What to Keep in Mind Before Owning a Telehealth Professional Corporation
Key takeaways:
Telehealth companies often need to create professional entities to operate in new states.
The two most common professional entity types are professional corporations and professional limited liability companies.
If you’re asked to help create or hold a professional entity, there are four important things to consider: who’ll pay for insurance, who’ll be responsible for any legal costs and annual filings, the details of the indemnity, and whether you’ll receive equity in the company.
This article isn’t meant to be legal advice, and if you have legal questions you should contact an attorney in your state.
Telehealth may have progressed more in the last 18 months than was predicted for the next 10 years. COVID-19 precautions pushed many healthcare providers (HCPs) into remote work, but it didn’t lessen the demand for health services. As a way to meet this need, new telehealth organizations were formed, existing telehealth companies experienced a boom, and some brick-and-mortar companies shifted to providing services both in person and online.
A brick-and-mortar company is typically limited to providing services within a certain geographic area. It has a headquarters, some practice locations, and maybe even a call center. It hires HCPs to serve patients, making sure that the practitioners are licensed in the state in which they will be providing services. Telehealth exponentially expands the geography in which companies can provide services, yet they must comply with state-specific rules and regulations to be operational.
Why telehealth companies need a corporation
With the right technology, providers can communicate with patients at home or wherever they may be — no commuting or waiting rooms needed. But there are two snags:
Instant Rx savings for insured and uninsured patients
GoodRx for HCPs has savings that can beat insurance copays and reduce your need to complete prior authorizations.
1) The company has to hire and/or cross-license its providers in the states it would like to do business.
2) The company must be registered in each state to provide services.
Each state has its own healthcare regulatory scheme, in addition to the federal one. Some states are fine with registering an out-of-state (or “foreign”) healthcare company, while others require that new corporate entities be formed within the state. These states often have strict rules about who can create the entity, who can be employed by the entity, and can require that the board of directors of the entity consist solely of HCPs. As a result, companies looking to branch out to new areas often turn to their licensed healthcare employees to help create the required entities.
Types of professional entities
If the state requires a separate entity to be created before providing healthcare services, there are typically two business organization types to choose from: a professional corporation (PC) or a professional limited liability company (PLLC).
These entities are classified as “professional” because they consist of members of a particular licensed profession, the list of which is defined by state law. This can include the various medical professions, behavioral health, legal professionals, accountants, and even architects in some cases. There are few exceptions to the rule that require licensed practitioners to create a professional corporation or professional limited liability company in any given state, which is why it is always advisable to consult with an attorney who practices in this area.
Corporations
A professional corporation (sometimes called a professional service corporation, or PSC) is a type of entity that solely consists of or has a certain percentage of shareholders of a particular profession. (As mentioned above, state law defines the list of professions that require a PC or PLLC.) PCs, like traditional corporations, carry a variety of unique characteristics:
There is limited liability for owners, directors, and officers.
Shares, or pieces of ownership in the corporation, can be transferred freely under a traditional corporation, and within members of the profession within the state for service corporations.
Taxation structures are different depending on the type of corporation. For example, a traditional corporation can be taxed both at the point of earnings and at the distribution of funds.
Limited liability companies
PLLCs are distinct in their organization, management, and taxation structure. Like PCs, they must be formed via an application to secretaries of state, but unlike PCs, managers of traditional LLCs can be liable for the debts of the entity to a certain extent.
One of the key benefits of the LLC structure is the taxation: Unlike corporations subject to the “double taxation” mentioned above, LLCs can choose between being taxed like a corporation or being taxed like a partnership. Choosing to be taxed like a partnership means that the business is taxed through its owners based on the amount of profit, often resulting in smaller tax payments. LLCs are considered one of the easier business types to operate, as they are simple to set up and have fewer formal requirements to operate than a corporation.
4 questions to ask about PCs and PLLCs
If you have been approached by a telehealth company about creating a professional entity in a state where you are (or could be) licensed, there are several things to consider before taking the plunge.
First and foremost, it's critical to understand that while you helped create the entity, you don’t actually own it. In essence, licensed healthcare employees hold these corporations on behalf of their companies; if you leave the company, you will have to “give it back.” This means you will be removed from the state filing and another PC holder will be added. In some cases, this can mean a small payout for your cooperation with the transition, but that would depend on the terms of the agreement you signed with the company.
Before agreeing to hold a telehealth professional entity, there are 4 questions to explore.
1) Who will be responsible for insurance coverage?
At some point during the application, you (or your company) will likely have to produce a certificate of insurance to show the state that if anything goes wrong, a backup financial plan is in place. While many people would remember general liability insurance, fewer would extend the question further to inquire about professional liability. Setting expectations early in the relationship between the company and PC holder is critical, especially when you’ll be responsible for “holding” the professional entity for them.
2) Will you receive equity in this professional entity or in the main organization?
In essence, ask yourself: “What do I get for helping my company with this?” Before creating the entity, the details of compensation are often discussed. There are two main kinds of compensation in transactions like this: equity and payment. Some companies will distribute equity (a small stake in a company) to the PC holder, while others might increase the salary of the PC holder or provide some other type of compensation.
These figures can vary widely depending on the incorporation state, number of states the entity will be registered in, or risk factor of the entity.
3) What happens if the entity is sued, and will the company indemnify?
An indemnification provision is a contractual clause that basically says: “If person A is sued, person B agrees to pay them back and help them with the legal proceedings.” These types of clauses are typically found in large group, vendor, and high-risk contracts.
It can be helpful to have an indemnification clause here. That way if someone brings an action against the professional entity you are holding, your company will step in and take over payment and proceedings. (Don’t worry — most agreements of this type have the provision.) This also often means that the company’s insurance policies extend over to the new entity as well, so if a patient brings a malpractice claim against the entity, the company’s malpractice insurance can extend down and cover it.
That being said, professional entities as a whole exist independently from one another, yet they are still connected to the main company. So, for example, the PC holder of a Georgia entity likely wouldn’t be liable for any actions against a separate Nebraska entity.
4) Who will be responsible for creating and organizing all the business documentation, including filing annual taxes?
As discussed, one of the drawbacks of creating a new professional entity is the amount of paperwork that goes with it. For PCs, this can be the minutes from meetings with shareholders or the board of directors, reorganization plans, share certificates, and other similar documents. PLLCs have fewer requirements, but they will also have to file documents in the ordinary course of business.
In most cases, the company (or the company’s legal department) will take on this task, but it’s important to understand your requirements beforehand and to know who will be responsible for taxes and the like.
The bottom line
Telehealth has helped create an accessible environment of care for patients across the country. It has removed barriers such as travel, waiting time, childcare, and the like. By following state procedures, telehealth companies can expand exponentially and enter new markets with relative ease.
Nevertheless, it’s important for practitioners to weigh the costs and benefits of professional corporation ownership before agreeing to be part of the process. Where possible, prospective owners should seek independent legal counsel to make sure their interests are protected, even while in service to their companies.
Why trust our experts?
