Business Structures for Therapists

• Psychotherapists frequently have questions about choosing a business structure, especially when opening a private practice. “Business structures” doesn’t refer to the type of building in which your practice is housed. Rather, it refers to the type of business association you choose. For example, can you incorporate yourself (inc.)? Can you form a limited liability company (LLC)? What about a sole proprietorship? And if you choose one of these, what are the implications for personal liability protection and taxes?

• First, let’s get some basics out of the way: when you create a business structure, you are deciding on the type of legal status you are giving your practice. For most businesses, choosing a business structure is dependent on several factors such as income, personal liability protection, and the fees typically associated with a particular business structure. For these reasons, this decision in consultation should be made after consultation with an accountant, as well as an attorney.

• State law also plays a major role in which business structures are available. Some business structures, such as LLCs, provide some personal liability protection to its owner(s), but states vary widely in whether they allow some types of businesses to form LLCs. LLCs are, in some ways, very desirable business structures because of the combination of tax benefits they can afford, relatively low accounting costs, and some personal liability protection. However, in California the legislature has specifically ruled out this option for certain professions, and psychotherapists (psychologists, MFTs, Social Workers, and psychiatrists) are some of those excluded professions. Professional limited liability corporations (PLLCs) are currently not allowed in California.

• For the solo practitioner, the two most common business structures available are the sole proprietorship and the professional corporation. The professional corporation is similar in many respects to a traditional corporation. Some commonalities are the ability of the professional corporation to own property and claim expenses, as well as higher associated fees and bookkeeping/accounting costs. As noted above, the decision of which structure to adopt should be made only after consulting an attorney and an accountant.

• Fortunately, the decision isn’t final. Practitioners are free to adopt a different structure at any time, assuming the proper fees and paperwork have been paid and filed with the State.

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