Professional Medical Corporations

Professional Medical Corporation California: Formation, Ownership Rules, and CPOM Compliance

A professional medical corporation California physicians form under the Moscone-Knox Professional Corporation Act is the primary legal vehicle through which doctors may practice medicine in corporate form while complying with the state's strict Corporate Practice of Medicine (CPOM) doctrine. California prohibits unlicensed entities — including general stock corporations, LLCs, and limited partnerships — from practicing medicine, employing physicians to deliver medical services, or exercising control over clinical decision-making. The professional medical corporation, governed by Corporations Code §§13400–13410, is the legislatively authorized exception.

Forming a medical corporation requires more than filing articles with the Secretary of State. California law imposes specific requirements regarding shareholder eligibility, the 51% physician ownership threshold, corporate naming conventions, governance structure, and ongoing compliance with both the Medical Board of California and the Secretary of State. Physicians who fail to comply with these requirements risk disciplinary action, involuntary dissolution, loss of malpractice coverage, and personal liability for CPOM violations.

Bay Legal PC advises physicians and physician groups across California on the formation, governance, and regulatory compliance of professional medical corporations. This page provides a comprehensive overview of the statutory framework, shareholder rules, formation steps, tax considerations, multi-physician structures, and the relationship between medical corporations and Management Service Organizations.

Section 1: Statutory Framework and CPOM Compliance

H2: The Moscone-Knox Act and California's Corporate Practice of Medicine Doctrine

California's Corporate Practice of Medicine doctrine is among the most strictly enforced in the nation. Business and Professions Code §2400 states that "corporations and other artificial entities shall have no professional rights, privileges, or powers." BPC §2052 makes it a criminal offense for any person or entity without a valid medical license to practice or attempt to practice medicine. Together, these provisions prohibit lay entities from owning medical practices, employing physicians to render medical services, or interfering with physician clinical judgment.

The professional medical corporation, authorized under the Moscone-Knox Professional Corporation Act (Corp. Code §§13400–13410), is the mechanism through which physicians may practice in corporate form without violating CPOM. The Act requires that the corporation be organized for the purpose of rendering professional services in a single profession — in this case, medicine — and that ownership, governance, and control remain in the hands of licensed professionals.

SB 351, signed by Governor Newsom on October 6, 2025 and effective January 1, 2026, further strengthened California's CPOM framework by codifying restrictions specifically targeting private equity groups and hedge funds involved with physician practices. The new law prohibits these entities from interfering with physicians' professional judgment, controlling hiring of clinical staff, or dictating coding and billing procedures for patient services. The California Attorney General is empowered to enforce SB 351 through injunctive relief and equitable remedies. For medical corporations operating with MSO support structures, SB 351 requires careful review of existing management services agreements to ensure ongoing compliance.

Section 2: Shareholder Eligibility and the 51% Physician Ownership Rule

H2: Who Can Own a Professional Medical Corporation in California

The shareholder rules for California professional medical corporations are set forth in Corporations Code §§13401, 13401.5(a), and 13403. The fundamental principle is that licensed physicians must hold at least 51% of the issued and outstanding shares of the medical corporation. The number of physician shareholders must equal or exceed the number of non-physician licensed professional shareholders.

Under §13401.5(a)(1)–(15), the following licensed professionals may hold minority shares (up to 49% collectively) in a medical corporation: doctors of podiatric medicine, psychologists, registered nurses, optometrists, marriage and family therapists, licensed clinical social workers, physician assistants, chiropractors, acupuncturists, naturopathic doctors, licensed professional clinical counselors, physical therapists, pharmacists, licensed midwives, and occupational therapists. No unlicensed individual — whether a business manager, investor, family member, or anyone else — may hold any shares whatsoever.

Additionally, under BPC §2408, a single-shareholder medical corporation may itself be a shareholder of another medical corporation, provided the single shareholder is a licensed physician complying with all Medical Board regulations. This facilitates multi-entity structures but must be carefully documented.

Governance rules mirror ownership restrictions. Under Corp. Code §13403, directors must be licensed persons. A single-shareholder corporation need have only one director (the shareholder), who must also serve as president and treasurer. A two-shareholder corporation requires two directors who must between them fill the offices of president, vice president, secretary, and treasurer.

Section 3: Formation Requirements and Corporate Governance

H2: How to Form a Professional Medical Corporation in California

Formation of a California professional medical corporation begins with drafting Articles of Incorporation that comply with both the general Corporations Code and the Moscone-Knox Act. The Articles must include the corporation's name (which must include a proper corporate designation and comply with BPC naming requirements — the corporation may use the physician's name followed by "Medical Corporation" or "M.D., Inc." without requiring a fictitious name permit), the purpose statement (declaring engagement in the profession of medicine under Corp. Code §13400 et seq.), a registered agent for service of process, the corporation's initial street address, and the authorized share structure.

The Articles may be filed using the Secretary of State's Form ARTS-PC or through attorney-drafted articles providing enhanced indemnification and liability protections. Filing may be done by mail, online, or through 24-hour expedited service.

Following incorporation, the medical corporation must: adopt bylaws; hold an organizational meeting of the board of directors; appoint officers; issue shares; obtain an EIN from the IRS; open a corporate bank account; and file a Statement of Information (Form SI-550) within 90 days. The corporation must also register with the Medical Board of California and obtain any required fictitious name permits.

Ongoing governance requires annual meetings of shareholders and directors, corporate minutes, timely Statements of Information, Medical Board compliance, and ensuring all shareholders and directors maintain active licensure. Failure to maintain corporate formalities can result in loss of limited liability protection, exposing shareholders to personal liability.

Section 4: Tax Elections and Multi-Physician Structures

H2: S-Corp vs. C-Corp Tax Elections and Multi-Physician Practice Design

Professional medical corporations must make a federal tax election that has significant financial implications. The two primary options are C-corporation taxation and S-corporation taxation, each with distinct advantages and drawbacks.

A C-corporation pays corporate-level income tax on its profits and shareholders pay a second layer of tax on dividends — creating what is commonly referred to as "double taxation." However, C-corporations offer greater flexibility in fringe benefit deductions and may be advantageous for physicians who wish to retain significant earnings within the corporation. In California, C-corporations are subject to an 8.84% corporate income tax rate.

An S-corporation, by contrast, is a pass-through entity for federal tax purposes — profits and losses flow through to the shareholders' individual returns, avoiding double taxation. California recognizes S-corporation status but imposes a 1.5% minimum franchise tax on S-corporation net income (with a minimum annual franchise tax of $800). For most physician practices, S-corporation election is the preferred structure due to the avoidance of double taxation and the ability to split income between salary (subject to employment taxes) and distributions (not subject to self-employment tax). However, the S-corporation election imposes restrictions, including a maximum of 100 shareholders, a single class of stock, and the requirement that all shareholders be individuals (not entities) who are U.S. citizens or residents.

For multi-physician practices, the medical corporation structure requires careful design of compensation models, governance protocols, and shareholder agreements. Key considerations include: how profits will be allocated among physician-shareholders (productivity-based, equal shares, or hybrid models); voting rights and decision-making authority; restrictive covenants (noting California's strong public policy against non-compete agreements, now further codified by SB 351); buy-sell provisions triggered by death, disability, retirement, or departure; mandatory redemption of shares upon license revocation; and dispute resolution mechanisms. Bay Legal PC designs governance frameworks and shareholder agreements that balance physician autonomy with practice stability.

The medical corporation may also engage a Management Service Organization (MSO) to handle administrative and business functions. The MSO structure allows non-physician capital and management expertise to participate in the business side of the practice without violating CPOM. The management services agreement must be at arm's length, at fair market value, and must clearly preserve the medical corporation's exclusive authority over all clinical decisions, physician hiring and supervision, and patient care protocols.

Steps / HowTo Section:

H2: Steps to Form a Professional Medical Corporation in California

1. Determine Shareholder Structure — Identify the founding physician(s) and any minority shareholders from the licensed professions permitted under Corp. Code §13401.5(a). Confirm that physicians will hold at least 51% of shares and that no unlicensed individuals will hold any ownership interest.

1. Draft Articles of Incorporation — Prepare Articles of Incorporation compliant with the Moscone-Knox Act, including the required purpose statement for the profession of medicine, a compliant corporate name, registered agent, initial address, and share structure. Consider attorney-drafted articles for enhanced liability protections beyond Form ARTS-PC.

1. File with the Secretary of State — Submit the Articles of Incorporation to the California Secretary of State by mail, online, or through 24-hour expedited service. Pay the applicable filing fee. Upon acceptance, the corporation is legally formed.

1. Adopt Bylaws and Organize the Corporation — Draft and adopt bylaws governing internal operations. Hold the organizational meeting of the board of directors. Appoint officers (president and treasurer must be licensed physicians in a single-shareholder corporation per Corp. Code §13403). Document all actions in corporate minutes.

1. Issue Shares and Execute the Shareholder Agreement — Issue shares to physician-shareholders and any permitted minority shareholders. Execute a comprehensive shareholder agreement addressing transfer restrictions, buy-sell triggers, valuation methodology, mandatory redemption upon license loss, and governance provisions.

1. File Statement of Information and Register with Regulatory Bodies — File Form SI-550 with the Secretary of State within 90 days of incorporation. Register with the Medical Board of California. Obtain a fictitious name permit from the Medical Board if the corporate name requires one.

1. Obtain EIN, Elect Tax Status, and Open Bank Account — Apply for an EIN from the IRS. File IRS Form 2553 for S-corporation election (if desired) within 75 days of incorporation or by March 15 of the tax year. Open a corporate bank account in the corporation's legal name.

Bay Legal PC advises physicians across California on the formation, structuring, and ongoing compliance of professional medical corporations. Our services encompass drafting Articles of Incorporation and bylaws, structuring shareholder agreements for single-physician and multi-physician practices, advising on S-corp versus C-corp tax elections, designing governance frameworks for multi-provider groups, structuring MSO relationships in compliance with CPOM and SB 351, and representing medical corporations before the Medical Board of California. We serve physicians in all specialties — primary care, surgery, dermatology, psychiatry, internal medicine, radiology, and subspecialties — across solo practices, group practices, and multi-location operations.

Q: Can a non-physician own or invest in a California medical corporation?

A: No. Under California's Corporate Practice of Medicine doctrine (BPC §§2400, 2052) and the Moscone-Knox Professional Corporation Act (Corp. Code §§13400–13410), only licensed professionals may hold shares in a medical corporation. Physicians must hold at least 51% of shares, and the remaining shares may only be held by professionals in the specific licensed categories listed in Corp. Code §13401.5(a)(1)–(15). Unlicensed individuals — including family members, business partners, and investors — are categorically prohibited from holding any ownership interest. Non-physician participation in the business operations of a medical practice is possible only through a properly structured Management Service Organization.

Q: What is the difference between a professional medical corporation and a regular corporation?

A: A professional medical corporation is organized under the Moscone-Knox Professional Corporation Act (Corp. Code §13400 et seq.) specifically to render medical services. It is subject to shareholder restrictions, governance requirements, naming conventions, and Medical Board oversight that do not apply to general stock corporations. A general corporation cannot lawfully employ physicians to practice medicine in California — doing so violates CPOM and constitutes a criminal offense under BPC §2052.

Q: What licensed professionals other than physicians can hold shares in a medical corporation?

A: Corporations Code §13401.5(a) lists fifteen categories of licensed professionals who may hold minority shares (up to 49% collectively) in a medical corporation. These include doctors of podiatric medicine, psychologists, registered nurses, optometrists, marriage and family therapists, licensed clinical social workers, physician assistants, chiropractors, acupuncturists, naturopathic doctors, licensed professional clinical counselors, physical therapists, pharmacists, licensed midwives, and occupational therapists. These minority shareholders may not outnumber the physician shareholders.

Q: What are the California tax implications of forming a medical corporation?

A: A California professional medical corporation may elect to be taxed as a C-corporation or an S-corporation. A C-corporation pays the California corporate income tax rate of 8.84% on net income, and shareholders are taxed again on dividends (double taxation). An S-corporation passes income through to shareholders' individual returns, avoiding double taxation, but California imposes a 1.5% tax on S-corporation net income with an $800 minimum annual franchise tax. Most physician practices elect S-corporation status for tax efficiency, but the optimal choice depends on the practice's revenue, physician compensation structure, and retention needs. A qualified tax advisor should be consulted before making this election.

Q: How does the medical corporation relate to an MSO?

A: A Management Service Organization (MSO) is a separate legal entity that provides administrative and business services to the medical corporation — billing, marketing, HR, facilities management, equipment, and technology. The MSO does not practice medicine, employ physicians for clinical purposes, or control clinical decisions. The relationship is governed by a management services agreement that must be at fair market value and must preserve the medical corporation's exclusive authority over all clinical operations. SB 351 (effective January 1, 2026) codifies additional restrictions on private equity groups and hedge funds that operate through MSOs, prohibiting interference with physician professional judgment and certain operational controls.

Q: What happens if a medical corporation's physician shareholder dies or loses their license?

A: The corporation's shareholder agreement should contain mandatory redemption provisions requiring the corporation to repurchase shares upon death, disability, license revocation, or departure. If the sole physician shareholder of a medical corporation dies or loses their license, the corporation loses its ability to practice medicine — creating an urgent compliance crisis. Multi-physician corporations must ensure that the departure of any shareholder does not cause the physician ownership percentage to fall below 51%. Bay Legal PC drafts shareholder agreements with built-in succession provisions, insurance-funded buy-sell mechanisms, and transition timelines to protect against these contingencies.

Q: What corporate formalities must a medical corporation maintain?

A: Medical corporations must hold annual meetings, maintain written minutes, file annual Statements of Information, keep accurate stock records, ensure all shareholders and directors maintain active licensure, pay the franchise tax, and comply with Medical Board reporting requirements. Failure to maintain these formalities can result in administrative dissolution, loss of limited liability, and regulatory sanctions.

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• Medical Board of California
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