By Julia W.
When starting a private practice, not many therapists think that they are starting a business. And starting a business means that you as a counselor will have business responsibilities as we discussed in our ‘Business skills in Private Practice‘ article. But when they finally do realize this, the most common question asked is whether to register as a sole proprietorship or an LLC. In this article, we give you a breakdown of what each of these entails.
Remember: This article is for informational purposes only and you should consider consulting a lawyer to give you better guidance.
Sole proprietorship is the simplest business form. It is the easiest to start as it requires little paperwork. As a sole proprietor, you and the business are “one person,” meaning that the government recognizes you and your practice as a single entity.
This in itself has its benefits and disadvantages. For one thing, you are not required to file your personal and business returns separately. You only need to file your personal returns and a Schedule C, which will cover your business. The downside to this is if you find yourself needing to declare personal bankruptcy, it will affect your business and vice versa.
A sole proprietorship is easy to establish. You only need to register a trade name, get a business permit, and you are good to go. This ease is the reason why most small business owners choose to start with a sole proprietorship.
While the benefits of a sole proprietorship are attractive, the downsides could be heavy. For example if you get sued by a client because of something that happened at your practice, you are liable to answer for the practice itself, unlike if your were practicing under an LLC. This can be a major downside, since if required to pay, you will have to pay from your personal finances since you are the same entity. If your practice is on the wrong side of the law, you are solely responsible.
LLC (Limited Liability Company)
A Limited Liability Company is a combination between a sole proprietorship and a corporation. This means that you get a bit of both worlds. An LLC means that you and your private practice are two separate entities. Although separate entities, profits, losses, and taxes are all the members’ (owners) responsibilities like they are in a sole proprietorship. This is unlike in a corporation, where all of the above are entirely separate from the owner(s). This means that if you owe creditors money, they can come after you and require you to pay from your own resources.
Even though an LLC is treated like a sole proprietorship financially and for tax purposes, your practice is treated as an independent entity when it comes to matters of litigation. In case an accident or any incident that could trigger litigation happens at your establishment, you as a therapist are safe, as the incident happened at your practice which is an independent entity. There’s a loophole to this though: Someone can decide to sue both you and your practice, which is legally allowed.
It’s also important to note that some states (like California) do not recognize LLC as a form of business for therapists. This means that therapists cannot register their private practice as an LLC in California. In these cases, it is worth looking into a PLCC (Professional Limited Liability Company). This is where professional advice can help you make the best decision of how best to proceed.
Registering an LLC is somewhat more difficult than starting a sole proprietorship but easier than starting a corporation. The requirements may differ from state to state so it is important to check the requirements in your state before starting the process. An advantage of an LLC is that you are allowed to have more than one partner. This means that you could team up with other therapists to share costs and still get taxed separately.
As for tax benefits, there are different opinions when it comes to this subject. Some people say that there are tax write-offs when registered as an LLC, while others who say there are little-to-no benefits. To get a detailed picture, consult an accountant and lawyer who could give you accurate information tailored to you as an individual.
Given this information, you can see that both business forms are worth considering. Some therapists have started their practice as a sole proprietorship then changed to an LLC when their business grew. Some therapists also argue that registering as an LLC makes your practice appear more credible.
If you have already started your practice, how have you registered it? And is it working for you? We’d like to hear from you and we’re sure therapists who are in the process of starting their own practice would be interested too!