A private equity backed platform offers to buy your practice. A hospital system wants to employ your group. A friend who is not a physician wants to put money into the imaging center you are opening. In every one of those conversations, somebody eventually says the words “corporate practice of medicine,” usually with more confidence than precision.
Here is the part that surprises most people, including some who structure these deals for a living. Texas has no statute called the corporate practice of medicine. There is no section of the Occupations Code you can point to that announces the rule. What exists instead is a set of licensing and prohibited practice provisions that, read together, produce the rule. The Attorney General has said plainly that the corporate practice of medicine is prohibited under the Occupations Code, in Opinion JC-0304 issued November 10, 2000, and located the prohibition in exactly those scattered provisions.
That matters practically, not just academically. A doctrine assembled from inference has softer edges than a statute, and the places where it is genuinely unsettled are the places deals get structured. This article walks through what is actually in the statute books, which arrangements Texas expressly permits, where management services organizations sit, and which questions remain open.
Where the rule actually comes from
Three provisions do most of the work.
Section 155.001 of the Texas Occupations Code states that “A person may not practice medicine in this state unless the person holds a license issued under this subtitle.” Section 155.003 then sets out who can get one, and every criterion is individual. An applicant must be at least 21 years of age, must have graduated from an approved medical school, must have passed an examination. Nothing in the chapter contemplates licensing an entity. A corporation therefore cannot hold a medical license, and because it cannot hold one, it cannot practice medicine.
Section 164.052(a)(17) is the enforcement engine. A physician is subject to discipline if the physician “directly or indirectly aids or abets the practice of medicine by a person, partnership, association, or corporation” “that is not licensed to practice medicine by the board.” Read that carefully, because the target is the physician. The Medical Board regulates licensees. The lay company on the other side of the arrangement is largely outside its reach. If a structure is wrong, it is the doctor who answers for it.
Section 165.156 reaches the company directly, though in a narrow way. An unlicensed person, partnership, trust, association or corporation commits an offense if, through letters, words or terms on stationery, in advertisements, or in any other manner, it indicates that it is entitled to practice medicine. In other words, the management company’s own website, signage and letterhead are part of the compliance question, not a marketing afterthought.
Your practice probably cannot be a professional corporation
This is the most common technical error, and it is sitting in the definitions.
The Texas Business Organizations Code governs professional entities in Title 7. Section 301.003(3) defines a professional corporation as one formed to provide a professional service “other than the practice of medicine by physicians, surgeons, or other doctors of medicine.” The practice of medicine is carved out of the professional corporation form by name.
A Texas physician practice is therefore organized as a professional association under Chapter 302 or a professional limited liability company under Chapter 304. Practices set up out of state templates, or set up quickly, sometimes land in the wrong box and nobody notices until a transaction puts the organizational documents in front of a buyer’s counsel.
Who may hold an interest
Section 301.007(a) provides that “A person may be an owner of a professional entity or a governing person of a professional limited liability company only if the person is an authorized person.” Subsection (b) adds that an individual may be an officer of a professional entity, or a governing person of a professional association or professional corporation, only if the individual is a professional individual.
Section 301.004 then defines authorized person, and the distinction between the two entity types is the interesting part. For a professional association, an authorized person is a professional individual, meaning a licensed human being. For a professional limited liability company, an authorized person is a professional individual or a professional organization.
That second category is a real statutory opening and it is narrower than it first appears. Section 301.003(7) defines a professional organization as an entity that renders the same professional service “only through owners, members, managerial officials, employees, or agents, each of whom is a professional individual or professional organization.” The chain has to stay clean the whole way up. A holding company with lay investors in it does not qualify.
Several related provisions matter when something goes wrong. Section 301.008 requires an owner who becomes ineligible to divest promptly, and requires the entity to purchase or cause the purchase of that interest at a price set by the governing documents. Section 301.009 restricts transfer of an ownership interest to an owner, the entity, or an authorized person unless the governing documents say otherwise. Section 301.010 makes the entity jointly and severally liable for an error, omission, negligent or incompetent act, or malfeasance by an owner, official, employee or agent rendering service for it.
Who may share ownership with a physician
Texas does permit some cross licensure ownership. Section 301.012 of the Business Organizations Code allows physicians to jointly own an entity with podiatrists, chiropractors, optometrists and therapeutic optometrists, licensed mental health professionals, and physician assistants. The conditions matter: an organizer of the entity must be a physician, physician assistants may hold only a minority interest, and each practitioner’s authority remains limited to that practitioner’s own scope of practice. Parallel provisions sit at Sections 162.051 through 162.053 of the Occupations Code.
The arrangements Texas expressly allows
There are statutory routes by which an organization that is not a physician owned practice may lawfully employ physicians. They are specific, and if your structure does not fit inside one of them it is not covered by it.
Certified nonprofit health organizations. Chapter 162, Subchapter A of the Occupations Code lets the Medical Board certify a nonprofit health organization that may then employ physicians. Section 162.001(b) describes the main route: a Texas nonprofit corporation organized for research, medical education, improving the capabilities of medical professionals, delivering health care or public instruction, organized and incorporated solely by persons licensed by the Board, with directors or trustees who are themselves licensed and actively engaged in practice. Section 162.001(c) covers a separate category tied to federally qualified health centers and migrant, community and homeless health centers. These are the entities practitioners call 501(a) corporations, a nickname carried over from the former Medical Practice Act. It does not refer to Section 501(a) of the Internal Revenue Code, and the statute’s own cross reference is to Section 501(c)(3).
Private nonprofit medical schools. Chapter 162, Subchapter E permits a qualifying accredited private nonprofit medical school, certified under Section 162.203, to retain professional income earned by a faculty physician for services rendered as part of faculty duties.
Certain hospitals. Subchapter E of Chapter 311 of the Health and Safety Code permits physician employment by hospitals that are designated critical access hospitals under 42 U.S.C. Section 1395i-4, are sole community hospitals as defined in 42 U.S.C. Section 1395ww, or are located in a county of 50,000 or fewer people. Section 311.062 is the operative permission. Section 311.061(b) is the limit, stating that the subchapter may not be construed as authorizing a hospital governing body to supervise or control the practice of medicine.
Hospital districts, one at a time. Chapter 281 of the Health and Safety Code addresses employment of physicians by hospital districts, but there is no single general authorization. The chapter names specific districts in separate sections, including Section 281.0286 for the Tarrant County Hospital District. Districts not named there depend on their own enabling acts. Verify your district specifically rather than assuming a general rule exists.
The clearest statement of the line
If you want to know what Texas actually considers off limits to a lay organization, the certified nonprofit rules are the most explicit text available, and the principles read across usefully even when your structure is something else entirely.
Section 162.0021 provides that a certified organization “may not interfere with, control, or otherwise direct a physician’s professional judgment.” Section 162.0022 requires the organization to adopt, maintain and enforce policies ensuring the employed physician exercises independent medical judgment, and specifies that those policies must address credentialing, quality assurance, utilization review and peer review. Subsection (d) requires those policies to be drafted and interpreted in a manner that “reserves the sole authority to engage in the practice of medicine to a physician.” Section 162.0023 provides that the physician retains independent medical judgment and may not be disciplined for reasonably advocating for patient care.
Then Section 162.0024(a) does something worth noticing: “The requirements of this subchapter may not be voided or waived by contract.” You cannot paper around it.
Delegation sits alongside this. Section 157.001 permits a physician to delegate a medical act to a qualified and properly trained person acting under supervision, and subsection (b) states that “The delegating physician remains responsible for the medical acts of the person performing the delegated medical acts.” Delegation transfers tasks. It does not transfer responsibility.
Where management services organizations sit
No Texas statute authorizes, defines or regulates a management services organization. No Medical Board rule does either. The Board’s current rule chapter on business arrangements, Chapter 174 of Title 22 of the Administrative Code, covers nonprofit health organizations, jointly owned entities and call coverage agreements. There is nothing in it about MSOs.
So the legal test for a management arrangement is assembled, the same way the doctrine itself is. It comes from Section 164.052(a)(17), Section 157.001, Section 165.156, the ownership provisions in the Business Organizations Code, and by analogy from the certified nonprofit standards above. In practice that means a defensible arrangement leaves the following with the physicians: diagnosis and treatment decisions, independent medical judgment free of control or direction, credentialing, quality assurance, utilization review and peer review, supervision of delegated medical acts, the equity in the practice entity, and the ability to advocate for a patient without being disciplined for it. It also means the management company does not hold itself out as providing medical care.
Two cautions on points that are often asserted more firmly than the authority supports. We found no Texas statute or Board rule that expressly reserves the setting of professional fees to the physician. And the Board’s rule on medical records custody, Section 163.5 of Title 22, addresses who holds records on a physician’s death, incapacity or abandonment of practice. It is a custody rule. Treating it as establishing physician ownership of the chart goes further than the text does. Both propositions are reasonable risk positions. Neither is black letter law in Texas.
Fee splitting, and what Texas actually prohibits
Texas has no general physician fee splitting statute. That statement surprises people, so it is worth being precise about what does exist.
Chapter 102 of the Occupations Code governs solicitation of patients. Section 102.001(a) makes it an offense to knowingly offer to pay or agree to accept, directly or indirectly, any remuneration “for securing or soliciting a patient or patronage” for a licensed health care provider. A violation is a Class A misdemeanor under subsection (b), and a third degree felony under subsection (c) on a prior conviction or where the person was employed by a governmental entity.
The provision that matters most for structuring a management fee is Section 102.003, which permits any payment, business arrangement or payment practice permitted by 42 U.S.C. Section 1320a-7b(b) or any regulation adopted under it. Texas imports the federal anti-kickback statute and its safe harbors wholesale. A management fee that fits inside a federal safe harbor is not a Chapter 102 offense.
Chapter 102 targets remuneration for securing or soliciting patients. It does not by its terms address a percentage of revenue management fee. The common assertion that a percentage fee is fee splitting in Texas is a risk position derived from the aiding and abetting provision and from federal law, not a prohibition you can cite to a section number.
What happens when the structure is wrong
Three kinds of consequence, and they do not all land on the same party.
The physician faces Board discipline under Section 164.052(a)(17). Criminal exposure exists as well: Section 165.152 makes practicing medicine in violation of the subtitle a felony of the third degree, with each day a separate offense, and Section 165.156 reaches the unlicensed entity that holds itself out as entitled to practice.
The contract may not do what the parties intended. In Community Health Systems Professional Services Corp. v. Hansen, No. 14-1033, decided June 16, 2017, the Supreme Court of Texas addressed an arrangement in which a hospital that could not employ a physician directly did so through a certified nonprofit. The Court noted that state law “prohibits corporations comprised of lay persons from employing physicians to practice medicine,” and held that “Courts cannot construe a contract to impose or enforce an illegal obligation,” applying the construction that does not result in a violation of law. The result was that hospital revenue could not count toward the physician’s contractual practice losses. Notably, the Court did not declare the arrangement void, and it rejected a challenge to a management company executive on the ground that he “merely provided information and recommendations” to the nonprofit’s board.
The Fifth Circuit went further on different facts in Xenon Health, L.L.C. v. Baig, No. 15-20627, decided October 25, 2016, holding that three agreements were illegal and void under the Texas Medical Practice Act where the purchase and equity agreements were an integral part of a scheme for a management company to control a Texas entity. That decision is unpublished and therefore not precedential, and it drew a partial dissent arguing that an illegal provision may be severed unless it is the essential purpose of the agreement.
What changed recently
Two things, and one non event.
The Medical Board reorganized its rules effective January 9, 2025. The old Chapter 177 on business organizations and agreements was repealed and a new Chapter 174 adopted. One casualty is worth knowing about: the old rule listing hospital districts authorized to employ physicians was not carried forward, so there is no longer a published consolidated list. If your materials still cite 22 TAC Section 177 anything, they need renumbering.
Senate Bill 1318, effective September 1, 2025, rewrote the rules for physician non-competes, capping buyouts, limiting duration to one year and geography to a five mile radius. That change has little to do with ownership and a great deal to do with whether a roll up can hold a physician group together after closing. We covered it in What Makes a Non-Compete Enforceable Under Texas Law?.
The non event: there is no Texas regular legislative session in 2026, and we found no 2026 Medical Board rule change touching business organizations, employment of physicians or delegation.
What is still unsettled
Several things, and anyone who tells you the line is bright is overselling.
Whether a violating contract is void in whole or merely construed or severed. Hansen construes to avoid illegality and declined to void the arrangement before it. Xenon voided three agreements, but it is unpublished and drew a dissent on severability. There is no published Texas Supreme Court decision voiding a management services agreement on this ground.
Whether a private party has a cause of action for a violation at all. We found no Texas appellate holding resolving it.
How far the professional limited liability company route reaches. The statute plainly allows a professional organization to own a medical PLLC, but no Texas case or Board rule construes how the chain is tested in practice.
Where advice becomes control. Hansen approved an executive providing information and recommendations to a governing board. The boundary between that and directing clinical operations has not been drawn by a Texas court.
If you are structuring an investment in a Texas medical practice, reviewing a management services agreement, or trying to work out whether the entity you formed years ago is the right one, the healthcare attorneys at Hanshaw Kennedy Hafen work with practices and investors across Frisco, Plano, McKinney, and the surrounding North Texas communities. Visit our Healthcare Law page to learn more.
Related reading
- LLC vs. S-Corp in Texas: Which Structure Is Right for Your Business?
- What Should Be in a Texas LLC Company Agreement?
- What Every North Texas Business Owner Should Have in a Legal File
About the author: Collin D. Kennedy is a partner at Hanshaw Kennedy Hafen in Frisco, Texas, and a Fellow of the Litigation Counsel of America. He has tried business, healthcare and contract cases across Texas and the Southwest.