the significant risks and limitations inherent to practicing medicine as a sole proprietorship. The advantages and disadvantages of operating with a California Professional Medical Corporation are compared below together with a recommendation for when a California Professional Medical Corporation is the best legal structure for practicing medicine.

Advantages of California Professional Medical Corporations

While practicing medicine as a sole proprietorship is simple to establish, doing so carries significant risks and is not tax efficient for most medicine. California Professional Medical Corporations significantly reduce liability risks and are more tax efficient for most medicine.

A California Professional Medical Corporation is a separate legal entity, which means the physician is generally shielded from personally liable for debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability). For physicians in high-liability medical practices, this reduction in risk can be substantial.

The separate legal entity status also means there is a distinction between personal and professional business assets for physicians, meaning the debts, liabilities, and legal judgments against their medical practice are not generally satisfied from the personal assets of the physician.

Disadvantages of California Professional Medical Corporations

The primary benefit of a sole proprietorship is its simplicity, and in turn the primary disadvantage of a California Professional Medical Corporation is the relative complexity of formation and operation. However, physicians may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for establishing and maintaining the California Professional Medical Corporation, leaving these physicians with essentially the same tasks they would undertake to establish and maintain a sole proprietorship.

When is a California Professional Medical Corporation the Right Business Structure for Practicing Medicine?

A California Professional Medical Corporation can be an ideal option for physicians starting medical practices based upon the tax efficiency, limited liability protection, and separation of personal assets from professional business assets that California Professional Medical Corporations provide. Small-scale medical practices with the expectation of revenue growth can benefit from starting as a California Professional Medical Corporation to avoid the future need to reestablish the medical practice as revenue grows. Similarly, small-scale medical practices in high-risk practice areas may benefit from the limited liability protection and separation of personal assets from professional business assets provided by a California Professional Medical Corporation regardless of revenue or profitability.

For a more detailed understanding of the differences between physician sole proprietorships and California Professional Medical Corporations, and when a California Professional Medical Corporation is the best choice of business structure for a professional practice, see “When to Use a California Professional Medical Corporation” and “Sole Proprietorship vs Professional Medical Corporation in California” for more information.

Physicians in California May Not Practice Medicine as a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)

A The experienced corporate attorneys at San Diego Corporate Law are frequently asked about limited liability companies and professional limited liability companies, so this topic will be briefly discussed here.

California law explicitly prohibits physicians from operating their practices as Limited Liability Companies (LLCs) or Professional Limited Liability Companies (PLLCs). This prohibition may be found in California Corporations Code Section 17701.04(e), which reads:

“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.”

Instead, California requires physicians who wish to operate in corporate form to utilize other types of business entities, such as California Professional Medical Corporations.

For a more detailed understanding of the prohibition on the use of LLCs for medical practices in California, see “Can a Physician Practice Medicine Using a California LLC?” and “Can I Use a PLLC to Practice Medicine in California?” and for more information.

If an LLC or PLLC is currently being used for a medical practice in California, see “10 Steps to Convert LLC to Professional Medical Corporation in California” and “Four Reasons Not to Convert LLC to Professional Medical Corporation in California” or “12 Steps to Convert a PLLC to a California Professional Medical Corporation” and “Four Reasons Not to Convert Foreign LLC or PLLC to a California Professional Medical Corporation” for more information about bringing the professional practice into compliance with California law.