The medical spa (med spa) industry is rapidly growing, offering lucrative opportunities for medical professionals and entrepreneurs alike. However, California’s strict laws regarding the corporate practice of medicine (CPOM) make it essential to establish compliant business structures to avoid severe legal and financial repercussions. Two key entities often involved in med spa operations are the Professional Corporation (PC) and the Management Services Organization (MSO). Understanding how these entities interact and operate within the boundaries of California law is critical for success in this industry.
This blog will provide a detailed step-by-step guide on how to structure and maintain a legally compliant relationship between a PC and an MSO, ensuring adherence to California’s regulatory framework.
Step 1: Understanding the PC and MSO Relationship
What is a Professional Corporation (PC)?
A Professional Corporation is a legal entity specifically designed for licensed professionals, including medical doctors, nurse practitioners, and physician assistants. In California, only licensed medical professionals can own and control a PC, as required by the California Business and Professions Code.
What is a Management Services Organization (MSO)?
An MSO is a separate business entity that provides non-clinical administrative services to the PC. These services can include:
- Marketing and advertising
- Facility management
- Staff hiring and payroll (excluding clinical staff)
- Billing and collection services
- Procurement of supplies and equipment
The MSO allows medical professionals to focus on patient care while delegating business operations to a specialized team.
Why is This Relationship Necessary?
California’s CPOM doctrine prohibits non-licensed individuals or entities from practicing medicine or influencing clinical decisions. By structuring the med spa with a PC and MSO, you can maintain compliance with CPOM regulations while ensuring efficient business operations.
Step 2: Forming the Professional Corporation
- Choose a Name:
- The PC’s name must comply with California’s naming requirements, typically including the physician’s name and professional designation (e.g., John Doe, M.D., Inc.).
- File Articles of Incorporation:
- Submit the Articles of Incorporation (Form ARTS-PC) to the California Secretary of State.
- Obtain a Certificate of Registration:
- Apply to the appropriate medical board (e.g., Medical Board of California) for a Certificate of Registration.
- Draft Bylaws:
- Create corporate bylaws that outline the governance of the PC, including compliance with CPOM laws.
- Appoint Officers and Directors:
- Only licensed medical professionals can serve as officers or directors of the PC.
- Obtain an EIN:
- Apply for an Employer Identification Number (EIN) from the IRS.
- Secure Professional Liability Insurance:
- Ensure the PC has malpractice insurance in place.
- Open a Bank Account:
- Set up a business bank account solely for the PC’s operations.
Step 3: Forming the Management Services Organization
- Choose a Business Structure:
- The MSO is typically formed as an LLC or a corporation, owned by non-medical professionals.
- File Formation Documents:
- Submit Articles of Organization (for LLCs) or Articles of Incorporation (for corporations) to the California Secretary of State.
- Obtain an EIN:
- Apply for an EIN for the MSO.
- Draft Operating Agreements or Bylaws:
- Clearly define the MSO’s purpose and ensure it does not engage in any clinical activities.
- Secure Business Insurance:
- Obtain general liability and other relevant insurance policies for the MSO.
- Open a Bank Account:
- Establish a separate bank account for the MSO.
Step 4: Drafting the Management Services Agreement (MSA)
The MSA is the cornerstone of the PC-MSO relationship, outlining the terms of service and ensuring legal compliance.
Key Elements of the MSA:
- Scope of Services:
- Clearly define the administrative services the MSO will provide to the PC. Avoid including any clinical decision-making responsibilities.
- Compensation Structure:
- Use a fixed-fee or fair-market-value arrangement to compensate the MSO. Avoid percentage-based fees tied to the PC’s revenue, as this may violate anti-kickback and CPOM laws.
- Ownership and Control:
- State that the PC retains full control over clinical operations and medical decision-making.
- Duration and Termination:
- Include provisions for the agreement’s duration and conditions for termination.
- Compliance with Laws:
- Require both parties to adhere to all applicable laws and regulations.
- Indemnification Clauses:
- Protect both the PC and MSO from liabilities arising from the other party’s actions.
- Dispute Resolution:
- Include mediation and arbitration clauses to address disputes efficiently.
Step 5: Maintaining Legal Compliance
- Separate Operations:
- Ensure the PC and MSO operate as distinct entities with separate bank accounts, records, and employees.
- Regular Audits:
- Conduct periodic audits to confirm compliance with the MSA and California laws.
- Updated Agreements:
- Review and update the MSA regularly to reflect any changes in laws or business operations.
- Training:
- Provide ongoing compliance training for staff in both entities.
- Consult Legal Counsel:
- Work with an experienced attorney to navigate complex CPOM regulations and other legal requirements.
Step 6: Avoiding Common Pitfalls
- Revenue Sharing Violations:
- Avoid percentage-based compensation models for the MSO.
- Influence Over Clinical Decisions:
- The MSO must not interfere with the PC’s medical decisions.
- Improper Ownership Structures:
- Ensure only licensed medical professionals own and control the PC.
- Failure to Update Agreements:
- Neglecting to update the MSA can lead to non-compliance with evolving laws.
The PC-MSO structure provides a compliant and efficient way to operate a med spa in California, allowing medical professionals to focus on patient care while delegating business operations. By following this step-by-step guide, you can establish a legally sound and successful relationship between a PC and an MSO.
For professional assistance in forming a PC or MSO, drafting MSAs, or ensuring compliance with California’s CPOM laws, contact the Law Office of Kris Mukherji at www.kmsdlawoffice.com.