Running a medical practice comes with significant legal and financial risks, including malpractice lawsuits, regulatory violations, and business disputes. Without proper corporate structuring, medical professionals may be personally liable for business debts, legal claims, or compliance issues.
To protect your medical practice, personal assets, and professional reputation, it is essential to establish the right corporate structure. Proper structuring ensures legal compliance, tax benefits, and risk mitigation, helping your practice thrive while minimizing liability exposure.
This guide outlines the best corporate structuring strategies to protect your medical practice from liability and ensures compliance with California’s Corporate Practice of Medicine (CPOM) laws.
1. Choosing the Right Business Entity for Your Medical Practice
Selecting the right business structure is the first and most important step in protecting your medical practice from liability. In California, medical professionals cannot form a Limited Liability Company (LLC) or operate as a sole proprietorship due to strict Corporate Practice of Medicine (CPOM) laws.
The Best Business Entity for Medical Practices: Professional Corporation (PC)
- A Professional Corporation (PC) is the only legally compliant business entity for medical professionals in California.
- PCs provide limited liability protection, shielding personal assets from business debts, lawsuits, and contractual obligations.
- The Medical Board of California requires medical practices to be owned and operated by licensed physicians to comply with CPOM laws.
Operating as a sole proprietor exposes a doctor to unlimited personal liability, making a Professional Corporation the best legal structure for reducing risk.
2. Separating Personal and Business Finances
Once a Professional Corporation is established, maintaining separate financial accounts is critical to preserving liability protection.
- Open a business bank account under the Professional Corporation’s name.
- Use separate credit cards and payment methods for business expenses.
- Never mix personal and business funds, as this can lead to corporate veil piercing, which allows creditors to go after personal assets.
Keeping clear financial separation ensures that your personal wealth remains protected if your practice faces a lawsuit or financial dispute.
3. Implementing a Strong Corporate Governance Structure
A well-structured corporate governance system helps prevent internal disputes, fraud, and liability risks.
Steps to Strengthen Corporate Governance:
- Draft and adopt corporate bylaws that define how the practice operates.
- Hold regular board meetings and document decisions in corporate records.
- Issue stock certificates to clarify ownership interests.
- Maintain detailed financial records to ensure tax compliance and reduce audit risks.
Proper governance ensures corporate compliance and strengthens liability protection for your medical practice.
4. Creating a Management Services Organization (MSO) for Business Operations
A Management Services Organization (MSO) allows medical professionals to separate clinical services from business operations, further reducing liability risks.
How an MSO Protects Your Medical Practice:
- The Professional Corporation (PC) provides medical services while the MSO manages administrative functions such as billing, HR, and marketing.
- The MSO is owned by non-physicians or investors, while the PC remains physician-owned, ensuring compliance with California’s CPOM laws.
- This structure helps reduce physician liability for business-related disputes.
Using an MSO allows physicians to focus on patient care while keeping non-clinical operations legally separate.
5. Carrying Proper Insurance Coverage
Even with the best corporate structure, medical professionals must carry adequate insurance to protect against liability risks.
Essential Insurance Policies for Medical Practices:
- Medical Malpractice Insurance – Covers claims related to patient injuries, misdiagnoses, and treatment errors.
- General Liability Insurance – Protects against business-related lawsuits, such as slip-and-fall accidents.
- Employment Practices Liability Insurance (EPLI) – Covers claims of wrongful termination, discrimination, or workplace harassment.
- Cyber Liability Insurance – Protects against data breaches and HIPAA violations.
Without proper insurance coverage, a lawsuit can result in severe financial losses, even if your practice is structured correctly.
6. Drafting a Strong Shareholder and Buy-Sell Agreement
A Shareholder Agreement (or Buy-Sell Agreement) protects the medical practice in case of:
- Partner disputes or ownership changes.
- Retirement, disability, or death of a physician-owner.
- Unexpected exits or practice dissolution.
This agreement should clearly define ownership rights, valuation methods, and succession plans to prevent legal battles and financial instability.
A well-drafted agreement ensures a smooth transition of ownership while safeguarding the practice from disputes.
7. Complying with HIPAA and Patient Privacy Laws
Medical practices must comply with HIPAA (Health Insurance Portability and Accountability Act) regulations to avoid legal liability from patient data breaches.
HIPAA Compliance Steps:
- Implement secure electronic health record (EHR) systems.
- Train staff on proper patient data handling and confidentiality protocols.
- Require signed HIPAA consent forms before sharing patient information.
HIPAA violations can lead to hefty fines, reputational damage, and potential lawsuits, making compliance a top priority.
8. Avoiding Employment Law Violations
Medical practices must comply with California labor laws to prevent employee lawsuits and regulatory fines.
Common Employment Law Pitfalls to Avoid:
- Misclassifying employees as independent contractors.
- Failing to pay overtime wages as required by law.
- Discriminatory hiring or termination practices.
- Ignoring workplace safety standards.
Establishing clear employee policies, proper payroll procedures, and workplace training can prevent costly employment-related disputes.
9. Protecting Against Tax Liabilities and Compliance Risks
A Professional Corporation must follow state and federal tax laws to avoid IRS audits and penalties.
Best Practices for Tax Compliance:
- Elect S-Corporation status to avoid double taxation.
- Deduct eligible business expenses, including equipment, salaries, and insurance.
- File annual reports and tax returns on time.
Hiring a CPA or tax attorney ensures tax compliance and financial efficiency for your practice.
How We Can Help
At KMSD Law, we specialize in helping medical professionals protect their practice from liability through proper corporate structuring. Our legal team can:
- Form and register a Professional Corporation to comply with California law.
- Draft bylaws, shareholder agreements, and buy-sell agreements for risk protection.
- Structure a Management Services Organization (MSO) for legal separation of business operations.
- Ensure HIPAA compliance and employment law adherence.
- Advise on tax strategies and insurance coverage to safeguard your financial future.
We offer free case consultations to ensure your medical practice is legally sound, protected from liability, and structured for long-term success.
Contact KMSD Law today to secure the future of your medical practice and minimize legal risks.