Disclaimer: This is not tax or legal advice. This is for educational purposes only. Your individual situation may differ. Please consult an attorney or CPA to review what option is best for you and your practice.
As a therapist, making the decision to start your private practice can be incredibly overwhelming. Many feelings, doubts, questions, or thoughts may come up. How do I start? What do I need to know? Can I do this? Unfortunately, graduate school doesn’t teach us how to start or run a business. If you’re having questions about how to get started, you’ve come to the right place.
One of the first important decisions therapists can make is choosing the right type of business entity to form. Your business entity will determine the structure of your business, limited liability protections, and tax implications. A business entity is a legal entity and one formed by one or more individuals to conduct business.
One of the main benefits of forming a business entity is creating a legal distinction and protection between yourself and your business. This means that should you be sued, you are not personally liable. For example, if you lease an office and someone trips and falls in your office, the business would be liable and your personal assets would be protected such as your home, car, retirement benefits, etc.
When selecting a business entity, it is important to consider the type of liability your business may expose you to and weigh the risks and protections to your personal assets. It is important to understand business entities do not protect you from malpractice liability as professional liability are the actions you take as a licensed healthcare professional, which is separate from your role as a business owner, and you should consider obtaining malpractice insurance coverage for your practice.
There are four main forms of entities. This includes sole proprietorships, general partnerships, limited liability companies, and corporations. Now let’s break it down!
Launching a private practice without forming a limited liability company or corporation would be automatically considered a sole prop. Technically, a sole prop is not considered a legal entity and it refers to a person who operates a business and is responsible for its debts. Though there is no formal registration, therapists should check with their city or county government to obtain a business license, permits, zone clearances, and instructions on filing a fictitious business name (DBA).
1. It’s easy to set up. A sole prop allows therapists to avoid many of the costs, formalities, and reporting requirements associated with other forms of business
2. You may be able to deduct business losses on your personal tax return.
1. Therapists hold personal liability for any debts and actions of the business as there is no legal separation between owner and business. This includes if a sole proprietor decides to take on employees, they would be held liable for injuries caused by the negligence of the employees, and also required to file payroll and other tax returns, obtain workers’ compensation insurance, etc.
2. Therapists are responsible for withholding and paying all income taxes including self-employment taxes.
A partnership is when two or more therapists decide to operate as co-owners of a practice. In a general partnership, each partner holds joint authority meaning they can bind the business to a contract or business deal. Each partner holds joint liability meaning they can be sued for business debts. All partners share profits and losses. A partnership is considered a “pass-through entity” meaning the partnership does not pay income taxes on profits instead business profits “pass-through” to the partners who report profits and losses on their individual tax returns. Therapists should check with their city or county government to obtain a business license, permits, zone clearances, and instructions on filing a DBA.
1. Similar to sole props, it’s easy to establish. There are no corporate formalities or paperwork.
2. Business losses are divided between partners.
3. Partners are able to deduct business losses on their personal tax returns.
4. Partners can enter into a written partnership agreement specifying details of ownership and share of profits and duties and obligations of the partners to avoid disputes among owners.
1. Partners are personally liable for business debts and obligations and, in some states, may be liable for the negligent actions or behaviors of their partners too.
2. If there is no written agreement, business disputes may negatively affect business growth.
3. If one partner wants to end the partnership, the business dissolves unless a buyout agreement is included in the partnership agreement.
An LLC is a business entity that can have one or more members and provides the limited liability protection of a corporation and also the “pass-through” taxation of a sole prop or partnership. Similar to a partnership, it may be beneficial to draft an agreement between members. Some states may require licensed professionals to conduct business through professional entities such as Professional Limited Liability Company (PLLC). Similar to LLC, a PLLC creates a legal distinction between individual and business. To form a PLLC, some state licensing boards may have to approve it. Once approved, the documents can be filed with your Secretary of State. In addition, please note some states (e.g. CA) do not allow professionals whose occupation requires a license to form an LLC. Please check with your Secretary of State’s office for more information.
1. Simple to form as it does not require corporate formalities and paperwork as a corporation does (e.g. boards, meetings, admin duties).
2. Limits personal liability for debts or lawsuits against the company.
3. Profit and losses of the company “pass-through” to member’s personal tax return and are taxed at the owner’s personal tax rates, unlike a corporation where the company pays its share of taxes and owners/shareholders also pay their share of earnings.
1. The cost to establish an LLC is higher than a sole prop or partnership. There are filing fees to form the LLC and there are state annual filing fees and taxes too.
2. If establishing a PLLC, there are extra steps required, which are delineated above.
A corporation is a distinct legal entity offering limited liability protection. The owners of the corporation are shareholders who obtain an interest in the business by purchasing shares of stock and must elect a board of directors. In comparison to other business entities, there are more requirements, regulations, and tax laws to consider. As always, specific requirements vary by state. Additionally, an S Corporation (S Corp) is not a business entity but a tax election, which LLCs and corporations can opt into. This requires additional paperwork and must meet several requirements such as being an individual, having 100 or fewer owners/shareholders, have only one class of stock, among other requirements. A key benefit to opting into an S-Corp is avoiding double taxation; owners would not pay corporate taxes twice, first, as the corporation, then second, as the income “passes through” to the shareholders.
1. Personal assets are protected.
2. Eligible for more tax deductions than other entities.
3. Owners may pay lower employment taxes.
1. Expensive to form.
2. Owners unable to deduct business losses on personal tax returns.
3. Requires corporate formalities like board and shareholder meetings, keeping meeting minutes, creating bylaws, etc.
4. Therapists would be subject to double taxation (if not an S Corp).
In short, sole proprietorships and general partnerships do not offer limited liability protections, are taxed at a personal tax rate, and formation requirements are low. LLCs offer limited liability protection, flexibility in choosing to be taxed as a partnership or as a corporation, and formation requirements are higher than sole props and general partnerships. Corporations offer limited liability protections, must pay corporate taxes, and have higher formation requirements. Sole props or general partnerships are deemed a great starting point for therapists starting their first private practice if the therapist deems there is a low risk of personal liability. As the practice and business grows, it may be beneficial to register as an LLC, PLLC, or corporation for limited liability protection and tax benefits. To evaluate risks to personal assets and receive specific help with your particular situation, consult an attorney and/or CPA.
Ease was founded to empower clinician entrepreneurs to regain their practice independence. Our Financial Practice Operations Platform or POP was designed to make starting private practices as easy as possible, turning a complicated process that traditionally took months or years into minutes. Now clinician entrepreneurs can easily form their business entities with Ease Start. Ease Start (previously DocSpace Launch) is the first and only business entity formation service that automates fully compliant private practice formation for licensed clinician entrepreneurs in all 50 states.
Join the Ease Community! Joining the Ease community comes with many perks, such as learning more about which business entity formation is best suited for your practice, how to file your clinical license, and how to avoid costly mistakes when filing for your private practice. But that’s not all, Ease can also help with learning how to set proper pricing structure, how to get enrolled and credentialed with insurance, develop a financial framework to stay on top of your accounting and taxes, learn about marketing and advertising, and learn how to set up an FDIC checking and savings account with embedded payments all in one place.
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