Business Structures for a Physician Practice: An Informed Choice

Types of Business Organizations – Preliminary Considerations

Physician offices may operate as sole proprietorships, partnerships, medical corporations, professional service corporations, or professional limited liability companies (PLLC). One principle that holds for each of these entities in Illinois is that they must be 100% owned by licensed professionals. Non-licensed persons, even spouses and family members, may not participate in any portion of ownership nor inherit an ownership interest in a practice, regardless of its business structure.

Some business aspects of sole proprietorships and partnerships are the same for physicians as they are for any business; however, medical corporations, professional service corporations, and professional LLCs have unique characteristics that differ from non-medical business entities. It is important that the physician, as well as any assisting professional (CPA or attorney), be familiar with these distinctions to ensure that the correct form of business is created. For example, the ICS frequently learns of physician practices that are incorporated as regular business (non-medical) corporations, even though it is not legal for a business corporation to own or run a medical practice in Illinois. Also, all of these practices must be solely owned by licensees; i.e., a non-licensee may not own any portion, no matter how small, of a physician practice.

Sole Proprietorships

A sole proprietorship is the simplest structure for a business. It is an unincorporated business owned and run by one individual owner with no distinction between the business and the owner; therefore, they are one and the same entity and there is no requirement to form an entity nor to file any formation paperwork with the Secretary of State. In the case of a medical practice, a sole proprietor must, of course, be licensed under the Illinois Medical Practice Act. The owner or sole proprietor directly owns or leases the assets of the practice in his or her name. The owner is entitled to all business profits and is personally responsible for all debts, losses, and liabilities.

A sole proprietor may register an assumed name for the practice (see below); however, this merely permits the sole proprietor to operate the practice under a name other than the doctor’s and does not change the legal status or eliminate personal liability in any way. For example, Susie Smith, D.C., may operate her practice as Susie Smith, D.C. (or Susie Smith, Chiropractic Physician), or she may register as Susie Smith, doing business as Caring Chiropractic. Susie Smith, D.C. is entitled to profits and has personal liability for debts, losses, and liabilities.

Because of the unity of the sole proprietor with his or her business, creditors and others with claims against the practice (such as malpractice claimants) can collect from any and all assets owned by the physician, including personal assets such homes or automobiles. In the same way, a sole proprietor’s personal creditors may satisfy debts with fees from the practice. For example, a credit card company can attach the physician’s accounts receivable to pay for personal purchases unrelated to the practice. The owner’s assets essentially are considered to be part of “one pot” with no distinction between business and owner.

Similarly, a sole proprietor running a business is taxed as a single entity. This means the owner reports all business income and deducts business expenses on his or her personal tax return. Some business owners prefer to operate as sole proprietorships because it requires only one tax return and one tax payment (one each to the federal government and state government, of course), whereas a corporation is considered a separate entity that must file its own separate return and pay its own income tax, in addition to the individual owner. Although there are many other factors that weigh into the decision as to type of structure, for some, the sole proprietorship has the most appeal because it only involves one entity.

Just as any other practice in another business form, sole proprietor practices may employ associate physicians, other licensed and unlicensed personnel and assistants and administrative staff. However, a chiropractic sole proprietorship may only render services within chiropractic scope of practice, as distinguished from medical corporations, professional service corporations and professional limited liability companies, whose corporate purpose may be broader (see corporation and LLC sections below). There is no income limit on a sole proprietorship, nor a requirement to incorporate. However, sole proprietors are personally liable for their employees’ negligent acts committed on the job, which means that the owner’s personal assets are at risk for any claims brought against associate physicians or other staff. Of course, the owner can and should purchase both general and professional liability insurance for these occurrences, but the legal liability still exists, even if paid for by insurance. Also, the sole proprietor will be personally liable for any claim that exceeds the amount of insurance coverage.

Sole Proprietorship Summary:

Advantages: Minimal setup; high level of autonomy; taxes paid by only one taxpayer; licensing required for practitioner only and no separate Illinois Department of Financial and Professional (IDFPR) registration required for the practice.

Disadvantages of Sole Proprietorship: No insulation between business and personal liability; services limited to those within chiropractic scope.

Partnerships

Illinois has adopted the Uniform Partnership Act (805 ILCS 206), which defines a partnership as “an association of 2 or more persons to carry on as co-owners a business for profit.” A partnership may, but does not have to be, defined by a written or even verbal agreement; partnership may be determined from the parties’ intent and behavior. Generally, the relationship is considered a partnership when the owners share control of the business and the profits, even in the absence of a written agreement, and even if the parties label their arrangement as something else.

In a chiropractic partnership, as in a sole proprietorship, services must be within chiropractic scope. Of course, a partnership may also employ associate physicians, other licensed and unlicensed personnel and assistants and administrative staff.

A partnership may be simply created by its owners, and there is no requirement to file articles with the Secretary of State (as corporations and PLLCs must do). Nonetheless, a partnership is considered a legal entity that is distinct from its owners. Therefore, a partnership may conduct business, own property or sue in its own name. However, partners are subject to full liability for partnership debts, claims, and losses; there is no insulation against personal liability. In some ways, it provides the same disadvantage of a sole proprietorship (exposure to liability) with less control over risk management, because each partner is personally liable for any and all partnership debts, even if incurred by the other partner. (See below regarding joint liability for malpractice, for example.)

Like a sole proprietorship, a partnership may register an assumed name for the practice; however, this merely permits the partnership to operate the practice under names other than the doctors’ and does not change the legal status or eliminate personal liability in any way. For example, Susie Smith, D.C., and John Jones, D.C., may operate their practice as Susie Smith, D.C. & John Jones, D.C. (or Susie Smith and John Jones, Chiropractic Physicians), or they may file with their county to operate as Susie Smith, D.C., and John Jones, D.C., doing business as Caring Chiropractic.

If there is no agreement, the partnership is governed by the Uniform Partnership Act and case law. The statute essentially provides what would be “boilerplate” terms in a written partnership agreement, including provisions about the parties’ rights and liabilities. For example, under the Act, a partner is entitled only to profits and is not entitled to compensation, regardless of his or her initial contribution of funds or services. For this reason, in most medical practice partnerships, the parties use a written agreement to spell out terms to suit their specific needs.

Generally, each partner acts as an agent of the partnership and has the ability to enter into legal agreements on its behalf. For example, one partner may sign a lease that obligates the partnership (and, by implication, both partners). Unless a written agreement provides otherwise, each partner has an equal voice in the business decisions of the partnership.

Each partner is liable for civil malpractice committed by the other partner(s), so when one partner is sued, the other is included in the lawsuit and any judgment will be against the partners personally. In addition, a partner’s personal assets may be used to satisfy a partnership debt. For example, to pay for delinquent partnership lease payments, a partner may be forced to use his or her household bank account. However, a partner generally cannot be charged with a crime simply because it was committed by another partner.

For federal tax purposes, a partnership is required to file a tax return; however, the entity itself is not taxed. The owner partners are each taxed on their individual income and losses, similarly to the way in which a sole proprietor is taxed.

Partnership Summary

Advantages: Minimal setup; control may be divided as partners want; partnership return must be filed but taxes paid once by individual partners; licensing required for practitioners only and no separate IDFPR registration required for the practice.

Disadvantages: No insulation between personal and business liability, including liability for partner’s acts; joint management (less control than sole proprietorship); services limited to those be within chiropractic scope.

Medical Corporations

It is not legal in Illinois for a regular business corporation to own or operate an office for the practice of medicine, including chiropractic, nor may any person other than a licensee under the Medical Practice Act own any part of such a corporation. However, Illinois law permits one or more physicians licensed under the Medical Practice Act (MPA) to form a medical corporation (Medical Corporation Act, 805 ILCS 15). Because chiropractic physicians are licensed physicians under the MPA, they may solely own or co-own with other MPA licensees (chiropractic physicians, medical physicians or osteopathic physicians) a medical corporation. Unlike a sole proprietorship or partnership, forming a medical corporation requires the filing of Articles of Incorporation with the Secretary of State. See the Articles of Incorporation here.

The purpose of a medical corporation, which must be stated (and is currently pre-printed on the Secretary of State form) in the Articles of Incorporation, is, “to own, operate and maintain an establishment for the study, diagnosis and treatment of human ailments and injuries, whether physical or mental, and to promote medical, surgical and scientific research and knowledge; provided that medical or surgical treatment, advice or consultation will be given by employees of the corporation only if they are licensed pursuant to the Medical Practice Act.” The corporation may hire non-licensees to perform non-medical, administrative tasks; however, only Medical Practice Act licensees may hold shares, act as officers or directors, or render medical services. Although this requirement does not exist in every state, it is strictly enforced in Illinois. However, because the scope of practice of a medical corporation includes full, unrestricted scope under the MPA, this structure permits a chiropractic physician-owned medical practice to hire a medical or osteopathic doctor to provide services limited to a physician licensed to practice medicine in all of its branches (full allopathic services), in addition to services within chiropractic scope. The allopathic medical services are deemed to be rendered by the medical corporation within its corporate purpose, so long as provided only by an M.D. or D.O.

One of the biggest advantages of a non-medical business corporation is that owners (shareholders) are limited in their financial liability for corporate debts, usually no more than the amount the shareholder has paid for his or her shares. Under the Medical Corporation Act, a physician owner is similarly limited in liability for business debts of the corporation and even for the medical negligence of other physicians who render services for the corporation. Note, though, physicians employed by medical corporations remain liable for their own medical malpractice and for errors committed by persons whom the physician supervises and to whom the physician delegates tasks. As a matter of public policy, the law does not permit physicians to use the corporate structure as a shield to avoid their own malpractice liability, as it would allow for debts in a business corporation. However, physicians are not liable for malpractice committed by fellow physician owners or physician employees of the medical corporation (as would be the case in a sole proprietorship with associates or a partnership). Also, of course, employment by a medical corporation does not shield a physician licensee from disciplinary investigations and sanctions by licensing agencies and other governmental bodies.

A medical corporation is taxed as a separate entity, which means it must file its own return and pay its own taxes. The individual owners and employees must also file personal returns and pay tax on their individual income. Thus, some consider this arrangement to be “double taxation.” Physicians should seek the advice of a qualified tax professional as to whether there are other corporate tax advantages or deductions that offset the additional tax.

As a related matter, the commonly misunderstood term “C corporation “may be used in connection with a physician practice. Contrary to popular belief, this is not a separate form of business structure; it is an Internal Revenue Service designation. According to Investopedia, “A C corporation is a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation….Corporations pay corporate taxes on earnings before distributing remaining amounts to the shareholders in the form of dividends. Individual shareholders are then subject to personal income taxes on the dividends they receive. Although double taxation is an unfavorable outcome, the ability to reinvest profits in the company at a lower corporate tax rate is an advantage. “

Another commonly misunderstood IRS designation is the S Corporation. According to Investopedia, “A Subchapter S (S Corporation) is a form of corporation that meets specific Internal Revenue Code requirements. The requirements give a corporation with 100 shareholders or fewer the benefit of incorporation while being taxed as a partnership. The corporation may pass income directly to shareholders and avoid double taxation. Requirements include being a domestic corporation, not having more than 100 shareholders, which includes only eligible shareholders, and having only one class of stock.” Again, whether to file for designation as a C or S corporation is a decision to be made with the advice of a tax professional. However, these IRS designations do not change the legal status or responsibilities of the entity as a corporation.

In order to operate a health care practice, a medical corporation is required to obtain its own certificate of registration with the Illinois Department of Financial and Professional Regulation (IDFPR). Corporate registration is required in addition to individual licensure of the physicians who own and/or are employed by the corporation. A separate application must be filed for each location at which the corporation will maintain offices. If all officers, directors, and shareholders are licensed under the MPA and have no disciplinary action pending against them, the Department will issue a certificate with an individual registration number for each office. Each medical corporation registration (license) number will begin with the prefix “042-,” as distinguished from the chiropractic physician prefix 038-. The corporate certificate of registration may be revoked if the license of any officer, director or shareholder is revoked or suspended.

The corporate name must end with the word “chartered” or “limited” or the abbreviation “Ltd.” or the words “Service Corporation” or the abbreviation “S.C.” If a medical corporation wants to use a name other than its official corporate name containing the name or surname of any present or former shareholder, the corporation must file its “fictitious name” with recorder of its county.

Medical Corporation Summary

Advantages: Insulation from certain types of personal liability, including business debts and malpractice of associated physicians (but no personal insulation from claims arising from each physician’s own malpractice); permits hiring of medical or osteopathic physician to render services under all branches of medicine.

Disadvantages: Additional paperwork and filings to form entity; requires separate registration with the IDFPR; separate taxation of entity in addition to individual physician’s personal taxes.

Professional Service Corporations

A professional service corporation is a type of professional corporation that allows the offering of services and co-ownership by individuals who are licensed in “related professional services,” i.e., any combination of a combination of the following personal services: (a) the practice of medicine by persons licensed under the Medical Practice Act of 1987, (b) the practice of podiatry as defined in the Podiatric Medical Practice Act of 1987, (c) the practice of dentistry as defined in the Illinois Dental Practice Act, and (d) the practice of optometry as defined in the Illinois Optometric Practice Act of 1987. This entity is appropriate for any combination of the named licensees who want to offer some or all of the related services through one jointly owned corporate entity. This structure differs from a medical corporation in that the medical corporation may only render services by Medical Practice Act licensees within their defined scope.

The professional service corporation is formed by filing Articles of Incorporation with the Secretary of State. See the Articles of Incorporation form here. The articles must include in the corporate purpose the specific profession(s) to be practiced and services rendered and must list the street address of all offices at which the corporation intends to practice.

Liability of owners and employees of a professional service corporation is identical to liability in a medical corporation. A professional service corporation licensee owner is limited in liability for business debts of the corporation and for the professional negligence of other licensees who render services for the corporation. However, licensees employed by professional service corporations remain liable for their own malpractice and for errors committed by persons whom the physician supervises and to whom the physician delegates tasks. However, licensees are not liable for malpractice committed by fellow licensees of the corporation. Employment by a professional service corporation also does not shield a licensee from disciplinary investigations and hearings by licensing agencies and other governmental bodies.

A professional service corporation is taxed as a separate entity, which means it must file its own return and pay its own taxes. The individual owners and employees must also file personal returns and pay tax on their individual income. Thus, some consider this arrangement to be “double taxation.” Physicians should seek the advice of a qualified tax professional as to whether there are other corporate tax advantages or deductions that offset the additional tax. The same information regarding IRS designation as a C corporation or S corporation applies to professional service corporations (see Medical Corporations paragraph above). This designation applies only to taxation and does not change the legal status or responsibilities of the organization as a corporation.

Like the medical corporation, a professional service corporation is required to obtain a certificate of registration with the Illinois Department Financial and Professional Regulation. A separate application must be filed for each location at which the corporation will maintain offices. Each professional corporation registration (license) number will begin with the prefix “060,” as distinguished from the chiropractic physician prefix 038.The corporate certificate of registration may be revoked if the license of any officer, director or shareholder is revoked or suspended.

The corporation’s name must end with “chartered” or “Limited” or the abbreviation “Ltd.”, or with the words “Professional Corporation” or the abbreviation “Prof. Corp.” or the initials “P. C.” If a professional service corporation wants to use a name other one containing the full name or last name of one or more of its shareholders, the corporation must file with the county clerk to adopt a fictitious name.

Professional Service Corporation Summary

Advantages: Insulation from certain types of personal liability, including business debts and malpractice of associated physicians (but no insulation from claims arising from physician’s own malpractice); permits joint ownership and rendering of services by any combination of licensed physicians, dentists, podiatrists, and optometrists; permits hiring of medical or osteopathic physician to render services under all branches of medicine.

Disadvantages: Additional paperwork and filings to form entity; requires separate registration with the IDFPR; separate taxation of entity in addition to individual physician’s personal taxes.

Professional Limited Liability Company (PLLC)

The Professional Limited Liability Act (805 ILCS 185) allows an individual or group of individuals to form a professional limited liability company to render professional service, including the practice of medicine, to the public. This entity combines some characteristics of sole proprietorships and partnerships with other characteristics of corporations. The owners have control over management as in a partnership. They give assets to the company but are not personally liable for its debts for any amount over their original contributions, as in a corporation. Note that this entity is called a “company,” and is not a corporation, though frequently mistakenly referred to as such.

An important and appealing feature of the PLLC is that it can be taxed as a partnership or a corporation. The IRS treats an LLC with one owner as a non-entity for tax purposes (unless the LLC elects to be taxed as a corporation). This means that the income is attributed to the individual owner, who pays tax as one entity. If the LLC has two or more owners, the company has the option to be taxed as a partnership or a corporation.

A PLLC is a type of LLC specifically for licensed professionals. Most of the laws that apply to regular LLCs apply to PLLCs; however, as in medical and professional service corporations, licensed professional members of a PLLC are personally liable for malpractice claims that arose from their own errors or errors of persons working under the professional’s supervision. In a PLLC, each member is not liable for the malpractice of other professional owner-members.

Physicians licensed under the Medical Practice Act may organize a PLLC to practice medicine only when all managers are licensed physicians (includes chiropractic physicians), and all members are either licensed physicians, or physician entities that are properly 100% owned and managed by physicians licensed under the Medical Practice Act. In addition, the PLLC law (like the Professional Service Corporation Act) allows co-ownership by licensees of following services (1) the practice of medicine by physicians licensed under the Medical Practice Act of 1987, (2) the practice of podiatry by podiatric physicians licensed under the Podiatric Medical Practice Act of 1987, (3) the practice of dentistry by dentists licensed under the Illinois Dental Practice Act, and (4) the practice of optometry by optometrists licensed under the Illinois Optometric Practice Act of 1987. The law states that any of the listed professional services may be combined and offered within a single professional limited liability company, provided that each professional service is offered only by persons licensed to provide that professional service and all managers and members are licensed in at least one of the professional services offered by the professional limited liability company. Thus, the PLLC offers an alternative business form to individuals who wish to co-own and render multiple related services but want tax treatment as an LLC instead of a corporation.

A PLLC is created by filing Articles of Organization with the Secretary of State. See the Articles of Incorporation form here. Note that the Secretary of State provides one generic application form for all Limited Liability Companies and does not provide a separate application form for Professional Limited Liability Companies. However, the document becomes an application for a PLLC by entering the professions in the company’s purpose, and, as with medical and professional service corporations, a PLLC must separately register with the IDFPR. The PLLC is required to file a separate application for each location at which it will conducts business, and the IDFPR will issue a certificate for each. Prefix 56 for all types of LLCs

Professional Limited Liability Company Summary

Advantages: Insulation from certain types of personal liability, including business debts and malpractice of associated physicians (but no insulation from claims arising from physician’s own malpractice); a single-owner LLC is not taxed separately; a multiple-owner LLC may elect to be taxed as a partnership or a corporation; permits hiring of medical or osteopathic physician to render services under all branches of medicine.

Disadvantages: LLC owners must pay self-employment tax (Medicare and Social Security) when LLC is taxed as sole proprietorship or partnership; if the physician is an employee of a corporation, physician pays no self-employment tax; requires separate registration (licensing) with the Illinois Department of Financial and Professional Regulation.

Conclusion

Clearly, many factors are to be considered when selecting a business structure for a physician practice. It is important to gather input from tax and legal experts, as well as from family members who will be impacted in their taxes and potential exposure of their assets to liability. Learning about the differences in business formats is an excellent first step in making the selection.

Note: See additional ICS articles in this Business Structures series containing detailed information including how to form the entity; conversion of existing entities; and maintenance, compliance, and annual required filings.

For Additional Information See the Following Articles

Business Structures for A Physician Practice: How to Form and License Your Entity (PART II)
How-To Convert to A Correct Business Structure
Required Filings for Maintaining Your Business Structure

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