What entity type should I choose for my private practice?
So you Googled “how to start a private practice”
And the first thing that probably came up was something about choosing entity type.
you might be racking your brain…which class covered that in grad school? Oh wait…they didn’t. Choosing between an LLC (or PLLC) and a sole proprietorship might feel like deciphering hieroglyphics.
I gotchu.
Save this post, because I am about to break down the pros and cons of an LLC versus a sole proprietorship (and throwing in some PLLC fun for those special states). Let’s make this decision a breeze!
What is an LLC?
A limited liability company, or LLC, is a structure that protects its owner(s) from being personally liable for repayment of the company’s debts or liabilities. This means that if you own an LLC, someone cannot come after your personal assets such as your house or car. An LLC separates the individual from the company. If someone were to sue your company, they can only pursue the assets owned by the business.
Pros:
Separate legal entity
Added credibility/professionalism
Liability protection
Can add multiple owners (if you decide to open a group)
If sole member LLC, you file on your 1040
Possibility to make different tax elections for benefits (i.e. S Corp election)
Cons:
Annual filing fee
Possible name restrictions
What the heck is a PLLC?
In some states, there is a requirement for professional services (i.e. psychotherapists/counselors) to have “PLLC” or “Professional Limited Liability Company” in their name. This is because this certain services are more regulated. But otherwise, they are about the same as LLCs.
Make sure to check your state requirements if your license type requires a PLLC.
Also, please note some states, like CA, do not allow therapists to form LLCs.
What is a sole proprietorship?
A sole proprietorship is a type of enterprise owned by one person. There is no legal distinction between the person and the business. This business is not registered and is not legally identified.
If you decide to go the sole proprietorship route and want to use your name with your license as a business name, i.e. John Smith, LCSW, you may need to file with your local town for the DBA name. These often require a small fee and a notary.
Pros:
No start-up cost
Easy to dissolve
File on your 1040
Cons:
No liability protection
Not legally recognized
Rigid ownership rules (cannot add another member unless you become a partnership)
Ultimately, the decision is based on your comfortability with risk, but also your tax situation. A sole-member LLC can elect to be taxed as an S-Corp, which can offer tax benefits at certain income levels.
The best (but most annoying) answer is to consult with a CPA.
Either way, you can get an Employer Identification Number (EIN) from the IRS for FREE if you want some extra protection for your social security number. DO NOT pay for an EIN. It is free here.
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