Medical Practice Formation: How Do Physicians Set Up Practices?

Professional Corporations (PC) and Professional Limited Liability Companies (PLLC) are the principal entity types for physician-owned practices. S-Corporation election under IRC Section 1362 allows pass-through taxation while preserving liability protection. C-Corporation election may benefit larger practices reinvesting capital but exposes earnings to double taxation. State entity rules (California PC, Texas PA, New York PC) vary substantially in licensing and ownership. Strong healthcare entity formation counsel matches each practice's tax and growth goals to the proper entity.

The Corporate Practice of Medicine (CPOM) doctrine prohibits non-physicians from owning medical practices in approximately 33 states. Strict CPOM states (California, Texas, New York, Illinois) bar most non-physician ownership and require physician-only equity. Permissive states allow lay ownership through MSO structures, employed physician models, or hospital affiliations. Friendly PC structures separate clinical (physician-owned PC) and management (MSO) entities to permit investor capital. Coordinated healthcare laws counsel navigates each state's CPOM rules during formation.

Group practice buy-ins use book value, capitalized earnings, or appraised methodologies to set buy-in prices. Partnership tracks typically run 2 to 5 years, with milestone-based compensation, productivity benchmarks, and vote requirements. Compensation formulas (eat-what-you-treat, equal share, modified RVU) drive both physician retention and dispute risk. Non-compete, non-solicitation, and patient-record provisions affect physician mobility and patient continuity. Skilled healthcare practice management counsel structures buy-ins and compensation for stability.

Management Services Organizations (MSOs) provide non-clinical services (billing, HR, IT, real estate) to physician practices under long-term agreements. Friendly PC structures allow private equity investors to capture practice value while preserving physician clinical ownership. MSO fees must reflect fair market value and follow commercially reasonable structures to avoid Stark and AKS exposure. Investor governance rights include board representation, drag-along, tag-along, and exit rights. Coordinated healthcare management solutions counsel balances investor returns and autonomy.

State medical board licensure must be in place for each practicing physician before clinical services can begin. Facility licenses (clinic, ambulatory surgery center, urgent care) require state Department of Health approval and inspections. Medicare, Medicaid, and commercial payer credentialing typically takes 90 to 180 days and should begin pre-formation. DEA registration, state CDS permits, and CLIA certifications complete the regulatory foundation. Strong hospital licensing and permits counsel sequences each licensure step against the opening timeline.

The Stark Law (42 U.S.C. § 1395nn) prohibits physician self-referrals for designated health services (DHS) under Medicare or Medicaid. The Anti-Kickback Statute (42 U.S.C. § 1320a-7b) criminalizes remuneration to induce referrals across federal healthcare programs. Safe harbors (in-office ancillary services, bona fide employment, fair market value) shape most physician compensation. False Claims Act liability (31 U.S.C. § 3729) attaches when Stark or AKS violations taint billed services. Strong healthcare compliance counsel maps each financial relationship against the safe harbor.

Physician employment agreements specify compensation, benefits, productivity, call coverage, and post-termination obligations. State non-compete enforceability varies widely, with FTC guidance and state changes (California, Minnesota, New York) restricting covenants. Tail malpractice coverage (claims-made vs occurrence) must be addressed in every termination scenario. Termination for cause definitions, notice periods, and severance triggers drive most physician departure disputes. Experienced healthcare employment law counsel drafts agreements that balance protection and fairness.

Partnership disputes commonly involve compensation formula disagreements, capital calls, succession planning, and patient allocation. Buy-out provisions trigger on death, disability, voluntary withdrawal, involuntary termination, and dissolution. Valuation disputes during buy-outs benefit from pre-agreed methodology, periodic appraisals, and clear formula application. Mediation and arbitration clauses can resolve most partnership disputes before formal litigation. Coordinated partnership dispute counsel manages valuation, governance, and patient continuity.