One of the topics that comes up frequently in my coaching sessions is if a therapist "should" incorporate their practice. Before we get started let's look at three important reminders:
1. Always check with your state licensing board and/or your professional organization on what the state laws mandate regarding a licensed therapist incorporating a private practice. While the information provided here is offered as a support to licensed therapists within the state of California, it will likely provide helpful tips for out of California clinicians as well.
Please do not rely on social media posts, a well meaning colleague, a blog, or even a coach for that matter (no matter how experienced) to advise you on this important step. Any coach who would not advise you to seek the consultation of a legal or financial expert is not operating within their scope of practice, unless of course, they are an expert on this topic and this is one of their professional roles as well.
2. It is advisable to seek the support of an attorney or CPA who specializes in helping small businesses owners with incorporation. It is always important to do your homework before moving forward in incorporation.
3. The information I have outlined here is offered as a general support, and is not given as legal advise as I am not an attorney, a CPA, or an expert in this area. If you do not understand this cautionary note, then please exit this blog post now.
What is a "professional corporation"?
Minimally, California law defines a professional corporation as follows:
1. A corporation organized under the General Corporation Law that engages in rendering "professional services."
2. The term "professional services" is defined as any type of professional service that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act.
Thus, a licensed marriage and family therapist, a licensed clinical social worker, and a licensed psychologist may set up their private practices as California professional corporations.
There is more to this law, but this gives you the "nutshell" information.
Why would a therapist incorporate their practice?
Most therapists incorporate their practices for three reasons:
1. To protect personal assets: If a person decides to file a lawsuit against you, there is some protection in having a corporation. It may also protect other employees, owners or officers. However, please remember that the protection from personal liability is against claims that are not related to professional services. A professional service would very likely include a therapy session.
2. For tax benefits: There are tax advantages in incorporating, however, because tax law is complex and sometimes changes, it is imperative that you discuss this with a CPA. The onus of responsibility falls upon the business owner to stay abreast of changes and how that impacts not only you as the business owner, but your employees as well.
3. As another form of protection: Should a disgruntled party decide to file a lawsuit (perhaps a creditor or some other individual or company) they may only look to the assets of the corporation for compensation (as long as the suit filed is outside of a professional service).
For example: If a particular entity, party, person, and/or company you are doing business with decides to file a law suit for a breach of contract, this party or person can only receive compensation if they win from the business assets.
IMPORTANT NOTE: Please understand that incorporating your practice will NOT protect you from a lawsuit when someone is citing harm or damage as a result of the professional services you offer. If a therapy client files a law suit against you alleging professional negligence, the professional corporation that you have set up will not cover or protect you from the claim of malpractice. You will be held personally liable if the person who has filed the lawsuit citing negligence in professional services wins the lawsuit. Make sure you have liability insurance in place, and understand the limitations of that coverage as well.
What would my title be within my corporation?
Though you have a title through your licensing board, (for example, Licensed Marriage and Family Therapist) California law requires that a professional corporation consist of directors and officers. This means that if you are the sole owner of your professional corporation, then you must also be the director, and serve as both the president and the treasurer of the corporation.
IMPORTANT NOTE: There are other specific laws that address employees, and/or owners. At the risk of being a broken record, I cannot stress enough how critically important it is to make sure you work with an attorney who specializes in this and/or a CPA who can guide you through this process before filing your articles of incorporation.
What are "Articles of Incorporation"?
OK, so I'll bet you are now wondering, "Mari, what are articles of incorporation?" Good question, I remember feeling confused by this term when I incorporated my practice a few years back.
- "Articles of Incorporation" are the forms that are filled out by you (or hopefully your attorney or CPA)
- These forms are then filed and used as "proof" to establish the existence of a corporation in the United States and Canada.
- Your Articles of Incorporation will be filed by your attorney or CPA with Secretary of State, or other company registrar.
IMPORTANT NOTE: Remember that for the purposes of this blog, I am outlining minimal information here. You can google more information within your state, call our licensing board, or professional organization, and you can discuss in detail with your CPA or attorney.
What do I name my professional corporation?
This is a really important question as there are specific rules within in the state of California and criteria that must be adhered to when naming your professional corporation.
For example: The name of a marriage and family therapy corporation must contain one or more of the following words: “marriage,” “family,” or “child” together with one or more of the following words: “counseling,” “counselor,” “therapy,” or “therapist.” If you are not certain if the name you have selected meet this criteria, be sure to check with your licensing board or professional organization's attorneys.
Additionally, PhD's are not exempt if they have formed a psychological corporation. In this case, they must have one of these words included in the corporation name: “psychology,” “psychological,” “psychologist,” “psychology consultation,” “psychology consultant,” “psychometry,” “psychometrics,” “psychometrist, ” “psychotherapy, ” “psychotherapist,” “psychoanalysis,” or “psychoanalyst.”
IMPORTANT NOTE: If you are uncertain if your name meets your state requirements, simply go to your state boards website and search, or call your professional organization to double check.
How should I let my clients know that I am incorporated?
Great question! For example: Outside of my role as a coach, I am a Licensed Marriage and Family Therapist. Every LMFT who has a corporation within the state of California is required to inform clients before the start of therapy that they are doing business as marriage and family therapy corporation. It is a very good idea to have this outlined in your consent forms.
IMPORTANT NOTE: If you need a comprehensive clinical forms packet for your clients and prefer not to reinvent the wheel, you can find those here on the Therapist Toolbox page. And, if you are a LCSW within the state of California, you too must inform your therapy clients that your business is conducted by a licensed clinical social worker corporation (if, in fact, you have formed a corporation).
What if I use a Fictitious Business Name?
All of the above (i.e. LMFT, LCSW, PhD) corporations within California are required to include any wording or abbreviations that would reference a corporate existence, such as “a professional corporation.” What the heck does that mean Mari? This means that if you as the treating therapist incorporate and file a DBA ("Doing Business As") and are then conducting business and providing professional services under what is referred to as a "fictitious business name" vs. your corporate name, you may not, under any circumstances, use a name that would be deceptive or misleading to a client. So if you are an LMFT for example, you would not want to choose a fictitious business name like, "Psychological Center for Couples Counseling" because it may lead the client to believe that you are licensed psychologist.
I realize this can be confusing, but the nutshell is this: If your attorney or CPA files articles of incorporation under the corporate name you have selected (for our purposes here, let's call the corporate name, "Caring Marriage and Family Counseling Service"), and then you decide to file a DBA (doing business as) and use a fictitious business name other than the corporate name stated in Articles of Incorporation filed with the California Secretary of State, (let's say you decide on "Healing Marriage and Family Counseling" as your fictitious business name), you will want to make sure that you search through your county database to double check without a shadow of a doubt that the name "Healing Marriage and Family Counseling" is not already in use. This search is often done within the hall of records in that county.
Once you have done this, then you will submit a form with a nominal filing fee to file. You will likely then be required to publish a notice in a local newspaper for 6 weeks or more with your fictitious business name and submit an affidavit to show that you have fulfilled the publication requirement (note: there are local newspapers that are devoted only to DBAs and are very inexpensive so check with our City Hall or Hall of Records for the best price). If you are unsure of this process, simply go to the City hall in your city and request information on how this is done.
Again, hiring an expert is such a good support while walking through this process.
How is my corporation different from me?
As shared earlier, a professional corporation is thought of as an individual and treated as such. For example, a corporation can own property, engage in various aspects of business like signing a contract. It can also sue or be sued.
Remember, the corporation is thought of as a person, and because of this, it is very important to understand that it is the corporation that will be held responsible for the debts, legal issues, and other obligations that in incurs.
There are other factors, but for the purposes of a blog overview this gives you a sense of the difference.
Can I be an LLC in California?
No, as of this blog post, a licensed Marriage and Family Therapist in the state of California may not be an LLC. Because of this, I will bypass information on LLC (Limited Liability Company). There are two other categories of incorporation in California:
1. California S- Corporation (S - Corp)
2. California C- corporation (C – Corp)
There are numerous advantages and disadvantages within both categories. Because each practice and therapist is unique, it is best to work with an attorney or CPA who can clearly walk you through the differences specific to your practice.
The cons of incorporating your practice
By now you are understanding that incorporating a practice has a number of important steps and details. You (or your attorney or CPA) must also file the Articles of Incorporation with the Secretary of State once you have checked off the required boxes.
Additionally, once you have incorporated, your professional corporation is then mandated to create bylaws that outline and establishes how to operate the business side of the corporation. What in the world does that mean? Think of it this way, your bylaws in your corporation provide guidance on business operations which would include (but are not limited to):
- Owners Meetings (remember you are the owner)
- The names and addresses of all the owners and the number and class of shares held by each
- Maintenance of books and record keeping
- Directors meetings
- How many directors and officers there are
- The duties of the directors and officers and owners
- Meeting Minutes of the owners and directors
While these bullet points only address the highlights, it is also important to keep in mind that a professional corporation in California is a taxable entity. So when you incorporate, your business then becomes a separate taxable entity from you the owner of the corporation. And, this means that you will be required to pay taxes on your annual earnings (just like you as an individual pay taxes on your individual earnings).
In addition to all of the above, what often comes as a surprise to many therapists who are incorporating is the annual minimum franchise tax of $800. That can be a big expense when one is first starting out. I know I had a bit of "sticker shock" the first year I had to pay this.
IMPORTANT NOTE: This blog information is not meant as expert advise as it merely brushes the surface. There are other specific requirements regarding tax law and dividend payments that are out of my scope of practice to discuss, and there differences between S and C corporations with respect to taxes. Check with your CPA and/or attorney so that you are supported by an expert.
Can't I just save the money and do this myself?
Yes, I suppose that you could read a blog post like this, or chat with other non-experts on social media, and then dive in if you choose to do so. However this is not advisable. The benefits of working with an attorney or CPA is that beyond their professional guidance, they can advise you of the correct tax status given your unique business (S corp. vs. C corp.), and also prepare all of the required documents necessary for incorporation such as the Articles of Incorporation, bylaws, and any shareholder agreements.
Additionally, if you intend on forming a group practice, remember that you and your partners may have opposing views on how the business should operate. Thus hiring an expert is a wise investment to consider.
In closing, though I am not an expert on this topic, I do hope that this brief overview on small business incorporation for therapists was of support. I know it is a big step involving many small steps and I commend you for taking the time to read through this information before moving forward. Here is a website that can offer further resources as well: https://www.usa.gov/for-business-owners
One final important reminder, if you incorporate or file a DBA, please be sure to have that as part of your client intake forms. If you need this material, you can find that information here.
Mari A. Lee, LMFT, CSAT
The Counselors Coach