Starting a Medical Practice in California

California prohibits the practice of medicine through a standard LLC. Physicians must form a Professional Medical Corporation (a "professional corporation" organized under the Moscone-Knox Professional Corporation Act and the Medical Practice Act). Shareholders, directors, and officers of the corporation must be licensed California physicians, with limited exceptions for a small minority interest held by certain other licensed health professionals.

The corporate name must include the words "Medical Corporation," "Professional Corporation," or an approved abbreviation, and the entity must be registered with the California Secretary of State. Bylaws should reflect the professional-practice restrictions, and stock-transfer restrictions are required to keep ownership in licensed hands.

California enforces the Corporate Practice of Medicine doctrine strictly. Non-physicians and general business corporations cannot own a medical practice, employ physicians to deliver clinical care, or share fees from the practice of medicine. The doctrine is enforced by the Medical Board of California, the Attorney General, and through private civil actions.

Physicians who want outside investment, multi-state administrative support, or non-physician business partners typically use a Management Services Organization (MSO) structure. The physician-owned PC contracts with the MSO for billing, HR, real estate, marketing, and administrative services under a friendly-PC arrangement. The MSO cannot control clinical decisions, set treatment protocols, or hold an ownership interest in the PC.

California professional corporations are subject to the state's 8.84% corporate franchise tax on net income (or the $800 minimum franchise tax, whichever is greater). If the corporation elects S-corp status with the IRS, California treats it as an S-corp for state purposes but still imposes a 1.5% S-corp tax on net income, again with the $800 minimum.

Individual physicians pay California personal income tax at rates up to 13.3% on income passed through from the practice. Practices with significant California operations should also be aware of city-level gross receipts taxes (notably San Francisco and Los Angeles) and the requirement to collect sales tax on certain non-clinical goods.

California requires professional medical corporations to register the entity with the Medical Board of California, in addition to the individual physician licenses each shareholder holds. Registration covers entity ownership, the corporate name (or fictitious-name permit if applicable), and ongoing compliance with the Medical Practice Act.

California has the most physician-employer-unfriendly employment law landscape in the country. Wage-and-hour rules, mandatory meal and rest periods, daily overtime, mandatory paid sick leave, and PAGA (Private Attorneys General Act) enforcement create significant compliance and litigation exposure. Non-compete agreements with physicians are unenforceable and, as of 2024, employers cannot even require new employees to sign them.

Practices must classify clinical and non-clinical staff carefully under California's ABC test for independent contractors (AB 5/AB 2257). Physicians can sometimes be treated as independent contractors under a professional-services exemption, but support staff almost always must be W-2 employees.