Medical professionals looking to start their own practice must select the right business structure for legal compliance, liability protection, and tax benefits. Two common structures for businesses are Professional Corporations (PCs) and Limited Liability Companies (LLCs). However, in California, medical practices are not allowed to form LLCs, making Professional Corporations the only viable option for most licensed medical professionals.
Understanding the differences between these two business entities is essential for physicians, dentists, chiropractors, and other healthcare providers to ensure their practice remains legally compliant and financially optimized.
This article will explain why LLCs are not allowed for medical practices in California, the benefits of forming a Professional Corporation, and how it protects physicians and healthcare providers.
1. Why Medical Practices in California Cannot Form an LLC
Under California Business and Professions Code Section 13401, medical professionals cannot form an LLC to provide healthcare services. The state enforces Corporate Practice of Medicine (CPOM) laws, which restrict business entities from influencing medical decisions and ensure that only licensed professionals control medical practices.
Several reasons explain why LLCs are not allowed for medical practices in California:
- Corporate Practice of Medicine (CPOM) Compliance – California prohibits non-physicians from owning or controlling a medical practice, and LLCs could allow non-licensed individuals to exert influence.
- State Licensing Board Regulations – The Medical Board of California and other healthcare licensing agencies require medical practices to be structured as Professional Corporations to protect professional ethics.
- Legal Liability Concerns – Since medical services involve direct patient care, the state requires a stricter corporate structure that holds licensed professionals accountable for medical decisions.
If a healthcare provider attempts to register a medical practice as an LLC, it will not be approved by the state and could lead to legal penalties.
2. What Is a Professional Corporation (PC)?
A Professional Corporation (PC) is a business structure specifically designed for licensed professionals, including:
- Doctors (MDs and DOs)
- Dentists and Orthodontists
- Chiropractors
- Optometrists
- Podiatrists
- Nurse Practitioners (NPs) and Physician Assistants (PAs)
A PC operates similarly to a regular corporation but is restricted to licensed professionals within the same industry. It allows medical professionals to operate as a legally recognized entity while maintaining compliance with California law.
3. Benefits of Forming a Professional Corporation for Medical Practices
Since LLCs are not an option for medical practices in California, forming a Professional Corporation provides significant benefits for physicians and healthcare providers.
A. Compliance with California Law
A PC is the only legally allowed business entity for medical professionals in California. Forming a PC ensures compliance with:
- California’s Corporate Practice of Medicine (CPOM) laws
- Medical Board of California regulations
- State licensing requirements for professional service businesses
Operating a medical practice under any other business structure can result in legal violations and penalties.
B. Limited Liability Protection
A Professional Corporation protects physicians and healthcare providers from business-related financial risks. If the medical practice is sued for contract disputes, unpaid debts, or employee claims, the physician’s personal assets are shielded.
However, it is important to note that a PC does not protect against personal malpractice liability. Physicians must still carry medical malpractice insurance to cover claims related to patient care.
C. Tax Benefits and Financial Flexibility
A Professional Corporation allows physicians to optimize taxes and business expenses. PCs can elect to be taxed as an S-Corporation or C-Corporation, depending on financial goals.
- S-Corporation (S-Corp) Status – Avoids double taxation by allowing income to pass through to shareholders, which can reduce tax burdens.
- C-Corporation (C-Corp) Status – Provides greater flexibility for reinvesting profits into the business but is subject to corporate taxes.
- Tax-Deductible Business Expenses – A PC can deduct employee salaries, business expenses, insurance premiums, and retirement contributions, helping reduce taxable income.
Choosing the right tax structure depends on the size and financial strategy of the practice. Consulting with a business attorney or CPA can help determine the best tax election for a medical corporation.
D. Ability to Hire Other Medical Professionals
A PC allows a medical practice to expand by hiring additional licensed providers. Physicians can bring on other doctors, nurses, or specialists, ensuring business growth and continuity.
Unlike a sole proprietorship or partnership, a PC has a clear corporate structure that allows the medical practice to scale operations efficiently.
E. Professional Credibility and Business Longevity
Forming a Professional Corporation enhances the credibility of a medical practice. Patients and business partners often trust a legally structured entity over unstructured private practices.
Additionally, a PC allows for continuity of operations, meaning that the business can continue running even if the original physician retires, sells their shares, or passes away.
4. Key Differences Between a Professional Corporation and an LLC
While LLCs are commonly used by small businesses, they are not allowed for medical practices. Understanding the key differences between a Professional Corporation and an LLC helps medical professionals recognize why PCs are the best choice.
- Ownership Restrictions – Only licensed medical professionals can own and operate a PC, while LLCs can be owned by anyone (which violates CPOM laws).
- State Regulation – A PC is regulated by the Medical Board of California, while LLCs are not allowed for medical practices.
- Taxation – PCs can elect to be taxed as an S-Corp or C-Corp, while LLCs only allow pass-through taxation.
- Liability Protection – Both PCs and LLCs offer limited liability for business debts, but only a PC is legally compliant for healthcare services in California.
Since medical practices in California cannot use an LLC, forming a Professional Corporation is the only legally viable option.
5. Steps to Form a Professional Corporation in California
Physicians looking to establish a Professional Corporation must follow these steps:
- Choose a Name – Must include “Medical Corporation” or “Professional Corporation” and comply with California Secretary of State regulations.
- File Articles of Incorporation – Submit Form ARTS-PC with the California Secretary of State.
- Appoint a Registered Agent – A designated person or service to receive legal documents for the corporation.
- Obtain an Employer Identification Number (EIN) – Required for tax purposes, hiring employees, and opening a business bank account.
- Register with the Medical Board of California – Obtain approval from the relevant licensing board.
- Draft Corporate Bylaws and Shareholder Agreements – Establish governance rules and ownership structure.
- Obtain Business Licenses and Insurance – Medical practices need malpractice insurance, general liability coverage, and local business permits.
Following these steps ensures that your medical practice operates legally and efficiently.
How We Can Help
At KMSD Law, we specialize in forming and structuring Professional Corporations for medical practices in California. Our experienced legal team can:
- Ensure compliance with CPOM and state licensing regulations.
- Assist in incorporating your medical practice as a Professional Corporation.
- Draft corporate bylaws, shareholder agreements, and business contracts.
- Help you maximize tax benefits and legal protections.
We offer free case consultations to discuss your medical practice’s business structure and ensure full legal compliance.
Contact KMSD Law today to protect your medical practice and set up your Professional Corporation.