Choosing the right entity type is one of the first and most consequential decisions when forming a healthcare business. The wrong structure can create CPOM violations, tax inefficiencies, and gaps in liability protection. This guide breaks down the three most common entity types used in healthcare, when each is appropriate, and how state-specific rules affect your decision.
The Standard LLC
A Limited Liability Company is the default entity choice for most businesses in the United States, and it serves an important role in healthcare as the typical structure for a Management Services Organization (MSO). The LLC offers flexibility in management structure, pass-through taxation, and limited liability for its members.
In healthcare, an LLC is typically used for:
- The MSO entity that provides non-clinical administrative services to a professional corporation
- Healthcare consulting firms that do not deliver direct patient care
- Medical device or health technology companies
- Healthcare real estate holding companies
However, in CPOM states, an LLC generally cannot be used as the entity that employs physicians or delivers medical services directly. The reason is that LLC membership is not restricted to licensed professionals, which means a non-physician could own or control the practice of medicine through an LLC, violating CPOM.
The Professional Corporation (PC)
A Professional Corporation is a special corporate entity authorized by state law for the purpose of rendering professional services. In healthcare, PCs are the required entity type for medical practices in most CPOM states.
Key characteristics of a PC include:
- Ownership restricted to licensed professionals. Only physicians (or in some states, other licensed healthcare providers) may own shares in a medical PC.
- Formed under state-specific professional corporation statutes. Each state has its own Professional Corporation Act that governs formation, governance, and dissolution.
- Limited liability with an important exception. While the PC provides liability protection for the corporation's debts and obligations, individual professionals remain personally liable for their own malpractice.
- Taxed as a C-Corp by default. PCs are taxed as C-Corporations unless they make an S-Corp election, which introduces a flat corporate tax rate consideration.
In California, a medical corporation must be formed as a PC under the Moscone-Knox Professional Corporation Act. In New York, it must be formed under the Business Corporation Law with approval from the Education Department. The formation requirements are not interchangeable.
The Professional Limited Liability Company (PLLC)
A PLLC combines the ownership restrictions of a professional corporation with the operational flexibility and tax treatment of an LLC. Not all states authorize PLLCs, and among those that do, the specific rules vary considerably.
PLLCs are popular in states like:
- New York: PLLCs are commonly used for medical practices and require that all members be licensed in the profession
- Texas: PLLCs are authorized for healthcare professionals and provide pass-through taxation
- Washington: PLLCs can be formed for any profession that requires a license
The advantage of a PLLC over a PC is primarily in tax flexibility. A PLLC is treated as a partnership for tax purposes by default (if it has multiple members) or as a disregarded entity (if single-member), allowing profits to pass through to the owners without double taxation. It can also elect S-Corp taxation for additional payroll tax planning opportunities.
When to Use Each Entity Type
The decision tree for healthcare entity selection depends on three factors: the services being provided, the state where you are forming, and who will own the entity.
- Use an LLC when forming an MSO, a non-clinical healthcare business, or operating in a state without CPOM restrictions where you want maximum flexibility.
- Use a PC when forming the clinical entity in a CPOM state that requires a professional corporation, particularly in states like California that do not authorize PLLCs for medical practices.
- Use a PLLC when your state authorizes it and you want the ownership restrictions of a professional entity combined with the tax flexibility of an LLC. This is often the preferred choice in states like New York and Texas.
Tax Implications
Tax treatment differs meaningfully between these entity types and can have a significant impact on your bottom line.
- LLC (default): Pass-through taxation. Profits are reported on the members' personal returns. Self-employment tax applies to active members.
- PC (default): C-Corporation taxation with a flat 21% federal corporate tax rate. Profits distributed as dividends are taxed again at the shareholder level (double taxation). Can elect S-Corp status to avoid this.
- PLLC (default): Pass-through taxation like an LLC. Can elect S-Corp or C-Corp taxation if beneficial.
Many healthcare PCs elect S-Corp taxation to avoid double taxation while maintaining the professional corporation structure required by CPOM. However, the accumulated earnings tax and personal service corporation rules create additional tax planning considerations that do not apply to LLCs or PLLCs.
Liability Protection Considerations
All three entity types provide limited liability for business debts and general obligations. However, in healthcare, there is a critical distinction: no entity type shields a licensed professional from personal liability for their own malpractice. This is true for PCs, PLLCs, and LLCs alike.
What the entity does protect against is vicarious liability for the malpractice of other professionals in the practice. In a properly structured PC or PLLC, one physician's malpractice does not expose another physician-owner's personal assets, though the entity itself remains liable.
Getting your entity formation right from the start avoids costly restructuring later. If you are unsure which entity type fits your healthcare business, Foundry PC can help you navigate the state-specific requirements and establish the right structure for your clinical operations and growth plans.