Medical Practice Ownership and Profit Allocation Models Explained

Imagine this: You’ve spent years building your clinical expertise, earning the trust of patients and becoming a core contributor to a successful medical practice. Then comes the conversation many physicians look forward to the opportunity to become an owner, whether in a partnership or an s corporation. But what exactly does ownership mean, and how does it work?

For medical professionals, becoming an owner is more than a title. It can bring greater financial rewards, influence in business decisions and long-term security. Yet every practice handles this process differently. From ownership models to income-sharing arrangements, it is critical to understand how each option impacts you financially and professionally.

In this article, we explain the most common ownership structures, as well as how profits are allocated in medical practices today. Whether you’re evaluating your path to ownership or planning for succession, knowing how these models function helps you make smart, informed decisions.

Equal vs. tiered partnerships: The structure behind the scenes

Let’s begin with the foundation. Most group medical practices follow one of two ownership structures: partnerships or s corporations. Let’s discuss partnerships first. Two main partnership models are equal partnerships or tiered partnerships. Each approach affects not only profit distribution but also decision-making, voting power, and overall governance.

Equal partnerships distribute ownership equally among physician partners. Typically, profits are split evenly after expenses and each partner has the same voting rights. This straightforward model supports collaborative decision-making and removes hierarchy, making it well suited for smaller practices or for groups where contributions are similar across physicians.

In contrast, tiered partnerships establish different ownership levels. Senior partners often hold larger equity stakes, while newer physicians begin with more modest percentages. As junior partners gain experience or invest capital, they may earn the opportunity to increase their share. This model supports performance incentives and succession planning and aligns ownership with tenure and responsibility.

A May 16, 2023, MGMA Stat poll found that 47 percent of medical groups tie quality performance metrics directly to compensation, illustrating a shift toward nuanced incentives within tiered structures. While that statistic relates to compensation, it signals how modern practices use structured models that reward performance and experience.

Whether your practice adopts an equal or tiered model partnership, transparency is essential. Clear partnership agreements and defined paths to advancement protect morale and minimize confusion. Without solid documentation, even well-structured models can lead to disappointment or conflict.

The S corporation model: “eat what you kill” through payroll and performance

In an S corporation structure, physician-owners are typically compensated through a mix of payroll and shareholder distributions. This model is well suited for performance-based compensation, often referred to as the “eat what you kill” method

Here’s how it works. Physician-shareholders receive a  salary through payroll. This salary is subject to standard employment taxes, reflects a reasonable compensation for their work and is directly related to their production. In addition to payroll, profits are distributed to shareholders based on their ownership percentage. These distributions are not subject to self-employment tax, which can provide a tax-efficient way to reward productivity.

This model is attractive to high-performing physicians because it ties income to results. A shareholder who generates more revenue sees more of the profit pool, even when ownership percentages remain the same. It also encourages transparency in tracking individual performance using metrics such as patient volume, RVUs or collections.

However, this setup does come with compliance requirements. The IRS mandates that S corporation owners must be paid a reasonable wage before receiving distributions. Practices also need consistent financial reporting and tax planning to balance compensation methods without creating red flags.

For healthcare groups considering this model, it’s important to work with advisors who understand both tax compliance and physician compensation strategies. You can explore our specialized outsourced accounting services for healthcare to learn how James Moore helps practices build smart, compliant compensation systems.

Buy-in and buy-out models: Earning your stake and planning for transition

Buy-in and buy-out arrangements are the backbone of most long-term medical ownership strategies. These agreements outline how physicians become equity owners and how existing owners exit with fairness and financial clarity.

A buy-in model gives new physicians the chance to purchase ownership after demonstrating value to the practice. Typically, this opportunity arises after two to five years of employment. During that time, the practice evaluates the physician’s clinical skills, patient retention and cultural fit. When the time comes to buy in, the cost is usually based on a predefined valuation method, often involving the practice’s tangible assets, goodwill or a multiple of earnings.

On the other side, buy-out models protect retiring or departing owners by offering a structured exit. A buy-out agreement defines how a departing owner’s share is valued and how it will be paid. Payment terms might include an installment plan or a lump sum, depending on the practice’s liquidity and the agreement’s structure.

Without a buy-in and buy-out framework, practices risk financial instability or disputes when owners transition. We strongly recommend that agreements clearly spell out the timeline, valuation method and financing terms for these transactions. Practices also benefit from regularly revisiting these terms as market conditions, revenue models or staffing structures change.

When designed carefully, these agreements support continuity, reward long-term contribution and protect everyone involved. We have seen firsthand how a strong succession plan prevents confusion and helps preserve the financial health of the organization.

MSO/PC model: Business partners without clinical ownership

The MSO/PC model is a structure used by many medical practices to separate clinical responsibilities from business operations. In this setup, the professional corporation (PC) is owned entirely by licensed physicians and is responsible for providing patient care. A separate entity, the management services organization (MSO), handles nonclinical services such as billing, IT support, marketing, HR and administrative compliance.

This arrangement allows business-minded partners to support a practice operationally without holding any ownership in the clinical entity. It also helps practices remain compliant with regulations that prohibit non-physicians from owning medical practices.

Under this model, the PC and MSO work together through a formal management services agreement. The agreement outlines the services provided by the MSO and how fees are calculated. Typically, compensation for the MSO is based on a flat fee or a percentage of revenue, and it must reflect fair market value.

One of the key benefits of the MSO/PC model is operational efficiency. By allowing experienced business professionals to manage the practice’s back-office functions, physicians can focus on providing care. At the same time, the model maintains physician control over all clinical decision-making. Practices using this model should ensure that the MSO and PC operate independently with clearly defined roles, financial transparency and separate payroll and bank accounts.

Income sharing vs. production-based profit allocation

Physician-owned medical practices often choose between three main strategies for dividing profits: equal sharing, production-based models or a hybrid approach.

In an equal sharing model, each owner receives an identical portion of the net income after expenses. This method encourages a culture of collaboration and is typically used in practices where each physician contributes similarly to patient care, call coverage and administrative duties.

In contrast, production-based models compensate owners according to their individual output. Compensation may be based on metrics such as collections, patient encounters, or work RVUs. This approach rewards productivity and is well suited to practices where provider contributions vary significantly in terms of workload or revenue generation.

Many groups adopt a hybrid model that blends the two. For example, a practice might split a portion of the income equally among all owners while allocating the remainder based on productivity. This structure provides a balance between fairness and performance incentives.

When determining how to allocate profits, practices must also decide how to share expenses. Fixed overhead costs like rent and administrative salaries are typically divided equally, while variable costs such as medical supplies may be tied to each provider’s level of production.

It’s important to revisit these models regularly, especially as the practice grows or changes. Factors such as leadership roles, semi-retirement arrangements or shifts in patient volume can impact whether the current model remains fair and effective.

Choosing the best medical ownership structure and profit sharing model for long-term success

Selecting the right medical practice ownership structure is more than a financial decision. It shapes how your team works together, how profits are shared and how leadership transitions are handled. Whether you prefer an S corporation or a partnership structure, equal ownership, performance-based structures or hybrid models, a clear and well-documented approach is essential to sustaining trust, attracting new partners/shareholders and preserving operational control.

As practices grow, so does the complexity of financial reporting, profit distribution and compliance with tax and healthcare regulations. That’s why many healthcare organizations turn to experienced advisors who understand both the clinical and business sides of medicine.

If your practice is exploring a new ownership structure or profit allocation model or refining existing ones, the Healthcare Services team at James Moore can help. We understand the nuances of healthcare operations and offer tailored solutions that support fair compensation, compliance, and growth.

Contact a James Moore professional today to discuss how we can support your practice with strategic accounting and partnership planning.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.