Lawyer for Physicians, Medical
Corporations and Group Medical Practices
Should you incorporate your
medical practice?
In this suite of articles, I explain the basic
corporate, business and contract law issues for medical
corporations and group medical practices in California.
I explain things from both sides, that is, the perspectives
of both the individual physician and the group practice.
The articles in this suite are:
In this article I answer the question,
should you incorporate your medical practice?
What are the costs and benefits of forming a medical
corporation? It’s a
tough question. The
answer depends on a balancing of different factors. Most of
us suffer information overload not long after starting this
analysis. All of the
factors start swimming around in our minds and we don’t know
what to think.
This article gives you a quick roadmap.
The first factor is whether you want limited liability,
which is the primary benefit of forming a medical
corporation. Next you determine the costs of forming and
maintaining a medical corporation.
Then you delve into the tax advantages and
disadvantages of forming a corporation. Last, you weigh the
factors and make a decision.
Benefit – Limited Liability
Limited liability is the primary benefit of
incorporating your medical practice. A solo doctor is
personally liable for all general debts and liabilities of
the practice, including vendor contracts and real property
and equipment leases. On the other hand, a shareholder of a
corporation is not personally liable for the corporation’s
debts (except payroll taxes, workers compensation premiums
and related obligations imposed by the government). There
is one big exception, however: the doctor is always liable
for his or her own professional negligence and the
negligence of employees under the doctor’s supervision.
Only insurance can mitigate such liability.
Partners Need a
Corporation
Practices with more than one physician should use a medical
corporation. The medical corporation not only shields each
physician from general liabilities of the medical
corporation (discussed above), but also shields each
physician from liabilities arising from the acts of other
physicians in the group.
Although two or more doctors can work together as a
partnership, this is not your best choice. Partnerships are
risky because each doctor is liable for the acts of each
other doctor. Incorporation mitigates this risk by
protecting against liability from other doctors in the
group.
Costs
You want the benefits of limited
liability. But it costs money – corporations pay franchise
taxes and require legal and accounting costs for their
organization and maintenance. Worse yet, because physicians
are subject to special regulation, you need specialized
legal advice. A
physician probably will incur more legal fees than the
run-of-the-mill service corporation.
I charge $2,000 in legal fees to form a medical corporation.
You need at least another $1,000 or so to cover
filing fees, accounting costs and misc. costs of changing
your form of business.
In year two you’ll start paying franchise taxes –
annual franchise taxes are $800 + 1.5% of net profit.
Tax Factors
Disclaimer:
Consult your accountant about all tax matters.
I do not give tax advice.
If your accountant disagrees with my opinions below,
listen to your accountant, not me.
In my experience, tax analysis causes a
lot of confusion. The various and sundry tax advantages and
disadvantages of forming a medical corporation all depend on
your circumstances, which change from year to year, not to
mention the endless changes in tax law.
Worse, sometimes you
find that after weighing the tax advantages and
disadvantages, they all seem to cancel one another out,
leaving you with no clear-cut decision.
To sum it up quickly, there are few
remaining tax benefits for incorporating a medical
practice. Moreover, the few remaining tax benefits work
only for “C” corporations (not for “S” corporations). In
brief, forming a professional C corporation helps a little
with fringe benefits (most notably health insurance) and
life insurance, but not much else.
On the other hand, incorporation means you must pay
the annual franchise tax (explained above).
If after all this analysis you decide to
incorporate your medical practice, go to my next article,
Legal
compliance checklist for a medical corporation.
This article only gives a short roadmap of
the issues involved in deciding whether or not to
incorporate your medical practice. There is a lot more to
this topic than introduced here. Please get competent legal
and tax counsel before you form a medical corporation.
Call me to schedule a
legal consultation: 510-796-9144
| 