California: CPOM & MSO reference

California is a strict corporate practice of medicine state: lay ownership and control of medical practice is prohibited, enforcement is active, and the MSO-PC structure requires careful drafting to hold up.

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1. CPOM status: medicine

Tier: Strict The doctrine is statutory. Bus. & Prof. Code § 2400: “Corporations and other artificial legal entities shall have no professional rights, privileges, or powers.”⁵ It is enforced through § 2052 (unlicensed practice, including anyone who “conspires with or aids or abets” it), § 2264 (employing or aiding an unlicensed person to practice is unprofessional conduct for the physician), and the Moscone-Knox Professional Corporation Act. The case law runs from People v. Pacific Health Corp., 12 Cal. 2d 156 (1938), and Painless Parker v. Board of Dental Examiners, 216 Cal. 285 (1932), through Steinsmith v. Medical Board, 85 Cal. App. 4th 458 (2000) (no proof of actual interference with clinical judgment is required; lay ownership of the practice is itself the violation), to People ex rel. Allstate Ins. Co. v. Discovery Radiology Physicians, P.C., 94 Cal. App. 5th 521 (2023), where a layperson who formed “friendly” medical corporations, recruited their physician owners, set billing codes, and controlled collections was held to be practicing medicine, and claims submitted by those entities were actionable as insurance fraud without any misstatement about the services themselves.⁶ SB 351 (2025), effective January 1, 2026, added Health & Safety Code §§ 1190–1192 and codified the Medical Board’s long-standing list of decisions that must remain with the physician (section 6 below). The Medical Board of California publishes its own statement of the doctrine, including four structures it treats as prohibited: non-physicians owning or operating a business that offers patient evaluation, diagnosis, or treatment; physicians operating a practice as an LLC, LLP, or general corporation; an MSO “arranging for, advertising, or providing medical services rather than only providing administrative staff and services”; and a physician acting as “medical director” when the physician does not own the practice.⁷

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2. Other professions

The medical answer does not determine the answer for other professions. Each has its own doctrine, board, and statute. See Multi-specialty considerations.

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3. Professional entity forms

Permitted forms: PC only: a “medical corporation” under the Moscone-Knox Professional Corporation Act, Corp. Code §§ 13400–13410, and Bus. & Prof. Code §§ 2406–2408. PLLC is not available for medicine; the Medical Board lists LLC, LLP, and general-corporation practice as prohibited structures. Ownership: Shares may be issued and transferred only to licensed persons; any issuance or transfer in violation is void (Corp. Code §§ 13406–13407). Voting trusts and proxies that give voting power to a non-licensee are void (§ 13406(a)). Corp. Code § 13401.5 permits specified other licensees (podiatrists, psychologists, registered nurses, optometrists, physician assistants, chiropractors, physical therapists, pharmacists, and others on the enumerated list) to hold shares in a medical corporation, provided their combined holding does not exceed 49% and the number of such shareholders does not exceed the number of physician shareholders.⁸ Officers and directors: Every shareholder, director, and officer other than an assistant secretary or assistant treasurer must be a licensed person (Bus. & Prof. Code § 2408). A non-licensee may hold an administrative title such as chief executive officer or executive vice president, but not a board seat. A one-shareholder corporation’s shareholder is its sole director, president, and treasurer (Corp. Code § 13403). Disqualified shareholders must transfer their shares within 90 days of disqualification; a deceased shareholder’s estate within six months (§ 13407). Also confirm before filing:

• Naming rules, designator requirements, and whether the name is constrained to licensed owners’ surnames
• Board pre-approval, whether a licensing board certificate is required before the secretary of state will file
• Officer and director licensure: several states restrict these roles to licensees, not just shareholders, which forecloses MSO executives serving on the PC’s board

See PC vs PLLC vs PA and Form a professional corporation.

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4. Fee-splitting and percentage management fees

Fee-splitting: Permitted for genuine services under an express statutory safe harbor, Bus. & Prof. Code § 650(b), but read alongside § 650(a), SB 351’s control prohibitions, and the 2026 Attorney General settlements.¹ California’s rule is unusually specific, and both halves matter. The prohibition, § 650(a). Any Division 2 licensee (physicians, dentists, and every other healing-arts license) may not offer, deliver, receive, or accept “any rebate, refund, commission, preference, patronage dividend, discount, or other consideration … as compensation or inducement for referring patients.” The 1971 amendment deleted the word “unearned,” so compensation that is linked to referrals violates the section even if real services are also rendered: the point of Beck v. American Health Group International, where a medical-director fee set at 10% of psychiatric room-and-board charges was void because it rose with admissions.² Violation is a public offense: up to a year in county jail or a fine up to $50,000, or both. The safe harbor, § 650(b). “The payment or receipt of consideration for services other than the referral of patients that is based on a percentage of gross revenue or similar type of contractual arrangement shall not be unlawful if the consideration is commensurate with the value of the services furnished or with the fair rental value of any premises or equipment leased or provided by the recipient to the payer.” In Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015), the Court of Appeal enforced a percentage-of-collections management services agreement (MSA) on exactly this basis: “subdivision (b) permits precisely the arrangement contemplated … payment to a management company for management services based on a percentage of revenue, as long as the consideration is commensurate with the value of the services furnished.”³ So the California question is not “percentage or flat” but “what is the percentage paying for, and can you prove it is worth that?” Three things follow for an MSA:

• Fair market value support is the whole defence. The safe harbor is conditioned on the fee being “commensurate with the value of the services.” A percentage that produces a fee no unrelated party would charge for the same administrative services falls outside it. See Set the management fee.
• Nothing in the fee may compensate referrals. If the MSO steers patients (a marketing platform that generates the patients is the common fact pattern), the § 650(a) analysis becomes acute, because part of what the percentage rewards is patient flow. Separate and document the marketing services and price them at FMV.
• The Attorney General’s 2026 settlements bar revenue-based fees for the specific defendants. The Aspen Dental consent terms prohibit management fees “based on revenue, sales, or profits” and any employee compensation tied to practice revenue.⁴ Those are settlement terms, not a statutory change, and § 650(b) remains on the books, but they signal what the AG considers a marker of control, and counsel now weigh that in structuring new California MSAs.

Related statutes that reach the same conduct: The practical question for your MSA is whether a percentage-of-collections management fee is viable. Flat and cost-plus structures carry materially lower fee-splitting exposure everywhere. See Fee-splitting rules and Set the management fee.

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5. Physician noncompetes

General prohibition under Bus. & Prof. Code § 16600; Health & Safety Code § 1191(d) (SB 351) makes noncompete and non-disparagement clauses in PE- or hedge-fund-involved management and asset-sale agreements void, preserving sale-of-business covenants under § 16601 and confidentiality terms Noncompete law moved substantially in 2025–2026. The FTC’s Non-Compete Rule was vacated, the FTC dropped its appeals in September 2025, and the rule was removed from 16 C.F.R. pt. 910 effective February 12, 2026, leaving regulation primarily to the states, several of which have since restricted or voided physician noncompetes. Verify current law in this state before including one. See the legislation tracker.

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6. MSO-specific laws and registration

SB 351 (2025): Health & Safety Code §§ 1190–1192, effective January 1, 2026.⁹ A private equity group or hedge fund “involved in any manner with a physician or dental practice” may not:

• Interfere with professional judgment in determining appropriate diagnostic tests, the need for referrals or consultation, the ultimate overall care of the patient including treatment options, or how many patients a physician or dentist sees or how many hours they work (§ 1191(a)(1)).
• Exercise control over, or be delegated the power to own or determine the content of medical records; select, hire, or fire clinicians, allied health staff, or medical assistants based on clinical competency; set the parameters for contracts with third-party payers; set clinical competency standards; make coding and billing decisions; or approve the selection of medical equipment and supplies (§ 1191(a)(2)).

The prohibitions apply “regardless of the practice’s corporate structure” (§ 1191(b)). Contract terms enabling any of the above are “void, unenforceable, and against public policy” (§ 1191(c)). Management or asset-sale agreements may not bar providers from competing after termination or from commenting on quality of care, utilization, or “revenue-increasing strategies” (§ 1191(d)). Sale-of-business covenants under Bus. & Prof. Code § 16601 and confidentiality terms survive. The Attorney General enforces by injunction and other equitable relief, and recovers fees (§ 1191(e)). Section 1191(h) preserves the MSO’s legitimate role: unlicensed entities may assist so long as the physician or dentist “retains ultimate approval.” “Private equity group” and “hedge fund” are defined in § 1190; passive investors, lenders, hospitals and health systems, and public agencies are excluded, but the operative list in § 1191(a) restates the Medical Board’s pre-existing CPOM position, so non-PE MSOs should treat the list as the standard too. AB 1415 (2025), operative January 1, 2026: amends Health & Safety Code §§ 127500.2 and 127507 and adds § 127501.5. It defines a “management services organization” as “an entity that provides management and administrative support services for a provider in support of the delivery of health care services, excluding the direct provision of health services,” and makes MSOs, private equity groups, and hedge funds “noticing entities” that must give the Office of Health Care Affordability (OHCA) written notice at least 90 days before entering into a material change transaction. Section 127501.5 authorizes OHCA to require MSOs to submit data. Materiality thresholds are set by OHCA regulation: check the current thresholds before assuming a transaction is exempt.¹⁰ Bus. & Prof. Code § 2417.5: a business that provides outpatient elective cosmetic procedures “owned or operated in violation of Section 2400” and that contracts with or employs a physician to facilitate them is guilty of insurance fraud under Penal Code § 550(a)(6). This is the med-spa provision; see Med spas and aesthetics.

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7. Transaction review and notice

Yes: AB 1415 (2025). From January 1, 2026, MSOs, private equity groups, and hedge funds are “noticing entities” under Health & Safety Code § 127507 and must notify OHCA at least 90 days before a material change transaction involving a health care entity. Pre-existing OHCA notice obligations for providers and payers continue. Verify current materiality thresholds in OHCA’s regulations (Cal. Code Regs. tit. 22, § 97431 et seq.) before assuming a formation, MSA signing, or PC-to-PC transfer is exempt.¹⁰ See the legislation tracker.

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8. Practical structuring notes

The most consequential state to get right, and the one where the standard toolkit is under direct attack. In 2026 the Attorney General:

• Filed an amicus brief in Art Center Holdings, Inc. v. WCE CA Art, LLC (Cal. Ct. App., 2d Dist., No. B338625) arguing that where an agreement lets the management company replace the physician-owner with a physician of its choice, “the corporation effectively owns the practice,” and that a physician-owner who cannot replace the MSO without losing ownership is under undue control.¹¹
• Settled with Aspen Dental Management ($2 million in penalties, $300,000 restitution) on terms barring the DSO from replacing owners or requiring surrender of ownership on termination, owning practice property, charging revenue-based fees, tying any employee compensation to practice revenue, or using clinician noncompetes.⁴
• Settled with Carbon Health Technologies and its affiliated professional corporations ($4.4 million, plus $100,000 from the co-founder personally) over a “friendly PC” structure in which contracts let the MSO replace physician-owners: the first AG CPOM settlement against a technology-platform MSO.¹² See Digital health and telehealth.

The practical consequences: draft the MSA’s clinical carve-out to track § 1191(a) verbatim; do not give the MSO a unilateral right to designate the successor shareholder in the stock transfer restriction agreement; expect revenue-based fees to draw scrutiny even though § 650(b) permits them; and treat the physician-owner’s genuine ability to terminate the MSO as a feature the AG will look for. SB 351 covers dental practices as well as medical.

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The standing checklist for any state

• Confirmed the permitted entity form for your profession
• Confirmed whether board pre-approval is required before filing
• Confirmed whether officers and directors must be licensees
• Confirmed the fee structure is lawful here
• Clinical carve-out drafted against this state’s current statutory language
• Transfer restriction agreement checked against current state law
• Noncompete provisions checked against current state law
• MSO foreign-qualified before it has employees here
• Any MSO registration or transaction notice obligation identified

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9. Sources and where to verify

For the cases and statutes referenced above, see CPOM case law. For enacted and pending legislation across all states, see the CPOM & MSO legislation tracker.

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Sources

1. Cal. Bus. & Prof. Code § 650 (last amended Stats. 2021, ch. 439). Text checked August 2026.
2. Beck v. American Health Group International, Inc., 211 Cal. App. 3d 1555 (1989). Opinion. See also Mason v. Hosta, 152 Cal. App. 3d 980 (1984) (referral-fee contract unenforceable under § 650).
3. Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015). Opinion.
4. California Attorney General, Attorney General Bonta Announces Settlement with Aspen Dental over Corporate Practice of Dentistry Violations (May 7, 2026).
5. Cal. Bus. & Prof. Code § 2400; exceptions at § 2401; § 2052; § 2264.
6. People v. Pacific Health Corp., 12 Cal. 2d 156, 82 P.2d 429 (1938); Steinsmith v. Medical Board, 85 Cal. App. 4th 458 (2000), opinion; People ex rel. Allstate Ins. Co. v. Discovery Radiology Physicians, P.C., 94 Cal. App. 5th 521 (2023). See also Conrad v. Medical Board, 48 Cal. App. 4th 1038 (1996) (health care districts have no exception and may not employ physicians).
7. Medical Board of California, Practice Information: Corporate Practice of Medicine. Checked August 2026.
8. Cal. Corp. Code § 13401.5; § 13403; § 13406; § 13407; § 13408.5; Bus. & Prof. Code § 2408.
9. S.B. 351, Stats. 2025, ch. 409 (approved Oct. 6, 2025). Bill text; Cal. Health & Safety Code § 1190, § 1191. The enumerated list above is a close paraphrase; quote the code section directly in any agreement.
10. A.B. 1415, Stats. 2025, ch. 641. Cal. Health & Safety Code § 127500.2, § 127507, § 127501.5. Morgan Lewis, Double Dose of Regulation: SB 351 and AB 1415 (Oct. 2025).
11. California Attorney General, Attorney General Bonta Files Amicus Brief in Defense of California’s Ban on Corporate Practice of Medicine (Apr. 1, 2026). Appellate decision status not checked as of August 2026.
12. California Attorney General, Attorney General Bonta Announces First-of-its-Kind Settlement with Carbon Health (June 26, 2026); Holland & Knight, California AG Settlement Again Targets “Friendly PC” Model (June 2026).