Choose The Best Business Structure for Your Therapy Practice

Starting your own therapy practice is an exciting venture, full of potential to make a difference in the lives of others. But before you can begin working with clients, there are important decisions to make regarding your practice’s legal and financial setup.

One of the most crucial choices you’ll face is selecting the best business structure. In this guide, we’ll explore the four most common business structures for therapists: Sole Proprietorship, LLC, PLLC, and S-Corp. We’ll break down the key differences and help you determine which one is best suited to your needs.

Helpful CPA illustration showing which business structure is best for your therapy practice

Sole Proprietorship

A Sole Proprietorship is the simplest and most common type of business structure for those just starting out. As a Sole Proprietor, you are the sole owner of your therapy practice, and there is no legal distinction between you and the business. This means you have full control over decision-making and do not need to register as a separate legal entity, making it easy and inexpensive to set up.

Pros:
Low Costs: Some states, like Florida, require filing a fictitious name and may impose certain fees, but overall costs remain minimal.
Simple Setup: No formal registration with the state is required (except for licensing and local permits).
Complete Control: You make all the decisions about how the practice operates.

Cons:
Unlimited Liability: The biggest downside is that you are personally liable for all debts and legal obligations. Additionally, therapists providing professional services are potentially liable for personal liability lawsuits regardless of business structure. If someone sues your practice, your personal assets (e.g., home, car, savings) are at risk.
Limited Growth Potential: Since there’s no legal separation between you and your practice, it can be harder to secure financing or bring in partners.

Best For:
Therapists just starting out who want to test the waters with minimal financial risk or commitment.
Low-risk practices that do not require substantial upfront investment or significant liability protection.

Helpful CPA illustrating the pros and cons of sole proprietorship as a business structure for your therapy practice

Limited Liability Company (LLC)

An LLC, or Limited Liability Company, offers a step up from a Sole Proprietorship in terms of liability protection. However, it’s important to note that some states, like California, do not allow therapists to form an LLC or PLLC. In such cases, therapists must consider alternative structures.

Pros:
Limited Liability: Your personal assets are protected from debts and lawsuits related to your practice.
Flexible Taxation: By default, an LLC is treated as a pass-through entity for tax purposes, but it can also elect to be taxed as an S-Corp, which may reduce self-employment taxes.
Simplicity: LLCs are easier to manage than corporations, with fewer compliance requirements and less paperwork.

Cons:
State Fees and Requirements: Setting up an LLC involves registration with the state, and there may be annual fees and paperwork to maintain compliance.
Self-Employment Taxes: As an LLC member, you may be subject to self-employment taxes on the entire net income of the practice, which can sometimes be higher compared to other structures.

Best For:
Therapists seeking liability protection without the complexity of a corporation.
Practices that want flexible taxation options as they grow.

Helpful CPA illustrating the pros and cons of LLC as a business structure for your therapy practice

Professional Limited Liability Company (PLLC)

A PLLC is similar to an LLC but is specifically designed for licensed professionals, including therapists. However, it’s important to note that some states, like California, do not allow therapists to form a PLLC, requiring them to consider other business structures.

Pros:
Liability Protection: Like an LLC, a PLLC protects your personal assets from business-related liabilities.
Professional Compliance: It ensures that your practice complies with state regulations for licensed professionals, which can be an important consideration for therapists.

Cons:
State-Specific Requirements: The rules for PLLCs vary by state, and setting one up can involve more paperwork and fees than a standard LLC.
Limited to Licensed Professionals: Only licensed therapists can be members, which may limit your ability to bring in partners or investors who are not licensed.

Best For:
Therapists practicing in states that require licensed professionals to form a PLLC.
Practices needing liability protection while maintaining compliance with professional regulations.

Helpful CPA illustrating the pros and cons of PLLC as a business structure for your therapy practice

S Corporation (S-Corp)

An S-Corp is not actually a type of business entity, but rather a tax designation that can be elected by LLCs or corporations. Many therapists choose to have their LLC taxed as an S-Corp to take advantage of potential tax savings. However, this choice typically only makes sense once certain income thresholds are met, as the administrative costs can outweigh the benefits at lower income levels. Helpful CPA can work with you to review your practice’s financials and help determine when it’s the right time to elect S-Corp taxation. An S-Corp allows owners to take a reasonable salary from the business, with the remaining profits distributed as owner distributions, which are not subject to self-employment tax.

Pros:
Tax Savings: By taking a reasonable salary and receiving the rest of your income as distributions, you can potentially save on self-employment taxes.
Liability Protection: Like an LLC, an S-Corp provides liability protection for your personal assets.
Credibility: Operating as an S-Corp can lend your practice more credibility with clients and financial institutions.

Cons:
Complexity: S-Corps have more stringent IRS requirements, including payroll, regular salary payments, and additional paperwork. This can mean higher administrative costs.
Reasonable Compensation Requirement: The IRS requires that S-Corp owners take a “reasonable salary,” which may reduce the amount of income that can be taken as distributions.

Best For:
Established therapy practices that generate consistent revenue and are looking for tax savings.
Therapists who want to reduce self-employment taxes while maintaining liability protection.

Helpful CPA illustrating the pros and cons of S-Corp as a business structure for your therapy practice

How to Choose the Best Structure for Your Therapy Practice

Selecting the best business structure for your therapy practice comes down to understanding your current needs and long-term goals. Here are some factors to consider when making your decision:

Liability Protection: If you want to protect your personal assets, consider an LLC, PLLC, or S-Corp. These structures provide a separation between your personal and business liabilities.
Administrative Complexity: Sole Proprietorships are the easiest to set up and manage, while LLCs and S-Corps involve more paperwork and compliance requirements. Consider how much time and resources you can dedicate to administrative tasks.
Tax Implications: Sole Proprietorships and LLCs offer pass-through taxation, which means business profits are reported on your personal tax return. If you want to reduce self-employment taxes, electing S-Corp taxation for your LLC might be a good option.
Growth Plans: If you plan to expand your practice, bring on partners, or hire employees, an LLC or S-Corp might offer the flexibility and structure you need for growth.
State Requirements: Laws regarding business structures vary by state. For example, some states like California do not allow therapists to form LLCs or PLLCs, requiring them to consider other structures. Make sure to check your state’s requirements or consult with a professional.

Helpful CPA illustration showing How to Choose the Best Business Structure for Your Therapy Practice

Helpful CPA Can Guide You Every Step of the Way

Choosing the best business structure is an important step in building a successful therapy practice, but it’s not one you have to take alone. At Helpful CPA, we specialize in helping therapists navigate the complexities of starting and growing their practices. From selecting the right legal structure to bookkeeping, taxes, managing cash flow, and ongoing financial support, we’re here to make the financial side of your practice stress-free.

Ready to Take the Next Step?

If you’re ready to set up your therapy practice and need help choosing the best business structure, get in touch with Helpful CPA today. Our specialized accounting services are designed specifically for therapy professionals, ensuring you get the tailored support you need to thrive.