Professional Corporation vs. LLC for Therapists in California

Why the LLC usually doesn’t work for therapy in California

Corporations Code 17701.04 allows an LLC to provide licensed services only if the relevant licensing law authorizes an LLC to hold that license, and subsection (e) says the LLC act doesn’t permit an LLC to render professional services as defined in the Professional Corporation Act. Therapy licensed by the BBS falls on the professional side. So an LLC that provides psychotherapy in California is a problem, even though online formation services may happily file one for you.

Some therapists use an LLC for a separate, nonclinical business (for example, a consulting or education business, or owning office space). That can be legitimate, but it should not provide clinical services. Ask your attorney.

Option 1: Sole proprietorship

• What it is: You, doing business under your own name (or a registered business name).
• Setup: Minimal. No Secretary of State filing for the entity itself. You’ll still need any local business license and an NPI.
• Taxes: Income goes on your personal return (Schedule C) with self-employment tax.
• Liability: No separate entity. Malpractice insurance is your main protection for professional claims, and a corporation doesn’t shield you from your own malpractice anyway.
• Good fit for: Side practices and new solo practices that want to start simple.

Option 2: Professional corporation

• What it is: A corporation organized under the Moscone-Knox Professional Corporation Act to provide professional services, such as a marriage and family therapy corporation or a licensed clinical social worker corporation.
• Setup: Articles of Incorporation filed with the California Secretary of State, bylaws, a board and officers, shares issued only to eligible licensed persons, and an annual Statement of Information.
• Ownership: Corporations Code 13401.5 allows certain other licensed professionals to own shares in a designated professional corporation, but together they can’t exceed 49% of shares or outnumber the shareholders licensed in the corporation’s profession. BBS regulations (16 CCR 1850.7) say shares can be issued or transferred only to the corporation or appropriately licensed persons.
• Taxes: Corporations file their own returns and pay California’s minimum franchise tax; many small practices elect S-corporation tax treatment. That’s a CPA conversation.
• Good fit for: Practices with steady income, owners who want payroll and an S-corp election, and group practices hiring clinicians.

Side by side

Timing matters for insurance

Your entity determines the tax ID and often the NPI that payers contract with. Switching later usually means updating or re-contracting with every payer and Medi-Cal. If you plan to grow, decide before you start credentialing and PAVE enrollment.

Questions to bring to your attorney and CPA

1. Given my income projection, is a sole proprietorship enough for now?
2. If I form a professional corporation, which type, and who can own shares?
3. Should the corporation elect S-corp treatment, and what reasonable salary would I pay myself?
4. What annual filings and taxes will I owe, and when?
5. How do I set up payroll correctly?
6. If I have a nonclinical side business, should it be separate?

What forming a professional corporation usually involves

1. Choose the corporation type that matches your license and confirm the name rules.
2. File Articles of Incorporation with the Secretary of State.
3. Adopt bylaws, appoint directors and officers, and issue shares only to eligible licensed persons.
4. Get an EIN and a Type 2 NPI for the corporation.
5. Open a business bank account in the corporation’s name.
6. Set up payroll if you’ll pay yourself a salary.
7. File the Statement of Information and tax returns on time every year.
8. Update payers, Medi-Cal, CAQH, and your malpractice carrier with the new entity.

Most people do this with an attorney and CPA. The filing itself isn’t the hard part; the ongoing compliance is.

Don’t let the entity decision stall your launch

If you’re not sure yet, many therapists start as a sole proprietor and form a professional corporation later. Just know that switching means updating every payer contract, so do it before you add many payers if you can.