What is the best business entity for a private therapy practice?

Disclaimer: This is not legal or tax advice. This information is for educational purposes only. You should consult with an attorney and a CPA to determine which type of business will best meet your needs.

When you decide to go into private practice, you need to first start by changing your mindset and begin seeing yourself as a business owner. Your business now has legal, tax, and other regulatory requirements that must be attended to.

What is the best business entity for a private therapy practice?

First, you need to decide what type of entity will best fit your needs as an individual and a business. Compare the pros and cons and talk to a professional to help guide you. You can usually get your initial discovery meeting for free, and then decide if you want to employ their services.

Don’t forget to check state regulations, as some states are very strict with the type of business entity mental health professionals are allowed to use.

While this is not legal advice, let’s start with what usually fits most private practices in most states: LLC.

LLC  (Limited Liability Corporation)

Since LLCs are relatively new compared to other forms of business entities, you should read up on your state’s regulations concerning them. Why are LLCs getting popular (and rightly so in most cases)?

LLC stands for Limited Liability Company with the idea of being a vehicle to provide liability protection for the business owner when compared to a sole proprietorship and allowing more flexibility and less burden when compared to a corporation. In most states, taxes are passed through to the individual members of the LLC. This means that unlike corporations, the business entity itself does not pay corporate taxes, rather it’s profit or loss is passed through to the individual business owners. LLCs can have multiple members/owners unlike a sole proprietor, it’s own employer identification number (EIN), it’s own assets and it’s own liabilities separate from the individual business owners or members. The members of an LLC are akin to the shareholders of a corporation and can either be involved in the day to day management or can choose to have managers to run the business entity.

In short, you get a hybrid that tries to combine the benefits of a sole proprietorship with the benefits of a corporation. The liability risk that comes with a sole proprietorship is reduced and the regulatory and tax burdens of a corporation are minimized.

This is why LLCs are considered the preferred method and are growing in popularity. However, some states don’t allow licensed professionals like therapists, counselors, or doctors to establish LLCs.

You should consult with an attorney and a CPA to determine which type of business will best meet your needs.

PLLC  or PC (Professional Limited Liability Corporation) 

PCs and PLLCs are entities of choice for many professions that require state licensing such as accounting, law, healthcare, and architecture. Some states also do not allow professionals whose occupation requires a license to form LLCs. In this case, your closest option will be PCs or PLLCs. State laws vary, but PCs and PLLCs usually require the following:

• All owners in the practice are generally required to be licensed in the same profession.
• To get state approval, you must show proof of licensing in your profession.
• There may be limits to your choice of name due to industry-specific regulations e.g. some states may require entity-specific endings for your company name (“PC” for a Professional Corporation and “PLLC” for a Professional Limited Liability Company, for example).

Forming a Professional Corporation or Professional Limited Liability Company does not free you from personal liability for malpractice or other suits brought against you. Hence, it is important to continue to carry malpractice insurance. However, this entity type does protect you from the malpractice of other owners within the company. Be aware, too, that not all states recognize the PLLC entity.

In addition, PCs and PLLCs are taxed differently. PCs are generally taxed like a C-Corporation, with the PC paying taxes at the corporate rate, which can lead to double taxation. PLLCs, on the other hand, are taxed like LLCs, which generally have pass-through taxation of the members. Consult with a tax advisor before forming either a PC or PLLC to determine the best tax treatment for your company.

Finally, along with approval from the Secretary of State, you may need approval of your formation documents from your state professional licensing body.

Some states don’t recognize PLLCs, so be sure to check.

Sole Proprietorships

A sole proprietorship is the easiest and cheapest business entity to establish for your practice. However, it comes with certain downsides. The biggest downside is, legally, you and your business are essentially one and the same. All financial, legal, and other risks faced by the business extend to you personally. And that includes your personal belongings such as your investments, home, and car.

You are also subject to self-employment tax. Sole proprietorships are generally not recommended for private counseling practices that expect to grow and thrive as a real business.

Partnerships

Partnerships, for the most part, have the same risk exposure as Sole Proprietorships. A partnership begins when two people enter into a business arrangement with one another. While partnerships have some of the operational and tax advantages of a limited liability company, it lacks the protection. A partnership business and the partners of the company are one and the same.

Corporations

There are two types of corporations that your private practice can fall into a C-corp or an S-corp. Each has its own regulations and are treated differently for tax purposes. A corporation is regarded as its own entity, with its own identification number (EIN) and pays its own taxes. Corporations are owned by shareholders and require a board of directors. They are also subjected to other requirements such as annual reports, business filings, etc.

An S-Corp, much like an LLC, allows a pass-through of profit and losses to individual shareholders with certain restrictions.

Non-profits

A non-profit, sometimes called a not-for-profit organization, is a business entity that does not distribute profits to its owners but exists to advocate for a cause or to provide some form of public service or benefit.

With a non-profit status, your business is eligible to apply for grants and charitable contributions which can be deducted on the taxes of those that contribute to your organization. This is one of the primary benefits of a non-profit entity. While non-profits have generous tax privileges and provide liability protection, they are complex from a regulatory and tax standpoint and you should consult with a non-profit tax and legal expert.

Starting a private practice is confusing, but your EHR doesn’t have to be

One of the first things you’ll need to get your practice up and running efficiently is an EHR that has your back. Save time from the get-go and try a 21-day free trial of Ensora Mental Health. We’ll make sure you spend the majority of your time building your client base instead of figuring out your new software.