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Part III -- Business Structures for a Physician Practice: A “How-To” for Converting Your Practice

Wednesday, July 10, 2019   (0 Comments)
Posted by: Adrienne Hersh, JD, ICS General Counsel
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Part III -- Business Structures for a Physician Practice:   A “How-To” for Converting Your Practice Organization  


Parts I and II of this series reviewed how to choose and create various business structures for operating a physician practice. The law in Illinois is very specific about the type of entity that may render services by persons licensed under the Medical Practice Act (MPA).  Some physician owners who believed their organizations were formed correctly have discovered that their businesses are not legally authorized to provide medical services.  The most common structuring mistakes include permitting a non-physician to have an ownership interest in a practice and forming a practice as a regular business corporation or limited liability company (LLC), rather than as a medical corporation, professional corporation, or professional limited liability company (PLLC).  Finally, owners of medical corporations, professional corporations, and PLLCs must register their business entities with the Illinois Department of Financial and Professional Regulation, in addition to their individual physicians requiring licensure.  Many practice owners are unaware of this requirement, and their offices are, in effect, practicing without a license.

The operation of a physician practice by an unlicensed entity or person can result in insurance reimbursement denials, regulatory citations based on the unlicensed practice of medicine, and other problems.  What can the owner physician do upon learning that his/her practice is not formed correctly?  The law permits a business corporation to be converted to a medical corporation or a professional service corporation.  However, if a professional limited liability company (PLLC) is the desired form, a physician owner will need to create a new PLLC, because the law currently does not allow a business corporation to convert to a PLLC.  This Part III of the business structure series will review when and how to take steps to ensure your organization is authorized to render physician services in Illinois.

Do I Need to Convert?  A Brief Review of the Prohibition on the Corporate Practice of Medicine

Understanding public policy about the “business” of medicine helps to know when, how and why to convert an existing structure. Traditionally, states permit only individual persons to practice medicine, including chiropractic, because medical care requires skills that affect public health and safety.  As a result, licensed physicians are not permitted to operate or work for a practice formed as a regular business (non-licensee-owned) entities.  This doctrine is known as the “prohibition on the corporate practice of medicine,” based on the premise that the profit motive in a business entity does not always align with the best interests of patients.  Illinois has consistently adhered to this policy in statutes and case law.      

Although lawmakers recognize the need to protect public safety, they also acknowledge that physicians should be able to take advantage of certain tax and business liability advantages of corporations and LLCs, so long as professional (malpractice) liability remains.  For that reason, Illinois enacted laws allowing the creation of medical corporations, professional services corporations, and professional limited liability companies.  These entities are wholly owned by licensed professionals but allow for some corporate tax and liability advantages.  For a detailed discussion of the differences among these organizations, see:  

The ICS recommends that physicians take a moment to review their formation documents to make sure their practices are correctly structured.  Unfortunately, it is not uncommon for physicians (and sometimes even their well-meaning non-health care consultants) to be focused only on tax, liability, and estate planning considerations when forming a business.  These elements are all important and would normally take priority in a non-health care business.  However, physician offices are subject to additional, unique legal requirements.   Failing to consider legal requirements in health care law may result in inadvertent formation of an incorrect business structure.

The following will review how to correct the two most common errors:

  • permitting a non-physician to have an ownership interest in a practice; and
  • incorporating or organizing a practice as a regular business corporation or limited liability company (LLC) with a business, non-health care purpose, rather than as a medical corporation, professional corporation, or professional limited liability company (PLLC).

Sole Proprietorship or Partnership

Because sole proprietorships and partnerships are easily formed by a physician or physicians simply opening an office (without any formation documents required by the Secretary of State), these structures usually do not run into “corporate practice” problems.  However, it is important to remember to keep financial accounts solely in the name of the licensee to avoid any possibility of an unlicensed person, such as a spouse, receiving fees for physician services.  Regulators could view any joint arrangement between physician and non-physician as amounting to the non-physician engaging in unlicensed practice, or as the physician engaging in illegal fee splitting (dividing fees with an unlicensed person) or aiding and abetting unlicensed practice.

Converting a Business Corporation to a Medical Corporation

The purpose of a medical corporation is to study, diagnose and treat human ailments and injuries.  The correct form number for incorporating an Illinois medical corporation is Secretary of State Articles of Incorporation FORM BCA 2.10 (MCA).  However, a physician office becomes a non-medical business corporation if it was formed by filing Illinois Articles of Incorporation FORM BCA 2.10 for a regular business corporation.  This form contains pre-printed language in the corporate purpose section: “The transaction of any or all lawful purposes for which businesses may be incorporated under the Illinois Business Corporation Act,” which does NOT authorize health care services.

Check the upper left corner of the original Articles of Incorporation for the form number. If the business corporation FORM BCA 2.10 was used, you need to convert your corporation to a different type of entity.  For more information on how to choose the type of entity, see Business Structures Part I:  

An existing business corporation can be converted to a medical corporation, avoiding the need for creating a new corporation.  To convert a business corporation to a medical corporation, download Articles of Amendment form BCA 10.30 from the corporate section of the Secretary of State website. https://www.cyberdriveillinois.com/publications/pdf_publications/bca1030.pdf

The form is to be filled out as follows:

  1. Manner of Adoption of Amendment.  If by consent, check off the last box of paragraph 2 of form BCA 10.30 (see information at end of this paragraph about shareholder consent)
  2. Name/suffix change.   Keep the main name but use the suffix “S.C.” (Service Corporation) or the words “Service Corporation” after the name. The corporate name is changed by filling out paragraph 3a of form BCA 10.30 using the same the name of the corporation but substituting “S.C.” for “Inc.” or “Ltd.” For example, ABC Chiropractic, Inc., becomes ABC Chiropractic, S.C.
  3. Change the corporate purpose.  The purpose must be to provide professional services as described in the Medical Practice Act.  Insert in paragraph 3b of form BCA 10.30:

    “to change the corporate purpose for which the corporation is organized to a Medical Corporation: To own, operate and maintain an establishment for the study, diagnosis and treatment of human ailments and injuries, whether physical or mental, and to promote medical, surgical and scientific research and knowledge; provided that medical or surgical treatment, advice or consultation will be given by employees of the corporation only if they are licensed pursuant to the Medical Practice Act.”

  4. Any officer may sign the form at paragraph 6.

The form may be mailed to the Secretary of State at:  Department of Business Services, 501 S. Second, Room 350, Springfield, IL 62756 (address listed in the upper left corner of page 1 of the form) together with the $50 fee, OR for expedited service (within 24 hours), the applicant may walk the form in to the Chicago Secretary of State office at 69 West Washington, 12th floor business services, or 501 S. Second Room 350 in Springfield, together with the regular $50 fee plus an additional $100 for expedited filing.

In addition to formation with the Secretary of State, all medical corporations must register with the Illinois Department of Financial and Professional Regulation (IDFPR).  Once your corporation has been appropriately changed to a Medical Corporation, you are now able to register it with the IDFPR. Here is an article to help with that process: 

The corporation is also required to prepare a corporate resolution or consent in lieu of a resolution affirming the Articles of Amendment (i.e., approving the change of corporate purpose to health care).  This is an internal document that is maintained in the corporate records but is not filed with any governmental agency.  This step may be taken by consent if there is only one shareholder/director/officer, or when multiple shareholders and directors agree.  A sample form is found at the end of this article.  If the corporation has multiple shareholders and directors or if they disagree about the amendment, the ICS recommends seeking legal advice from a business attorney to guide you through requirements for notices, meetings and voting on the issue.

In addition to formation with the Secretary of State, all medical corporations must register with the Illinois Department of Financial and Professional Regulation (IDFPR).  Once you receive the filed Articles of Amendment back from the Secretary of State, the corporation has been changed to a medical corporation, and you are now able to register it with the IDFPR. Here is an article to help with that process:

Additionally, you can find information from the IDFPR at: https://www.idfpr.com/Forms/Online/(042)%20Medical%20Corporation%20User%20Guide.pdf and an application form at:  https://ilesonline.idfpr.illinois.gov/DFPR/Default.aspx.

Finally, the corporate name will be changed slightly by changing the suffix.   As a reminder, the ICS recommends that you send notice of the change of name to appropriate agencies, including:

  • Illinois Department of Financial and Professional Regulation (IDFPR) for medical corporations that were already registered with the IDFPR. 
  • If the practice has filed to use an assumed name, notify the Secretary of State and the County where name is registered.
  • Notify the Internal Revenue Service (IRS) to associate new name with Employer Identification Number.

Converting a Business Corporation to a Professional Service Corporation

A professional service corporation is a type of professional corporation that allows one corporate entity to offer any combination of:  medicine, including chiropractic; podiatry; dentistry; and optometry.  The correct form for incorporating a professional service corporation is the Secretary of State Articles of Incorporation FORM BCA 2.10(PSCA).  However, a physician practice is a non-medical business corporation if it was formed by filing FORM BCA 2.10 for a regular business corporation.  This form contains pre-printed language in the corporate purpose section: “The transaction of any or all lawful purposes for which businesses may be incorporated under the Illinois Business Corporation Act,” which does NOT authorize health care services.

Check the upper left corner of your original Articles of Incorporation for the form number.  If the business corporation form BCA 2.10 was used, you need to convert your corporation to a different type of entity.  For more information on how to choose the type of entity, see Business Structures Part I:  

An existing business corporation can be converted to a professional service corporation, avoiding the need for creating a new corporation.  To convert a business corporation to a professional service corporation, download Articles of Amendment form BCA 10.30 from the corporate section of the Secretary of State website. https://www.cyberdriveillinois.com/publications/pdf_publications/bca1030.pdf 

The form is to be filled out as follows:

  1. Manner of Adoption of Amendment.  If by consent, check off the last box of paragraph 2 of form BCA 10.30 (see information at end of this paragraph about shareholder consent)
  2. Name/suffix change.   Keep the main name but use the suffix “P.C.” (Professional Corporation) or “Professional Corporation” or Prof. Corp.” at the end of the name. The corporate name is changed by filling out paragraph 3a of form BCA 10.30 using the same the name of the corporation but substituting “P.C.,” “Professional Corporation” or Prof. Corp.” for “Inc.” or “Ltd.” For example, ABC Chiropractic, Inc., becomes ABC Chiropractic, P.C.
  3. Change the corporate purpose.  Insert in paragraph 3b of form BCA 10.30:

    “to change the corporate purpose for which the corporation is organized to a Professional Corporation to practice the profession(s) of _________________________, rendering that (those) type(s) of professional service(s) and services ancillary thereto.

    Professional service will be rendered from the following address(es): _______________________________________________________________________ 
    Number and Street    City      State    ZIP Code“

    Include in paragraph 3 each category of professional services to be rendered, e.g., medical services pursuant to the Illinois Medical Practice Act of 1987; dental services pursuant to the Illinois Dental Practice Act; podiatry services pursuant to the Illinois Podiatric Medical Practice Act of 1987; and/or optometry services pursuant to the Illinois Optometric Practice Act of 1987.
  4. Any officer may sign the form at paragraph 6.

The form may be mailed to the Secretary of State at:  Department of Business Services, 501 S. Second, Room 350, Springfield, IL 62756 (address listed in the upper left corner of page 1 of the form) together with the $50 fee, OR for expedited service (within 24 hours), the applicant may walk the form in to the Chicago Secretary of State office at 69 West Washington, 12th floor business services, or 501 S. Second Room 350 in Springfield, together with the regular $50 fee plus an additional $100 for expedited filing.

In addition to formation with the Secretary of State, all professional service corporations must register with the Illinois Department of Financial and Professional Regulation (IDFPR).  Once you receive the filed Articles of Amendment back from the Secretary of State, the corporation has been changed to a professional service corporation, and you are now able to register it with the IDFPR. Here is an article to help with that process: 

Finally, the corporation is also required to prepare a corporate resolution or consent in lieu of a resolution affirming the Articles of Amendment (i.e., approving the change of corporate purpose to health care).  This is an internal document that is maintained in the corporate records but is not filed with any governmental agency.  This step may be taken by consent when all shareholders and directors agree.  A sample form is found at the end of this article.  If the corporation has multiple shareholders and directors or if they disagree about the amendment, the ICS recommends seeking legal advice from a business attorney to guide you through requirements for notices, meetings and voting on the issue.

Finally, the corporate name will be changed slightly by changing the suffix. 

As a reminder, the ICS recommends that you send notice of the change of name to appropriate agencies, including:

  • Illinois Department of Financial and Professional Regulation (IDFPR) for medical corporations that were already registered with the IDFPR. 
  • If the practice has filed to use an assumed name, notify the Secretary of State and the County where name is registered.
  • Notify the Internal Revenue Service (IRS) to associate new name with Employer Identification Number.

Business Corporations and Professional Limited Liability Companies (PLLC)


Unfortunately, at this time a business corporation cannot be converted to a PLLC. If you want to operate a physician office as a limited liability company (LLC), it must be a professional LLC (PLLC) If your practice was initially incorporated as a business corporation using Secretary of State FORM BCA 2.10, and you wish to operate as a professional limited liability company (PLLC), you will need to create a new PLLC.  See the ICS article here for instructions for how to form a PLLC: https://www.ilchiro.org/news/news.asp?id=449305

If you do not formally dissolve the original business corporation, you may need to use a different name for the new PLLC, because the Secretary of State does not approve names that are very similar to those already in use for other entities.  Once you have received the Articles of Organization back from the Secretary of State, you should follow the other steps as described here in Part II of this series, including registration with the IDFPR.

A Note on IRS Election as an S Corporation


Some doctors refer to their corporations as “S-corporations,” under the misunderstanding that this designation is related to the type of business entity formed with the Illinois Secretary of State.  The “S-Corporation” designation is given by the Internal Revenue Service (not by the Illinois Secretary of State) and allows an alternate method of taxation for a corporation.  A medical corporation may also be an S-corporation, but the designation is completely unrelated to the type of business entity formed by the Illinois Secretary of State and does not legitimize the use of a regular business corporation to operate a physician practice.

A Final Note


The ICS acknowledges that business structuring is detailed and technical.  However, the consequences for operating a physician office improperly can be costly.  Insurance plans have denied claims in some cases when health care offices are not formed correctly or not licensed with the IDFPR.  In addition, regulators will open an investigation if they receive a complaint that a physician office is not formed or owned in a way that is authorized to render health care services.  The ICS provides this information with the goal of making members aware of legal requirements, and the Society is available to assist members with the technicalities of a physician practice.

 

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