Benefits of Incorporating Your Physical Therapy Practice

For a long time, we have advised physical therapists regarding the benefits of organizing their practices as professional corporations.  But as the result of the recent activity of the Physical Therapy Board of California (PTBC) and the Legislature regarding physical therapists practicing in a corporate environment, organizing your practice as a physical therapy professional corporation has even more benefits today.
This blog entry is to explain the recent regulatory and legislative changes regarding corporations employing physical therapists, and to outline the main benefits of incorporating a physical therapy practice, especially in light of this new regulatory environment.
Latest Issues Involving Physical Therapists and Corporations
As the PTBC states on its website, there are two significant issues pertaining to physical therapists in a corporate environment – physical therapy corporations and physical therapists working for medical corporations.[1]
Physical Therapy Corporations – On November 3, 2010, the PTBC rescinded its 1990 resolution titled “Physical Therapy Corporation Ownership by a Layperson.”  The PTBC determined that its 1990 resolution which authorized a non-physical therapist to own a corporation may have been an illegal “underground regulation.”[2]  Accordingly, since that time, the proper corporate organization for a physical therapist is a physical therapy professional corporation whose shareholders, officers and directors are physical therapists.  Non-physical therapists cannot own shares of a physical therapy professional corporation.
Physical Therapist Employees of a Medical Corporation – Another legal issue surfaced in 2010 regarding whether or not a physical therapist may lawfully work as an employee of a medical corporation.  After legislation regarding this issue was defeated in 2009, the Legislative Counsel Bureau issued a legal opinion stating that medical corporations could not legally employ a physical therapist and that such employment could constitute “unprofessional conduct” under the Physical Therapy Practice Act.[3]  The Department of Consumer Affairs agreed in a legal opinion dated February 28, 2011.[4]
Then in October 2011, Governor Brown signed into law SB 543 which bars the PTBC from enforcing such an unprofessional conduct violation until 2013 (when the law expires).[5]  This means that in 2013, the PTBC may commence enforcing the law against physical therapists who are employees of medical corporations.
Given this tumultuous regulatory environment, it is more important than ever for a physical therapist considering the benefits of incorporating to do so now.
Possible Organizations of Physical Therapy Practices
Like a number of other businesses, physical therapists can organize as a sole proprietor, a partnership or a professional corporation.  A sole proprietorship is the least formal arrangement involving a single owner, but offers little structure or formality and no protection from liability for its owner.  A partnership is similar to a sole proprietorship, but each partner shares equal responsibility for the company’s profits and losses, debts, and liabilities depending on how the partnership ownership is defined.  A practice operated as a partnership offers no protection for the owner’s personal assets.  The partnership itself does not pay income taxes, but each partner has to report their share of business profits or losses on their individual tax return.  Estimated tax payments are also necessary for each partner for the year in progress.
Even in spite of the regulatory issues described above, a physical therapy professional corporation is the best option for a growing physical therapy practice that wants to protect the owner’s assets and will benefit from the formality of a corporation.
Main Benefits of Physical Therapy Professional Corporation
The main benefits of incorporating include:

• Asset protection – The assets of the shareholders of the corporation may be shielded from corporate debts, lawsuits and other liabilities.  While an individual therapist may still be liable for his or her own malpractice, protecting the owner’s individual assets from liabilities created by employees or other therapists is a significant benefit of incorporation.
• Business Transition – In the event of death, incapacity or retirement of the physical therapist, a professional corporation allows other physical therapists to serve as shareholders, officers and directors.  Whether rewarding excellent employees – physical therapist employees, mind you – with the opportunity to buy into the practice or selling shares to a purchaser, a corporation offers flexibility in planning for the future.
• Tax benefits/deductions – There can be tax benefits for incorporation.  There can be significant deductions that may be available to corporations that are not available to sole proprietors and partnerships.  Please consult your accountant or tax professional regarding how these tax benefits will work for you.
• Professionalism/formality – Because the corporation is a separate “person” or entity under the law, it becomes the employer, party to all contracts, marketing entity, etc.  In addition to asset protection and tax issues, patients and others will see that you have taken the time to formalize your business and take it to the next level.
• Independent Contractor Status – In many cases where a physical therapist contracts to provide services to medical groups, rehabilitation facilities and others who need physical therapy services, the physical therapist reduces the risk of being reclassified under the law as an “employee” in lieu of an independent contractor if the contract is between the professional corporation and for example, the medical group. This issue is becoming much more significant in light of the current regulatory environment which includes severe penalties for misuse or misclassification of independent contractors.[6]

 
While incorporating a practice involves a legal process, the resulting benefits are apparent and often very worthwhile.  Once created, the physical therapist must continue to maintain the corporation and observe corporate formalities required by law.  Of course we recommend consulting legal counsel regarding how a physical therapy professional corporation will benefit your practice.