Choosing a business entity for your therapy private practice.

Sep 11, 2024 by Bimba Shrestha

Starting a therapy private practice is a major step in your professional journey, and one of the most important decisions you’ll make early on is choosing the right business structure. Your choice will impact everything from taxes to liability protection, so it's essential to make an informed decision.

In this post, we’ll cover the most common business entity types for therapists, along with their pros and cons. By the end, you’ll have a clearer idea of which option might work best for your practice.

Sole Proprietorship

A sole proprietorship is the easiest and most straightforward way to start your private practice. You don’t need to file any formal paperwork — it’s the default business type when you start seeing clients without setting up a formal business.

Pros:

  • No paperwork: There’s nothing you need to do to establish yourself as a sole proprietor, so you can start seeing clients right away.
  • Simple taxes: Your business income is reported on your personal tax return, making tax filing relatively simple.

Cons:

  • No liability protection: There’s no legal separation between you and your business, meaning your personal assets (like your home or savings) could be at risk if you’re sued.
  • Higher taxes: Sole proprietors often pay more in self-employment taxes.
  • Insurance limitations: Some insurance providers may not credential sole proprietorships, preferring more formal business structures.

If you're starting part-time or just testing the waters, a sole proprietorship can be a great way to begin. You can always change your business structure later.

LLC and PLLC

A Limited Liability Company (LLC) is a popular choice for small business owners, including therapists. It offers liability protection, meaning your personal assets are separate from your business assets.

Pros:

  • Personal asset protection: If your practice is sued, only the business assets are at risk, not your personal ones.
  • Recognized by insurance companies: Many insurance providers prefer to credential LLCs over sole proprietors.

Cons:

  • Filing paperwork: You’ll need to file paperwork to create an LLC, and there’s annual renewal paperwork too.
  • Varied costs: The cost of forming an LLC varies by state — some are affordable, while others can be more expensive.

It’s important to note that some states require Professional LLCs (PLLCs) for licensed professionals like therapists, so check your state’s regulations before moving forward.

C-Corporation

A C-Corporation (C-Corp) provides the strongest liability protection, but it’s typically more complex and involves more paperwork than an LLC or sole proprietorship. While it's less common for solo practices, it may be an option if you're planning to grow significantly.

Pros:

  • Strong liability protection: Your personal assets are fully protected.
  • Recognition by insurance providers: Corporations are widely accepted by insurance companies.

Cons:

  • Double taxation: A C-Corp can face double taxation, where both the business and the owner (as a shareholder) are taxed separately.
  • More paperwork: You’ll need corporate bylaws and a board of directors, though you can be the sole board member.

A C-Corp might be more than what’s needed for a solo practice, but if you’re thinking about growing into a larger practice, it could be worth considering.

S-Corporation

An S-Corporation (S-Corp) isn’t actually a business entity but a tax filing status. Many practices start as an LLC or corporation and later file for S-Corp status once they begin making more money.

Pros:

  • Lower self-employment taxes: You’ll likely pay less in self-employment taxes, as your income is split between a regular salary and distributions.

Cons:

  • More paperwork: You’ll need to file additional paperwork to elect S-Corp status.
  • More financial tracking: You’ll need to manage both salary and distribution income, which adds complexity.

Most private practices won’t start off as S-Corps, but this can be a smart option as your income grows.

Partnership

In a partnership, two or more people share ownership of the business, splitting responsibilities, profits, and taxes based on their agreement.

Pros:

  • Shared responsibility: You have a partner to help you manage the practice, which can make things less overwhelming in the beginning.

Cons:

  • Risky dynamics: Many business partnerships fail due to disagreements or mismanagement. Statistics show that up to 70% of partnerships don’t last.
  • Liability for your partner: You’re responsible not only for your own debts but also for any debts incurred by your partner.

If you’re thinking about a partnership, make sure to have a clear legal agreement in place to protect both of you in case things don’t go as planned.

Final Thoughts

Choosing the right business structure for your therapy practice is a significant decision, but it’s one that can evolve over time. Many therapists start off as sole proprietors and move to an LLC or other structure as their practice grows.

Before making your final decision, make sure to research your state’s requirements, and consider consulting a lawyer or accountant to guide you through the process. The right structure will protect you and your business as you begin this exciting journey.