Corporate Structure Basics for Physician Ventures

April 28, 2016
Rachel V. Rose, JD, MBA
Rachel V. Rose, JD, MBA

Rachel V. Rose, JD, MBA, advises clients on compliance and transactions in healthcare, cybersecurity, corporate and securities law, while representing plaintiffs in False Claims Act and Dodd-Frank whistleblower cases. She also teaches bioethics at Baylor College of Medicine in Houston. Rachel can be reached through her website, www.rvrose.com.

As physicians create joint ventures and Accountable Care Organizations, what do they have to know about structuring a new entity?

The continued consolidation and utilization of joint ventures and Accountable Care Organizations in the healthcare industry requires physicians to appreciate corporate structures more than ever.

When constructing different ventures, attorneys are often asked some fundamental questions about structuring a new entity. Here is an overview of general considerations, as well as some of the possible types of entities. It is important to consult an attorney to assist with this process, especially when multiple entities are involved.

When forming a legal entity (e.g., corporation or partnership), participants should consult the relevant state laws that govern the formation of a corporation or partnership. For example, Texas corporations are governed by the Texas Business Organizations Code (TBOC). The respective state’s Secretary of State website provides guidance on forming an entity, as well as a method for filing the requisite forms electronically. This first step should get physicians thinking about the people involved, the papers that need to be compiled (e.g., articles of incorporation), and the equity (e.g., stock shares or units) being issued. Bylaws, which are internal to the entity, are also crucial, as is discerning whether or not a “pre-incorporation” contract is in existence. A pre-incorporation contract is when a person, who is usually a promoter, contracts with a third-party on behalf of a corporation that has not been formally created. This is an important area for consideration because a corporation may be liable if it adopts the contract. Hence, it is important to ascertain who is acting on behalf of the company and who may execute formal agreements.

When deciding what type of entity to choose - a C-Corporation, an S-Corporation, a Limited Liability Corporation (“LLC”), a Sole Proprietorship , or a Partnership, there are a lot of factors to consider. The type of entity that offers the least protection in terms of the ability of another person to reach the physician’s personal assets is a sole proprietorship. This type of entity is a product of the common law and should be avoided. A partnership can be formed as a general partnership or a general partnership with related limited partnerships. According to the Texas Secretary of State, “[a] partnership generally operates in accordance with a partnership agreement, but there is no requirement that the agreement be in writing and no state-filing requirement.” Limited Partnerships, however, require a filing with the Secretary of State. Partnership entities can be complicated to construct in order to insure the most appropriate tax and liability protection.

Corporations, whether an S-Corporation, C-Corporation or LLC, are formed by filing a certificate of formation with the respective Secretary of State. A major consideration in choosing the type of corporation is the tax implications. According to the Internal Revenue Service, an S-Corporation cannot have more than 100 shareholders, have only one class of stock, and be domestic only. By way of contrast, a C-Corporation can have unlimited numbers of shareholders, multiple classes of stock, and be international. LLCs are a fantastic type of entity that offer a lot of benefits; however, issues may arise under both State and Federal Securities Laws. Therefore, a multitude of factors need to be considered by physicians and their counsel when forming an entity.

In sum, physicians should do the following:

• Work with a knowledgeable attorney to discern the appropriate type of entity;

• Make sure that the new entity is adequately capitalized and that relevant types of insurance have been purchased;

• If raising money, make sure that investors are designated as accredited or unaccredited and that adequate due diligence is done; and

• Make sure that other relevant laws have been considered.