While it is often thought that forming a business is a simple process accomplished by filing formation documents provided by a jurisdiction’s Secretary of State (or equivalent), actual compliance with a particular jurisdiction’s corporate and/or limited liability company law provisions requires further analysis. For many types of professional services businesses, most states require such professional services businesses to organize as professional corporations (“PCs”) or professional limited liability companies (“PLLCs”), which impose additional organizational requirements. Professional services businesses are often categorized by jurisdictions as those businesses that require additional licensure to perform the services associated with the business, such as medical service providers, engineers, architects, accountants, and attorneys. For medical services PCs and PLLCs in Virginia and Maryland, these requirements which often relate to various licensing requirements, can complicate establishing professional services companies and expose owners, officers, and employees to additional risk and liability.
PCs and PLLCs
PCs and PLLCs are corporations and limited liability companies, respectively, organized for the sole and specific purpose of providing a designated professional service, which may include medical services. Virginia permits a medical services business to organize as either a PC or PLLC. In Maryland, medical services businesses must be organized as PCs and cannot elect to form as a limited liability company or a traditional corporation. PC and PLLC laws impose specific requirements on the business’s services, ownership, and management that must be strictly followed to ensure that the business does not lose its status as a PC or PLLC and avoids associated liability.
A business elects to be a PC or PLLC upon its formation, or, if the incorrect entity is chosen upon the original formation, upon conversion to a PC or PLLC. Unlike other businesses, which can be organized for broad purposes or any purposes under the law, PCs and PLLCs must have a sole and specific purpose set forth in their formation documents. For medical services companies, their formation documents must set forth the type of medical services that they will provide. Because the formation documents must clearly specify the company’s medical services, the company will be unable to provide any other services, including medical services that are not within the scope of the services identified in the formation documents.
Medical PCs and PLLCs have strict ownership requirements and limitations.
- First, only medical providers licensed to provide the services set forth in the formation documents or other medical companies may own equity in a medical company. For Virginia medical companies, the medical provider must be licensed in Virginia, while Maryland law permits ownership of PCs by medical providers licensed in other states.
- Second, because only licensed medical providers may be owners, PC and PLLC laws directly impose strict transfer requirements on an owner’s equity. Owners often can only sell their equity to other licensed medical providers or the company. As a result, medical providers who want to sell their equity may find it difficult to find a qualified buyer, and the company and other owners may find it expensive to purchase the selling owner’s equity upon the departure of an owner.
- Third, if an owner loses his or her medical license, then that individual may no longer be an owner of the medical company. That individual must sever all employment with, ownership of, and financial interests in the company when he or she loses his or her medical license. Failure to take these steps is grounds for the dissolution of the medical company.
Medical companies must be managed and controlled by licensed medical providers. In Virginia, the manager of a manager-managed PLLC must be a licensed medical provider, and all directors on a PC’s board of directors must be licensed medical providers. In Maryland, the rules are less stringent, requiring only a majority of the directors on the board of a PC to be licensed medical providers. In some cases, the company can delegate managerial tasks related to operational matters, including financial and administrative services, to other individuals or businesses, often through management services agreements. In Virginia, if a manager or officer loses his or her medical license, that individual must sever its employment with and financial interests in the company. In Maryland, the PC cannot knowingly employ or retain in its employment a medical professional who loses his or her medical license. Failure to do so is grounds for dissolution of the medical company.
Medical providers, as well as other professional service providers, should understand the complexities associated with the formation and operation of a professional services business. The Business & Transactions Law Group and Healthcare Industry Team at PilieroMazza can help medical providers organize their medical companies to ensure that they comply with state law requirements.