Practice Formation and the Corporate Practice of Medicine

Anyone can form a company in New York in an afternoon. A medical practice is different, and the difference is not procedural. New York restricts who may own a professional practice, restricts how professional fees may be shared, and treats violations as professional misconduct against the practitioner's license rather than merely as a corporate defect. An arrangement that works in most states can put a New York physician's license at risk.

The Law Offices of Albert Goodwin advises physicians, dentists, and other licensed professionals in New York City on how to structure a practice, and advises investors and management companies on how to work with one lawfully.

Only Licensed Professionals May Own the Practice

New York permits professional services to be rendered through a professional service corporation or a professional limited liability company, and it conditions ownership on licensure. Under the Business Corporation Law provisions governing professional service corporations, shareholders, directors, and officers must generally be licensed in the profession the entity practices. The parallel provisions of the Limited Liability Company Law impose the same requirement on the members and managers of a PLLC.

Formation itself requires a certificate of authority or consent from the Education Department, or from the Department of Health for certain entities, before filing, which is why medical entities cannot simply be filed online the way an ordinary LLC can. Our page on professional corporation and PLLC formation covers the mechanics of the filing, the tax considerations, and the ongoing compliance obligations.

The consequence that matters most: a non-physician cannot hold equity in the practice. Not a spouse, not an investor, not a management company, not a hospital that is not itself an authorized provider, and not a private equity fund. This is the corporate practice of medicine doctrine, and in New York it is enforced through the licensing statutes rather than a single dedicated provision.

Fee Splitting

Separately from ownership, New York treats the sharing of professional fees with an unlicensed person as professional misconduct. The Education Law and the Regents rules on unprofessional conduct prohibit a licensee from permitting any person to share in fees for professional services, other than a partner, employee, associate in a professional firm, or subcontractor licensed in the profession.

This is the provision that governs, in practice, how a management company may be paid. An arrangement in which a marketing company, a billing company, a management services organization, or a staffing vendor receives a percentage of the practice's professional revenue raises a fee splitting question. Arrangements in which the vendor is paid a fixed fee, or a fee based on the fair market value of the specific services provided, are on considerably firmer ground.

The rule reaches farther than most practitioners expect. Percentage-based billing company compensation, revenue sharing with a referral platform, and compensation to a non-clinical practice administrator computed as a share of collections have all drawn scrutiny. The analysis is fact specific, and the safest structures are the ones where the vendor's compensation does not move with the practice's professional fees.

Management Services Organizations and the Friendly PC

Because non-physicians cannot own the practice but can lawfully provide services to it, capital enters New York health care through a management structure. The common form has three components:

1. A professional entity, the PC or PLLC, owned by a licensed physician, which employs the clinicians, bills for professional services, and holds the clinical relationship with patients.
2. A management services organization, owned by the investors, which provides non-clinical services: space, equipment, non-clinical staff, billing and collections, information technology, marketing, and administrative management.
3. A management services agreement between them, under which the MSO provides those services for a fee.

Frequently the physician owner of the professional entity is subject to a succession or transfer arrangement giving the investor group influence over who holds the equity, an arrangement commonly described as a friendly PC.

These structures are common and can be lawful, but they fail in identifiable ways. The recurring problems:

• The management fee is a percentage of professional revenue, which raises the fee splitting issue directly.
• The fee is not supported by any fair market value analysis of the services actually provided.
• The MSO controls clinical matters: which patients are seen, how long visits run, what is ordered, clinical protocols, hiring and firing of clinicians on clinical grounds, or the setting of professional fees.
• The physician owner is nominal, with no real economic interest, no authority, and a transfer arrangement that treats the equity as belonging to the investors.
• The paperwork does not match the practice. Documents that carefully preserve clinical independence, alongside an operating reality in which the MSO decides everything, is the pattern that draws enforcement.

Where an arrangement crosses the line, the consequences reach the physician's license, the enforceability of the management agreement, and the legitimacy of claims submitted to payors, since insurers have used corporate practice violations as a basis for denying and recovering payments.

New York Transaction Notice Requirements

New York now requires advance notice to the Department of Health of material transactions involving health care entities, with the notice due in advance of closing and covering information about the parties and the transaction. The rules reach a broad range of transactions, including mergers, acquisitions of assets or equity, and affiliations, subject to thresholds and exclusions. Any structure being built with outside capital should be evaluated against these requirements early, since they affect timing. See selling a medical practice.

Choosing Between a PC and a PLLC

Both limit liability for business obligations, and neither shields a practitioner from liability for their own professional negligence, which is what malpractice insurance is for. The practical differences involve tax treatment and elections, formality requirements, how ownership transfers on death or disqualification, and how multi-owner governance is documented. The New York City unincorporated business tax and the general corporation tax treat these entities differently, which for a profitable practice can matter more than the corporate law distinctions. See PC and PLLC formation and S corporation and C corporation differences.

The Documents a Multi-Owner Practice Needs

Practices formed by two physicians who trust each other routinely skip the governing documents, and those are the practices we later see in litigation. The agreement should address, at a minimum:

• Capital contributions, ownership percentages, and how future contributions are called;
• Compensation: base, productivity formula, and how ancillary revenue is allocated;
• Decisions requiring unanimity versus majority, including hiring physicians, taking on debt, and signing a lease;
• What happens when an owner reduces hours, becomes disabled, dies, retires, loses licensure, or is excluded from a federal program;
• The buyout: the valuation method, the payment terms, and whether accounts receivable and goodwill are included;
• Restrictive covenants among the owners, and what happens to them on an involuntary termination;
• Which owner controls the patient records and how they are handled on a separation;
• Deadlock resolution.

See operating agreements, buy-sell agreements, and what happens when these are missing.

Getting the Practice Operational

Beyond entity formation, opening a practice requires professional and facility licensure as applicable, National Provider Identifier registration, payor credentialing and contracting, which typically takes several months and should be started earlier than founders expect, a Drug Enforcement Administration registration where controlled substances are involved, malpractice coverage placed before the first patient, HIPAA policies and business associate agreements with vendors, and a lease that permits the intended use and the necessary build-out. See HIPAA obligations.

You can contact us by phone at 212-233-1233 or by email at [email protected].