Physician Practice Entity Structure: The Professional Corporation, the Group Practice Rules, the Cash Balance Plan, and the Hospital or Private Equity Offer

Physicians decide their entity inside three sets of rules before the tax code. The corporate practice of medicine: in the states that apply it, a medical practice must be owned by licensed physicians (through a professional corporation, a professional association, or a professional LLC) and non-physicians may not own it or control its clinical decisions — which is why hospitals employ physicians through affiliated entities and private equity buys practices through the management services organization structure (the medical spa entity guide's MSO — the management company owns the non-clinical assets and provides services for a fee; the physician-owned professional entity holds the practice); the entity is formed under the professional entity statute with licensed physician owners. The group practice definition: the Stark law's in-office ancillary services exception (the physician practice taxes guide) requires, for a multi-physician practice, a single legal entity operating as a "group practice" under the regulations — unified business (centralized decision-making, consolidated billing, accounting, and financial reporting), the physicians' services furnished through the group, the compensation rules on productivity and profit shares — so a loose association of physicians sharing space in separate entities can't use the exception for shared imaging and lab; the group practice's single entity and its compensation plan are the compliance structure. The liability floor: malpractice (the individual physician's — insured; the entity shields against a colleague's malpractice and the practice's other liabilities, not the physician's own), the employment claims, the regulatory exposure (overpayments, a False Claims Act matter — the owners' personal exposure depends on their conduct, not the entity), the lease, and the data breach; the professional entity, with malpractice per physician, general liability, employment practices, cyber, and the umbrella as the first line. The tax structures: a solo physician's professional corporation or PLLC with the S election (the payroll exists — the staff; the physician's reasonable salary is the employed-physician market for the specialty — well documented by the compensation surveys, US$250,000 to US$600,000-plus depending on specialty — plus management; the saving is Medicare's 2.9 percent on the distribution portion, since the salary already exceeds the Social Security wage base — modest); a multi-physician group as an S corporation (salaries by the compensation plan, distributions by ownership — the single-class-of-stock rule means unequal compensation runs through salaries, which the Stark rules also constrain for ancillary profits — the law firm entity guide's salary-differential mechanic) or as a professional LLC taxed as a partnership (guaranteed payments and allocations by the compensation plan's formula — more flexible for unequal producers, with self-employment tax on the physicians' shares); the C corporation (the historical professional corporation form — still used by some groups that pay out nearly all profit as salary, leaving little corporate income; the flat 21 percent corporate rate applies to a personal service corporation like any other C corporation since 2018 — but double taxation on any dividend makes it a salary-out structure). The specified service phase-out: medicine is in the health field — the QBI deduction is zero for most practice owners above the range, under any entity; so the payroll-tax saving above the wage base and the retirement plan carry the analysis. The retirement plan — the instrument: a safe-harbor 401(k) with profit sharing (the staff at the safe-harbor level) and a cash balance plan for the physicians (actuarially determined contributions — US$100,000 to US$350,000 a year per physician depending on age — deductible in full — the dental entity guide) — the largest deduction a physician has, designed at the group level (which physicians participate, the benefit formulas by age, the staff's share), computed on the W-2 salary (S corporation) or the net earnings from self-employment (partnership); a group with physicians of different ages uses the plan's design flexibility (cross-tested profit sharing, tiered cash balance credits — tested for nondiscrimination under section 401(a)(4), usually with the cash balance plan and the 401(k) aggregated, and the cash balance plan must also cover the lesser of 50 employees or 40 percent of the workforce under section 401(a)(26)). The real estate: the practice's building in a separate real estate LLC owned by the physicians (or some of them), leased to the practice at fair market value under the Stark rental exception (the physician practice taxes guide) — the building stays with the physicians when the practice is sold. The exits. Hospital employment: a hospital or health system buys the practice's assets (equipment, furniture, the records' custody, the lease — goodwill payments to physicians are constrained, because a hospital's payment for a practice's goodwill may be seen as remuneration for future referrals; hospitals typically pay an appraised fair market value for the hard assets and little for goodwill, reflecting the HHS Inspector General's long-standing caution that payments for goodwill, patient records, or non-competes can be disguised payments for referrals) and employs the physicians under employment agreements (W-2 compensation set by the compensation surveys and productivity — the Stark employment exception); the physicians' tax becomes a W-2 employee's; the practice entity winds down (its final return, the tail coverage). Private equity: a platform buys the practice through an MSO structure — the management company buys the non-clinical assets and the practice's management rights (paying for the practice's EBITDA at a multiple — a large payment, much of it for goodwill, with the physicians often rolling a portion into the platform's equity — a deferral structure the advisers negotiate), and the physicians continue in the professional entity under a management services agreement that pays the platform a fee (reducing the physicians' income going forward — the "scrape"); the physicians' sale proceeds are capital gain on goodwill (much of it personal — the consulting succession guide) and the rollover's deferral, with the post-sale compensation as ordinary income; the physicians' non-competes are negotiated, and the platform's recapitalization years later is the second liquidity event. Independence: the group stays physician-owned, adds physicians under a partnership-track compensation plan, and funds its own growth — the entity and retirement plan designed for decades. The annual re-run: the compensation plan (the Stark review), the physicians' salaries against the surveys, the retirement plan's contributions and testing, the real estate lease's fair market value, and the exit offers — revisited each January, with the malpractice renewals and the credentialing alongside.

Key takeaways

• The corporate practice of medicine requires physician ownership through a professional entity in the states that apply it — which is why hospitals employ and private equity buys through management services structures.
• The Stark group practice rules require a single unified entity for a multi-physician practice that shares in-office imaging and lab — and constrain how ancillary profits reach physicians.
• Medicine is a specified service trade: the QBI deduction is zero above the range under any entity; the S election saves only Medicare tax on distributions once the salary is above the wage base.
• The retirement plan is the instrument — a safe-harbor 401(k) with profit sharing plus a cash balance plan for the physicians, six figures each, designed for the group's ages and tested for nondiscrimination.
• Multi-physician groups choose partnership treatment for flexible compensation or the S corporation with salaries by the plan; the building sits in a separate LLC leased at fair market value.
• Exits: hospital employment (hard assets at fair market value, little goodwill), private equity (an MSO purchase at an EBITDA multiple, rollover equity, a management fee going forward), or independence.

The physician practice's entity worksheet

Professional entity under the state's corporate practice rules. Stark group practice requirements met (single entity, unified business, compensation rules). Coverage (malpractice per physician with tails, GL, EPL, cyber, umbrella). Tax structure: S corporation (salaries by plan) or partnership (guaranteed payments and allocations); survey-based salaries. QBI: zero above the range. Retirement plan: 401(k) safe harbor + profit sharing + cash balance; design by age; testing. Real estate LLC at fair market value. Exit analysis: hospital, private equity (MSO, rollover, management fee), independence. Fifteen minutes each January, with counsel's compensation review alongside.

Worked example

Three practices. One: a solo dermatologist netting US$780,000 with a staff of twelve — a professional corporation with the S election, a US$420,000 salary (the employed dermatologist survey median plus management), a US$360,000 distribution saving about US$8,700 of Medicare tax, the QBI deduction zero, and a cash balance plan with a 401(k) adding US$290,000 of deductible contributions at 55 — the plan's deduction worth roughly US$100,000 of federal income tax — more than a decade of the election's saving. Two: the six-physician internal medicine group from the taxes guide — a professional LLC taxed as a partnership, guaranteed payments by each physician's personal productivity (work relative value units), the ancillary profits allocated per capita under counsel's Stark review, a cash balance plan with tiered credits for physicians aged 38 to 64, and the building in a separate LLC owned by four of the six. Three: a nine-physician orthopedic group with two offers — a health system's employment offer (fair market value for the equipment, no goodwill, W-2 compensation at the survey's 75th percentile with productivity bonuses) and a private equity platform's MSO offer (eight times the group's EBITDA after a 25 percent management fee — much of it for personal goodwill at capital gain rates, 30 percent rolled into the platform's equity under a deferral structure, and the physicians' future income reduced by the fee); the group models ten years of both against staying independent, and the senior physicians (near retirement) and the junior ones (with decades of reduced income ahead under the management fee) reach different answers — the decision the group's governance, not its tax adviser, has to make.

Official sources

The IRS states: “On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit plans are often more complex and, thus, more costly to establish and maintain than other types of plans.” — Internal Revenue Service, Defined benefit plan, https://www.irs.gov/retirement-plans/defined-benefit-plan

The IRS states: “To the extent gross receipts are generated by services of non-shareholder employees and capital and equipment, payments to the shareholder would properly be treated as non-wage distributions that are not subject to employment taxes. But to the extent gross receipts are generated by the shareholder's personal services, then payments to the shareholder-employee should be classified as wages that are subject to employment taxes.” — Internal Revenue Service, S corporation compensation and medical insurance issues, https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

Practitioner note

A physician practice's entity decision is made inside three sets of rules before the tax code — the corporate practice of medicine, the Stark law's group practice definition, and the specified-service label that zeroes the QBI deduction — so the instruments that matter are the compensation plan counsel reviews, a cash balance plan designed for the group's ages, and the exit. Our physician practice worksheets model the hospital's offer, the private equity platform's management-fee structure, and independence over ten years side by side — because the senior physicians and the junior ones rarely reach the same answer, and the group should see why before it decides.

See also: For related guidance, see why the building belongs in a separate entity; and browse every small business tax guide, by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles physician practice entity planning — professional entity formation under corporate practice rules, Stark group practice compliance, partnership versus S corporation compensation design, survey-based physician compensation, cash balance and 401(k) plan design with nondiscrimination testing, real estate LLC leases at fair market value, and hospital employment and private equity MSO exit analysis. See pricing or book a call.