Healthcare Entity Formation in California

The Law Offices of Nathan Mubasher helps physicians, nurses, and other licensed healthcare practitioners form the entities they practice through. This includes medical, nursing, and other professional corporations and group practices, along with the agreements among the owners. The office represents licensed practitioners who are forming or own their own practice entity. It does not represent management companies, investors, or other non-licensed owners. Initial consultations are free.

Why healthcare entities are different in California

California restricts who may own and control a medical practice. Under Business and Professions Code section 2400, “Corporations and other artificial legal entities shall have no professional rights, privileges, or powers.” Practicing medicine without a license is a public offense, and so is aiding or abetting it (Business and Professions Code section 2052). These rules are often called the bar on the corporate practice of medicine.

The main exception is the professional corporation. Section 2400 does not apply to a medical or podiatry corporation practicing under the Moscone-Knox Professional Corporation Act and the medical corporation article of the Business and Professions Code, as long as it complies with those laws (Business and Professions Code section 2402). The choice of entity matters: the Corporations Code does not permit a limited liability company to render professional services as defined in the Moscone-Knox Act (Corporations Code section 17701.04(e)), and the Medical Board of California lists operating a medical practice as a limited liability company, limited liability partnership, or general corporation among the structures that are prohibited.

Professional corporations under the Moscone-Knox Act

The Moscone-Knox Professional Corporation Act begins at Corporations Code section 13400. Its basic rules include:

A professional corporation generally renders services in a single profession, except as Corporations Code section 13401.5 allows other licensees to participate (Corporations Code section 13401(b)).
The articles of incorporation must state that the corporation is a professional corporation (Corporations Code section 13404).
Professional services may be rendered only through employees who are licensed to render them (Corporations Code section 13405(a)).
Shares may be issued only to licensed persons or to persons licensed to render the same professional services in the jurisdiction where they practice, and shares issued in violation of this rule are void. A voting trust or proxy that gives voting power to someone who is not a shareholder is also void (Corporations Code section 13406(a)).
Medical, nursing, dental, and several other healthcare corporations are not required to obtain a separate certificate of registration from their licensing board (Corporations Code section 13401(b)). Other professions may need one before the corporation can render professional services (Corporations Code section 13404).

Medical corporations

A medical corporation is a professional corporation authorized to render professional services, as long as it and its shareholders, officers, directors, and professional employees comply with the Moscone-Knox Act, the medical corporation article of the Business and Professions Code, and the other laws that apply to the corporation (Business and Professions Code section 2406). Key ownership and control rules include:

Each shareholder, director, and officer, other than an assistant secretary or assistant treasurer, must be a licensed physician, except as Corporations Code sections 13401.5 and 13403 allow (Business and Professions Code section 2408).
Certain other licensees may be shareholders, officers, directors, or professional employees of a medical corporation: podiatrists, psychologists, registered nurses, optometrists, marriage and family therapists, licensed clinical social workers, physician assistants, chiropractors, acupuncturists, naturopathic doctors, professional clinical counselors, physical therapists, pharmacists, midwives, and occupational therapists. Together they may own no more than 49 percent of the shares, and their number may not exceed the number of physician shareholders (Corporations Code section 13401.5(a); Cal. Code Regs., tit. 16, section 1343(b)).
A corporation with only one shareholder needs only one director, who must be the shareholder and serve as president and treasurer. The other officers need not be licensed (Corporations Code section 13403).
A person who is not licensed may hold an administrative title, such as chief executive officer, but may not be a shareholder, director, or officer except as the statutes allow (Business and Professions Code section 2408).
A physician who violates the Moscone-Knox Act or the medical corporation rules commits unprofessional conduct (Business and Professions Code section 2286).

Practice names and fictitious name permits

A medical corporation that does not have a fictitious name permit must use a name made up of the names or surnames of present, prospective, or former physician shareholders. Using any other name, or adding other words or names to the shareholders’ names, requires a permit (Cal. Code Regs., tit. 16, section 1344). Practicing under a name other than one’s own without a permit is unprofessional conduct (Business and Professions Code section 2285).

The Medical Board issues a fictitious name permit only if the practice is wholly owned and entirely controlled by licensees and the name is not deceptive, misleading, or confusing, and a notice accompanying the permit must be displayed at each place of business identified in the permit (Business and Professions Code section 2415). According to the Medical Board, permits must be renewed every two years, and a corporation applying for a permit must submit its endorsed Articles of Incorporation and list all shareholders and the percentage of the corporation each one owns. Osteopathic physicians apply with the Osteopathic Medical Board of California.

Nursing corporations and other licensed professions

A nursing corporation is a professional corporation regulated by the Board of Registered Nursing (Business and Professions Code section 2775). Its name must include the word “nursing” or “registered nursing” along with words indicating a corporation (Business and Professions Code section 2778), and its shareholders, directors, and officers must be licensed registered nurses, except as Corporations Code sections 13401.5 and 13403 allow (Business and Professions Code section 2779). Physicians, physician assistants, psychologists, and several other licensees may participate in a nursing corporation within the limits of Corporations Code section 13401.5.

Other California healthcare professions also practice through professional corporations, including dental corporations (Business and Professions Code section 1800), psychological corporations (Business and Professions Code section 2995), and optometric corporations (Business and Professions Code section 3160). Each profession has its own practice act and its own list of licensees who may participate under Corporations Code section 13401.5.

Partnerships and group practices

Physicians may also practice together in a partnership or group (Business and Professions Code section 2416), and a medical corporation may enter into a partnership agreement with physicians or other medical corporations (Cal. Code Regs., tit. 16, section 1347(b)). Group arrangements need the same attention to licensure, ownership, and control.

Management agreements offered to a practice

Practices are often offered a management agreement by a management services organization (MSO) that provides nonclinical support such as office space, staff, and billing. The Medical Board of California says a physician may consult with unlicensed persons on business decisions but must retain ultimate responsibility for or approval of those decisions, and that this control cannot be delegated to an unlicensed person, including a management services organization. The Board identifies decisions physicians must control, such as ownership of patient medical records, the parameters for contracting with payers, and coding and billing.

Health and Safety Code section 1191, added in 2025, bars a private equity group or hedge fund involved with a physician or dental practice from interfering with professional judgment in health care decisions or controlling matters such as medical records, coding and billing, and payer contracting, regardless of the practice’s corporate form. Contract provisions that violate these limits are void and unenforceable (Health and Safety Code section 1191).

Fees, referrals, and ownership interests

Payments between the practice, its owners, and business partners are regulated:

Business and Professions Code section 650(a) makes it unlawful for a licensee to offer or accept any consideration as compensation or inducement for referring patients, regardless of any ownership interest. Under section 650(b), payment for services other than referrals that is based on a percentage of gross revenue is not unlawful if it is commensurate with the value of the services furnished or with the fair rental value of the premises or equipment.
Business and Professions Code section 650.01 generally prohibits a licensee from referring a patient for laboratory, diagnostic imaging, physical therapy, and certain other listed services to an entity in which the licensee or an immediate family member has a financial interest, subject to the exceptions in section 650.02.
When federal health care programs are involved, the federal physician self-referral law (42 U.S.C. section 1395nn) and the federal Anti-Kickback Statute (42 U.S.C. section 1320a-7b(b)) may also apply.
For practices offering elective cosmetic procedures, Business and Professions Code section 2417.5 addresses businesses that are owned or operated in violation of section 2400 and contract with physicians to provide those procedures.

Governance documents and buy-sell terms

The owners also need governing documents that fit the licensing rules:

Articles of incorporation and bylaws. For a medical corporation with two or more shareholders, the articles or bylaws must require that the shares of a shareholder who dies be sold within six months after death, and that the shares of a shareholder who becomes disqualified be sold within 90 days after disqualification (Cal. Code Regs., tit. 16, section 1345(a)).
A shareholder agreement covering voting, capital, distributions, and what happens when an owner retires, leaves, loses a license, or dies.
Buy-sell terms, including how shares are valued and who may buy them. Shares of a professional corporation may be transferred only to a licensed person, another shareholder, or a professional corporation, and the corporation may buy back its own shares (Corporations Code section 13407).
Restrictions on competition. California generally voids agreements that restrain anyone from engaging in a lawful profession, but an owner who sells all of their ownership interest in a business, or its goodwill, may agree not to compete within a specified geographic area (Business and Professions Code sections 16600 and 16601).

Physician employment terms

For a physician reviewing or negotiating their own employment terms, see Physician Employment Contracts. In employment matters, the office represents physicians, not employers.

How the office can help

Choosing an entity structure that fits the licenses of the owners
Preparing and filing articles of incorporation with the California Secretary of State
Bylaws, shareholder agreements, and buy-sell terms
Fictitious name permit applications to the Medical Board of California
Reviewing, for the practitioner-owner, management agreements, leases, and other contracts the practice is offered
Restructuring an existing practice, adding or removing owners, or winding down a practice

Questions for a consultation

Which licenses does each proposed owner hold, and in which states?
Has the practice been offered a management agreement, lease, or investment?
What should happen if an owner retires, leaves, or loses a license?

Frequently asked questions

Can I use an LLC for my medical practice in California?

Generally, no. The Corporations Code does not permit a limited liability company to render professional services as defined in the Moscone-Knox Act (Corporations Code section 17701.04(e)), and the Medical Board of California lists operating a medical practice as a limited liability company as a prohibited structure. Physicians commonly use a medical corporation instead.

Can a registered nurse or nurse practitioner own part of a medical corporation?

Registered nurses are among the licensees who may own shares in a medical corporation, as long as all non-physician shareholders together own no more than 49 percent of the shares and their number does not exceed the number of physician shareholders (Corporations Code section 13401.5(a)). Nurses may also form a nursing corporation.

Can a non-physician investor own part of my medical practice?

Generally, no. Shares of a professional corporation may be issued only to licensed persons or to persons licensed in the same profession where they practice (Corporations Code section 13406(a)), and the Medical Board’s application form for a fictitious name permit states that a lay (unlicensed) person cannot own any shares in a professional medical corporation in California.

Is the first consultation free?

Yes, initial consultations are free. Call 1-800-691-2721 or use the contact form on the home page.

Talk with Nathan Mubasher

Call 1-800-691-2721 or request a confidential consultation. Each inquiry is reviewed directly by Attorney Nathan Mubasher. Submitting a request does not create an attorney-client relationship, so please do not send confidential documents until your matter has been accepted for review.

Attorney Advertising. Law Offices of Nathan Mubasher, 8583 Irvine Center Drive, Suite 35, Irvine, CA 92618. Responsible attorney: Nathan Mubasher. This page provides general information about California law, not legal advice for any specific situation. Reading it or contacting the office does not create an attorney-client relationship. Every matter is different, and no particular result can be guaranteed.