In this episode, Brad and Michael welcome back ByrdAdatto partner Jay Reyero. Jay shares the challenges a med spa group encountered while expanding their California practice across multiple states using one professional entity. Discover the essential state laws and regulations to consider for national expansion, and understand the risks associated with managing multi-state practices under one entity. Gain insights into strategic planning and proactive measures that can pave the way for successful growth across state lines.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto with my co-host Michael Byrd.
Michael: Thanks, Brad. As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. This season we’re talking about businesses who decide to double down. They’re going to scale their business. Our theme this season is Growing a Business.
Brad: Now, Michael, for those listening to the first time, growing a business, just one of several seasons of business, what are the others?
Michael: Yeah, Brad. So we have the building season. So that’s starting a business. We have the operating season. We’ve running a business, and we’re in the scaling season right now. And then we’ll conclude this calendar year with the buying and selling season.
Brad: So exciting. Now [00:01:00] Michael, before we get started for the first time this season, we welcome back our series, regular and partner and all around badass Jay Rojero.
Jay: Hey guys. Good to be back. Good to be back.
Michael: Okay, Brad, what insane idea do you have to help start us off today?
Brad: Well, I figured since I’m such a big wig, I thought we could show off my true colors by wishing you all, both the brick a leg with today’s show.
Michael: Okay. Weird, but thanks.
Brad: But I can tell your face, Michael, you may have woken up on the wrong side of the bed today. Hopefully I will not have to butter up someone to make you look better. I’d be willing to go the whole nine yards if needed, but I was hoping with this intro I could really break the ice. And it appears that the cat has your tongue – before you get cold feet, maybe I should bite the bullet, just let you speak.
Michael: Jay, do you think we can have Brad’s mic turned off? I don’t know whether it’ll be less [00:02:00] painful to humor him right now with whatever he’s building towards, or just to gouge my eyes out.
Jay: Yeah, I mean, you’re the one that speaks fluent Brad, but I’m hoping that Brad is using some idioms from other common phrases or old time sayings maybe, but it’s Brad, so we can’t be positive, I guess.
Brad: Well, you are the smartest guy at Alberto, Jay, so you are correct. And the other day I actually overheard someone said like, I think we should bury the hatchet. And of course, when I heard that understood to mean they were in a quarrel and become friendly again. And as a history major, I was wondering where does the statement really come from? Well,
Michael: Well, I always assume that it had something to do with negotiations and putting your weapons down.
Brad: Gold star for Michael, Kennedy, put on the chart right there. Thank you very much. And according to several authorities, that statement comes from when the Puritans and the Native Americans would negotiate, the men would literally bury all their weapons, making them [00:03:00] inaccessible. What other statements are you interested in learning about in history today?
Jay: I’m assuming that’s not a rhetorical question, but we probably don’t have a choice. Let’s look back at your opening comments. You use two phrases, big wig and true colors. So, Brad, I’ll indulge, what do those mean?
Brad: So big wig means an important person, especially in a particular skill set or sphere. The origin dates back to the 18th century. One of the most important political figures would wear the biggest wigs. Hence, today influential people are called big wigs.
Michael: So that explains why Brad described himself as a big wig because he’s got his collection for Mardi Gras and Halloween costumes. I don’t think that counts.
Brad: Oh, no. Okay. Fair. Well, as it relates true colors, it’s meaning showing one’s real character, especially when they’re being dishonorable. This origin comes from when warships would use multiple flags to confuse enemies. However, in warfare [00:04:00] rules, that dictated the ship must show its actual flag before firing, and hence the ships would be displaying their true colors.
Michael: Okay, one more, Brad. As a sports fan, what is the whole nine yards mean?
Brad: Most assume it does have to do with sports, as it means to do with everything that is possible. The origin is from, this is also from wartime, but this case, World War II, each fighter plane would have nine yards of chain on ammunition. So when a fighter pilot would use all the ammunition on one target, they would give them the whole nine yards.
Michael: Okay. I have to admit, that was mildly interesting, especially after the painful setup. I had very low expectations.
Brad: Well, no pain, no gain, buddy.
Michael: I am with you, man. Okay, I don’t even know if I could say quit while we’re ahead, let’s just quit and go to our main story.
Jay: So today’s story is going to be [00:05:00] out of California and involves an entrepreneur, a California licensed nurse practitioner, and a California licensed physician.
Michael: This sounds Jay, like you’re setting up a joke. An entrepreneur, an NP, and a physician walked into a bar.
Jay: And they all said, ow. No. So here the entrepreneur let’s call her Ms. Idea, the nurse practitioner, we’ll call her Ms. Clinical and the physician will call Dr. Director. They had all built a very successful aesthetic and wellness practice, had already had several locations throughout California.
Brad: All right, Jay, since Ms. Idea is a non-professional, and so because this person is involved and we’re in California, which has a very strong Corporate Practice of Medicine, hopefully they had an MSO.
Jay: Yes. I know shocking for our stories, right? No. In this case, they had correctly set everything up corporate structure wise using the MSO model. All three were owners of the MSO, the management company. The physician, the nurse practitioner [00:06:00] jointly owned the professional corporation, which was fine in California.
Michael: Okay. So Jay, we’re in the scaling season, but they’ve already scaled in some way by adding these multiple locations, so I’m guessing there’s a different scaling strategy at play here.
Jay: Of course. Otherwise, probably would’ve been the most anti-climactic and shortest podcast ever. So Ms. Idea had identified the need to expand to other states, and the states that she had picked out were Texas, New York, and Florida as kind of the initial targets to go after.
Brad: Oh, well, Jay, sorry to bust your bubble here, but Michael, I just don’t see – we did a story just like this Michael and I did on a hair transplant clinics just a few episodes ago. Maybe you should go back and listen to it.
Jay: Oh, that’s right. You do have a podcast! Yes, I know it contained two of my favorite things, beer and comic books. So yeah, I love that episode.
Michael: Pass the test. Well, hopefully this story’s different.
Jay: [00:07:00] Yeah. So, this was the same strategy, but today we’re going to talk about the different issues that we actually encountered. So you see, the reason that Ms. Idea hired us was compliance. But the first order of business, really, she wanted us to register the business in Texas. So take the professional corporation and register it to do business down here in Texas.
Michael: Okay, Brad, vocab time. Our first term of art today. Why don’t you give the audience an idea of what it means to register a company to do business in the state and why it’s necessary.
Brad: A company doing business in another state, so like California, and then because that’s where it’s formed, it would want to then go to a new state. It has to register in that new state, and it’s known as a foreign entity filing that’s so it could do business there, basically letting that new state know that the company’s active in their state. Now Jay, why was Mrs. Ideas wanting to register the entity rather than form a new one?
Jay: Yeah, one reason [00:08:00] was simplicity. She planned to use one entity for every state they were going to expand to because she wanted to keep it simple, right? Have one entity didn’t want to keep track of 50 plus entities. And plus she had been told and heard that you can use one entity for all 50 states.
Michael: Okay, well, what was the second reason?
Jay: Speed. It’s always the second reason they had signed a lease in Texas were preparing to open up in the next month. She knew Texas was a corporate practice in medicine state, just like California. And so it needed the MSO model and they were familiar with it. So she wanted to register the PC in Texas to be the professional entity, practicing medicine. And she wanted to do the same thing in New York and Florida to follow as soon as possible because they were finalizing the leases there as well.
Michael: Okay. I know the answer, but my internal ding radar is going off, but for the audience’s sake, I’ll ask the question, did we encounter a problem?
Jay: Well, after more than 200 episodes, can you really call it a twist or shock to say, [00:09:00] yes, Houston, we have a problem.
Brad: Well, that’s, that’s fair. There probably was a problem. So how did you approach this discussion with Ms. Idea?
Jay: So very carefully, because we are about to inform her that her vision of one entity for simplicity and speed was not going to be possible or feasible.
Michael: Where did you start?
Jay: Well, the only place to really start was the discussion on Texas registration for professional entities that are practicing medicine. First, Texas doesn’t recognize and it does recognize, and you can form a professional corporation in Texas. Okay, great. But that’s not the issue. The problem is that by law, a Texas professional corporation cannot practice medicine, so physicians are not able to form professional corporations. The only professional entities that are available are the professional limit liability companies and professional associations.
Brad: Right. And it gets really confusing in Texas because you have a lot of doctors who can’t practice inside a professional corporation, but then they hear, well, [00:10:00] dentists are allowed to practice in a professional corporation. Again, and that’s because it’s a different set of rules that you have to abide by. So where did you go from there, Jay?
Jay: Yeah, so I mean, as you can imagine, I mean, the news was not what Ms. Idea wanted to hear or had in mind when she first approached us, but we assured her, Hey, there’s a path to getting Texas up and running, but we would have to kind of walk through the corporate structure diligence to do so compliantly. And so in the meantime, she knew New York recognized and allowed professional corporations, so she still had hopes of kind of keeping things simple and still fast.
Brad: And then you did it. Yeah, I think you probably dashed all her hopes right there, didn’t you?
Jay: Yeah, I kind of did.
Michael: Jay, the dream killer. Okay, what did you tell her this time?
Jay: Well, we had to explain that yes, although New York did recognize and allow for professional corporations to practice medicine, it couldn’t work there for two reasons. One, the Dr. Director didn’t meet the requirements for a physician to own a professional [00:11:00] corporation in New York. She was neither licensed there, nor did she have an active practice. And then second, New York didn’t recognize jointly owned entities between nurse practitioners and physicians.
Brad: Jay, why you’re so cruel busting your idea of using this one entity for all these states. You know, stop allowing the law to really get in the way of a great idea.
Michael: Okay, Jay, but there’s still some hope here. There was a third State, Florida. Did that turn out better?
Jay: Yes. Kind of. See, Florida does recognize professional corporations, and this time Dr. Director also had a license in Florida. But more importantly, Florida is not a Corporate Practice of Medicine state requiring the use of professional entities. So Miss Idea’s ultimate vision was to be in all 50 states. And so what we wanted to do was discuss if it made sense to even use this professional corporation in Florida, or would [00:12:00] it make more sense to take advantage of that lack of Corporate Practice of Medicine rules and to build something for use in other similar non Corporate Practice of Medicine states.
Brad: So essentially you hit pause and you need to revisit this whole planning with Mrs. Ideas.
Jay: Yeah, absolutely. So if we were going to help her with the simplest, most efficient path toward her ultimate vision, we needed to have a discussion to kind of go back to the beginning and map out all the issues that were going to face when scaling throughout the country. From a corporate structuring perspective only. We also needed to map out the strategy to develop the realistic timeframe and the order of priority. And if not the complete picture, we needed to at least develop the strategy and plan for expansion into new states so that we wouldn’t have any more surprises like this, so getting ahead of the game – and this is where we started with our first whiteboard session.
Brad: Yeah. And I could see for those not familiar, but a good whiteboard session is where you really draw out the current model and structure that you are so we have a footprint, so the client and you are [00:13:00] on the same page, and then you start developing where else do you want to go and what does that look like? And then that allows you to then show the structure of ownership, the relationship between the entities being contractual, and then potential red flags. And everyone can visualize it, which is why we love that whiteboard experience because instead of saying it out loud, they actually can see it.
Michael: And it’s the whiteboard that’s killing dreams and not you.
Jay: Right. Exactly. Blame the whiteboard,
Brad: Not Jay.
Michael: Yeah. Okay. Well let’s go into commercial and kind of simmer and reflect on what we just learned and then come back and do a little bit of a legal breakdown.
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Brad: Welcome back to the Legal 123s with ByrdAdatto. I’m your host Brad Adatto, my co-host, Michael Byrd. And we’re still here with series regular and our partner Jay Rojero. Now Michael, this season our theme is Growing a Business, and you know, we’re in the scaling season and Jay just shared a great story with us about how he loves to crush people’s ideas.
Michael: Yes. Dream Crusher.
Brad: Including Ms. Idea, although I think she blamed the whiteboard instead of Jay.
Michael: Yes. Well, it’s just how do you redirect the problem and put it on a board. So kind of a recap for the audience. So we have three players in the story today. We have Ms. Idea, who’s an entrepreneur. We have Ms. Clinical, a nurse [00:15:00] practitioner, and we have Dr. Director, a physician. And just as a recap, they had already built a successful aesthetic and wellness practice in California, multiple locations. And coincidentally because it’s the scaling season, they were looking to scale further. But the scaling trick is they were going outside of California. And so, it’s not rinse and repeat, although they hoped through some things they had found out or heard on the street that their idea is – they were just going to use their same pc that was the friendly PC and the MSO model and just register that in all 50 states. And they thought this is going to be super easy. We’ve got our doctor, we’ll just rinse and repeat. And that’s where the dream crusher came in because they called out to Jay and said, “okay, we’re ready to roll.” It’s not just an idea. It was [00:16:00] way past that. They’re signing leases and ready to get after it in Texas, New York and Florida. And so we collectively talked about the problems that we encountered in each state along the way. And so, now we get to unpack it a little bit further.
Brad: Well that’s great and you’re the context guy, so that’s a good summary there. But before I ask Jay about the some of these compliance related details about using the same single entity in multiple states, talk about some of the general considerations that come into play when you’re thinking about one entity or more, and what does it look like in a single state or even across state lines.
Michael: Well, and it is kind of a hack for any time you are making a potential material change to your business, right? Whether it’s any type of scaling is, you want to look at it through kind of three dimensional view. You want to check it from a compliance perspective. And we’ve started to unpack [00:17:00] that. You also want to look at it from a tax and accounting perspective. And so again, you have a particular tax set up and you make a change to your business and what’s the impact going to be. Because you may have a federal tax, but you also have state taxes. And what’s the impact if you are going to take a California entity and start doing business in all these other states? And so you would have your tax advisor beat that up and make sure, and there may be some significant issues, so we never even had to get that far on that part.
And then there’s an accounting issue. So you have one PC that is theoretically in all 50 states and how are you going to track the revenues and do your bookkeeping and your P and Ls and all of that stuff. And so you want to make sure that that is going to work. And then you have the operations impact side of [00:18:00] things. And so you want to consider that. Okay, if we just have one entity and we run our business in this way, what’s going to be the impact on our team and how we staff, et cetera, our processes as we expand state by state under this one umbrella. But you can apply that same kind of three question analysis to any type of big change you want to make to your business. In fact, you should make that change. And I kind of skipped over the compliance because we’re about to really beat that up, and that’s really where the story for us, when Jay was crushing dreams, you know, there’s a lot of lessons we learned about the thought behind trying to do this.
Brad: Yeah. And audience members, obviously we are talking about health care in this and this. We’ll get in that compliance piece, but keep in mind that is for any business is what Michael was just talking about in all those categories. In many ways a single entity concept does have that great appeal [00:19:00] as most people believe. It will streamline everything you described legal and accounting and operational, but they actually don’t realize that significant risk and the hurdles associated with that particular concept. Now, Jay, turning to Ms. Idea and the issues you encountered, let’s start with the main question. Can you use a single entity for all 50 states?
Michael: You just want them to do it again, you just want them to crush more dreams.
Jay: Well, as you heard from the story, the answer’s no. But really the answer, well, it’s straightforward. The reason is anything, but it has a lot of nuances to it. And we’ve talked a lot about corporate practice and medicine and you guys talked about that through the hair transplant episode that I did listen to earlier this season., we believe you And so that’s just one issue. But then we get on this more technical, which is not the fun talk that everybody wants to have, but it’s a very important piece. What legal entities in [00:20:00] a particular state are permitted to provide professional services – practice medicine in this case? And not every state has the same, and not every state allows the same. So you have professional limit liability companies, you have professional corporations. I think Wisconsin has a service corporation. Some are just regular limited liability companies.
And so you have all these different entity types. And so when you’re going into a state, you kind of have to figure out, okay, what is an option? And as you heard from the story right off the bat, California and Texas, that requires two, because California requires a professional corporation. Texas doesn’t allow for that. And so you immediately just with those two states, have two options that you have to do, and so you’re not going to be able to get that one. Now, there is a path to create a consolidated effort as to create an efficient number of entities, but it takes some planning, it takes some effort. And quite frankly, most [00:21:00] people when they’re looking to expand, they’re not looking to expand in all 50 states right away. It’s kind of a graduated approach. But that planning that we talked about in the story, the whiteboarding, that’s where it becomes really critical so that you can kind of have a vision of where you’re headed.
Michael: Yeah audience, we’ve gotten into the weeds trying to decide to solve this technical problem because it goes both ways. Like California, you can only be a PC. That’s pretty much the only viable option they have for a medical practice. And so, we’ve tried to figure out is there a way we can mechanically solve going with the state saying, “Yeah, we’re a PC here, but we want to be seen as a PA here.” And the bottom line is that we have had some positive, I don’t even know if you want to call it success – but outcomes, but I’m hesitant because it’s so clunky. It feels like you have a corporate model that’s held together by scotch [00:22:00] tape when you start doing that. and it does not solve the other problems that we’ll discuss.
Brad: Yeah, I agree. And I wanted to clarify. I had asked you, Jay, about a single entity really; it should be a single professional entity is really issue here, not a single business entity. And additionally, as you mentioned, Michael an entity initially formed in one state can be subject to these other state laws since it’s going to be registered in that foreign entity. So you have to be aware of that. And a lot of times people’s like, “Well, what if I don’t want to register it there?” Well, if you don’t, you’re going to eventually, if and when you get caught, you’re going to be subject to a real aggressive penalties for failure to filing and potentially back taxes on top of that. So it is a significant issue if you’re doing business in that state and you’re not registering there. Jay, even if a state does recognize the same entity type, that isn’t the end of this story, is it? [00:23:00]
Jay: Right. So as you heard from the story, California and New York as the example, even though both states recognize professional corporations, the types of people that can own those professional corporations can differ. So you have a bunch of different flavors. And again, we’re not talking about the corporate practice of medicine issue, but when you look on a technical level, you’re looking at the Secretary of State, you’re looking at the rules. Who can own this professional corporation? Who can own the shares? They’re not all consistent. So you have some that say any licensed physician in any state can have these shares. In other states, it’s no, only a licensed physician in this state. And then some on top of that are even further saying, well, not only that, but they also have to be practicing or physically located in the state. Some added nuance to it to make it a little more difficult. So what you end up finding is that you’re trying to find this almost unicorn of a physician to match all these different criteria. Not to say it can’t be done, but it’s just not that [00:24:00] common.
Brad: Yeah and Jay you listed why the concept of one professional say being formed in multiple states is extremely complicated, even if that state recognizes that type of entity. But in today’s store we even have a bigger twist because of the ownership of that original PC.
Jay: Yeah. So don’t forget Dr. Director, Ms. Clinical, two different licenses. We have a nurse practitioner, we have a medical doctor – in California, perfectly fine for a physician nurse practitioner to co-own. That’s not always the case in other states. And so with all of this stuff, you have this underlying entity with an ownership structure. After we check the other two boxes, we still have to check this other box. And not every state recognizes jointly owned entities.
Michael: Yeah. And you know, even going back to Texas, which we stopped at the beginning ’cause we couldn’t match the PC and the PA, but Texas would not have recognized physician and NP co-ownership. And so even if we had figured out how [00:25:00] to clear with scotch tape the first hurdle, we would’ve bumped into that hurdle.
Jay: Yeah, and Arizona is similar. With an Arizona professional entity I could own up to 49%, but that’s not going to be the case in other states. And here’s the kicker. Let’s say we magically get all this stuff done and we find everything and we get into a state, there are some weird things that’ll happen out there. We ran into an issue in Kentucky where we checked all the boxes. Everyone who had to own it did own it. We had the foreign registration, the same entity, everything was good. We even went through the process and got it registered. When it came time to go get the malpractice insurance, the malpractice carrier would only issue a policy to a domestic entity. So it required its own entity just by reason of malpractice. So it’s still – you can get through all these things, there may be something weird like that that’ll pop up. So again, that’s why it’s not an easy task.
Michael: And Brad mentioned earlier the requirement [00:26:00] to register a foreign entity in the state, kind of the vocab word that started this whole thing. What we didn’t talk about that also kind of under that kind of accounting tax area is the cost. So, many states on average charge like a thousand dollars a year to be registered just as an administrative fee to be registered as a foreign entity. Well, do the math. Had you been successful and you just did this in 50 states and you had 40 to $50,000 in just annual fees, this isn’t the income tax or other taxes. This is an additional overhead item.
Brad: Much less the cost of paying a CPA to file in every single state, which is on top of that now. Now Michael, when a client is looking to scale through multiple states and they want to use as few entities as possible, besides doing a whiteboard with us, where should they start?
Michael: [00:27:00] Well, I think that because the laws vary so much by state, that my starting point, kind of my bias going into it, is that you want to have a professional entity per state. And that would be potentially the simplest solution. Now, what that requires is a willing physician owner willing to be over the entire state, owning the entity that does all the business in a particular state. And so ,we have some clients that get more complicated than that. They want to have a professional entity owned by location or by region, and so you can expand to that. If you want to get that efficiency, a lot of times that’s found in having one single MSO entity that is managing all the practices around the country. So I’m curious, Jay, what ended up happening after the whiteboard? [00:28:00]
Jay: We actually ended up having more whiteboards. We talked through all these issues. We evaluated the current situation during that first – that whiteboard, and then we kind of took a look at the near future to identify what those immediate states were and talk through the approach. Essentially after multiple whiteboards, we ended up devising a strategy where we had kind of a strategy for all the non-core practice of medicine states, which is much easier to deal with. And then a strategy for the corporate practice of medicine states trying to keep it as efficient as possible. And so by the end of it, we had mapped out the overarching strategy that made sense, ensure compliance matched their speed and simplicity that they were looking for, and then basically was smooth sailing after that.
Brad: Love it. I think it’s important to understand that scaling does allow you to have these amazing opportunities to grow your brand, and really if possible, dominate a market. However, li like all things in life, it doesn’t come without challenges, right? For those who tell you there’s this one easy solution, [00:29:00] they might be selling you a wooden nickel, and we all know you shouldn’t take these coins. Jay, final thoughts.
Jay: The dog days of summer and Brad’s idioms. Yeah, you got to plan ahead. You’ve got to invest in the strategy in building a model when you’re going out into multiple different states. And so, I think if you invest in that and you do it upfront, you’re going to be in a much better position and save yourself a lot of time and headache and possibly backtracking if you don’t do that.
Brad: How about you Michael? Final thoughts?
Michael: Well, first audience, I apologize if when Brad said wood nickels, you heard a tear hit the microphone. I tried to turn away. I’ll turn into it. I’m going to speak Brad with some old time expressions so that he can understand. My 2 cents is that while it is generally not going to work to have a single professional entity across the states, you can still design an efficient model to work for the business. So if you decided this single professional entity concept is so complicated that you’re just not going to do any structural planning, Brad, that would be throwing the baby out with the bath water.
Brad: Love it. Well, audience members, that is the end of today’s show, so we’re singing bye to Jay. Thanks for being with us. Now, don’t worry. Next Wednesday, Michael and I will be back. We will have a guest joining us. Mary Beth Hagen, we’ll dive into employment challenges while scaling. Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com.
Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or [00:31:00] recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.
