Business Formation for Therapy Practices

GoodTherapy | Business Formation for Therapy Practices

by Connor D. Jackson, JD

Connor D. Jackson is a healthcare attorney based in Chicago who serves independent practices in several states. Visit his firm’s website here.

Business Formation for Therapy Practices

One of the first questions many prospective independent practice owners ask is, “Do I need to establish an LLC or a PLLC before I open?” They also want to know, “Is this something I can do myself? Should I have my trusty accountant set it up for me?”  For a psychotherapist — or any licensed healthcare provider — professional regulations bring even more considerations and constraints.

Let’s discuss those considerations and constraints and talk about how to move forward with a new practice.

Corporate Entities

The first concept to understand is that of a business “entity.”  It’s possible to open a business that is, legally speaking, indistinguishable from you, the owner.  Any expenses or revenues flow to or from you. The business’s debts become your debts. Someone could sue you for the actions you carry out for your practice, such as entering into a contract or taking out a loan. Such a lawsuit would put your personal assets at risk. Legally, this form is called a sole proprietorship. It’s the default structure for any business that doesn’t establish a corporate entity with the state. 

But what if you want to limit your personal liability for the actions or debts of the practice? In this case, creating a corporate entity allows you to separate yourself from the practice and become a “member” or “shareholder.”  Corporate entities give members and shareholders limited liability, which protects personal assets from legal claims against the business in many situations.

When creating a corporate entity, you have the option of two primary structures: a limited liability company (LLC) or a corporation. Corporations are incorporated, and limited liability companies are organized.

Licensed healthcare providers need to be aware of two subtypes of these structures: professional limited liability companies (PLLCs) and professional corporations (PCs). Some states, such as Wisconsin, call professional corporations service corporations (SCs). These companies are organized or incorporated, respectively, to deliver professional services. However, the definition of professional services varies by state. Whether a state mandates that a therapy practice create a PLLC instead of an LLC or a professional corporation instead of a corporation requires a careful reading of that state’s laws and regulations.

Fees and Formalities

For many practice owners, finding the proper structure requires balancing the end goal (liability protections) and the costs in money and effort. The monetary fees, for example, differ for the entity types. But individual states’ fee schedules vary widely, too! An established California LLC, for instance, will pay an annual tax of $800. In contrast, an Illinois LLC will pay an annual report fee of only $75.

Forming a corporate entity also requires creating corporate governance documents, which are legal documents that determine how your entity functions. For example, an LLC should have an operating agreement and a corporation should have bylaws. These documents discuss liability, payment of profits to members or shareholders, and many other factors that have legal consequences and impact your legal rights and obligations. 

Further, to claim the protection of limited liability, you need to maintain corporate formalities. Corporate formalities might include

  • issuing stock 
  • filing annual reporting to the state 
  • segmenting funds of the entity from your personal funds
  • consistently entering into agreements in the name of the entity (not your personal capacity)
  • recording all the entity’s activity in signed resolutions. 

Typically, small or solo psychotherapy practices find professional limited liability companies more appropriate than corporations because they require fewer corporate formalities. Additionally, the filing fees can be lower than those of corporations. 

An attorney can help you work through the options and understand the best structure for you. You might also launch a practice as a sole proprietorship (sacrificing the liability protections of a corporate entity) and create your entity later, once your practice grows. Just keep in mind that any contracts you enter into as a sole proprietor will not automatically transfer to your corporate entity down the line.

Corporate Entities and Multi-State Practice

When considering the proper corporate structure for a practice, It’s important to remember the rationale for having corporate structures at all. First, the practice owner seeks to separate their personhood from their work. Also, they notify consumers of the entity with which they are doing business or seeking healthcare services. These reasons illustrate how your profession intertwines with your corporate structure.

To operate in multiple states — in person or virtually — you need licenses issued by the appropriate state agencies before you can treat clients in those states. When it comes to telehealth, the client’s location is typically where the care takes place. For example, say that you’re based in Texas and have a Texas license. However, you work with clients who live in Michigan. Thus, you ought to have a Michigan license as well. Failing to do so could invite professional disciplinary action in Michigan as well as Texas. Such activity could also invite claims of misrepresentation or even fraud (depending on your intent). States aim to protect consumers from harmful acts. They do so, in part, by requiring professionals to put consumers on notice of their professional status in its applicable corporate structure.  

Requirements Vary Widely By State

From an organization or incorporation standpoint, requirements for delivering services across state lines vary by state. So if you’re operating a multi-state practice, you need to understand the laws in each state in which you deliver care. 

For instance, in Michigan, a clinical social worker may choose either an LLC or PLLC structure. Meanwhile, Illinois requires licensed clinical social workers to deliver services through PLLCs. Thus, a dual-licensed provider in these states who wanted to enjoy limited liability protection might need two entities to render care in both locales. States may also have specific waivers for delivering care across state lines (e.g., PSYPACT for practicing psychologists). However, these exceptions are few, in our experience. 

Some states, such as New York, require proof of your licensure from the State Department of Education before they will accept your professional entity. In other states, an assertion of the professional purpose of the company suffices. (But if you were to practice a profession outside your scope, this would remain grounds for discipline.)

State laws also vary on which professions can co-operate a single professional entity. For example, what if a licensed clinical social worker wanted to organize a multi-member LLC in New York with a licensed professional counselor?  They would need to research whether the state allows that co-ownership.

And when researching the requirements, keep in mind that each state may not have identical licensure. For example, Texas likely defines a “licensed mental health counselor” differently from New York or California.

Corporate Entity vs. Tax Designation

Many new business owners conflate corporate entity types — the business formation — and tax designations.  You may have heard your accountant discuss the benefits of a particular tax structure, such as an S-corporation or a C-corporation. The tax structure determines how a corporate entity will be taxed. 

Corporate entities are assigned a predetermined taxation method. For instance, a single-member LLC is automatically taxed as a sole proprietorship. As a result, the profits and losses of the LLC are taxed the same way as personal income and losses. However, corporate entities can elect to be taxed in a way that is different from the default taxation method. For example, an LLC that meets specific requirements can elect taxation as an S-Corporation.

Accountants are experts at finding beneficial tax strategies. Meanwhile, attorneys focus on forming corporate entities that meet the rigorous requirements of the state. Healthcare’s strict regulatory environment magnifies the complexity of creating those corporate entities. Thus, a good accountant is a treasure and should serve as a key member of your team of professional advisors. However, accountants seldom have the background and experience to establish a proper healthcare business formation with robust corporate governance documents.

How to Get Started

A healthcare attorney can provide the best guidance on these matters and prepare your business formation with all necessary supporting documents. But perhaps you’re not ready to hire a lawyer or don’t yet have the resources. In this case, contacting the state agency responsible for business entities is a good start. They can direct you to information and answer your basic questions to help you get moving.

This article is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between Jackson LLP Healthcare Attorneys and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.

© Copyright 2021 GoodTherapy.org. All rights reserved. Permission to publish granted by Connor D. Jackson, JD

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