If you’re a self-employed therapist with multiple income streams, you may benefit from splitting them into separate businesses.
It typically makes bookkeeping and tax filing more straightforward. Creating separate companies can also prevent one income stream’s debt or financial liabilities from crossing over to and affecting the others.
Here’s everything you need to know about separating your income streams as a therapist, and how to choose the best approach for your type of practice.
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What is an income stream?
An income stream is a category you sort your income into for the purpose of bookkeeping. The more streams you separate your income into, the more insight you have into how your business is performing.
You can check out our complete list of income streams for therapy practices for a full breakdown, but here’s an abbreviated version.
- Therapy
- Individual therapy
- Couples therapy
- Family therapy
- Group therapy
- Coaching
- Life coaching
- Business coaching
- Executive coaching
- Couples coaching
- Supervision
- Case consultation
- Clinical assessment / evaluation
- Consulting
- Writing
- Speaking
- Teaching
- Clinical training
- Selling info products
- Masterminds / cohort-based courses
- Memberships / paid communities
- Brand partnerships / influencer marketing
- Podcast ads
- YouTube ads
For most therapy practices—and most businesses in general—income streams can be broken up into four categories.
- Service revenue. Fees you collect for providing a service to a client. In the context as therapy, this includes seeing patients on a regular, one-on-one basis.
- Transaction revenue. One-time transactions, such as revenue from selling online courses or ebooks.
- Project revenue. Money you earn by completing a project for a client. One example might be providing a six week coaching workshop for an organization.
- Recurring revenue. Regular payments made on a set schedule, such as rental fees you collect for subletting your office to another therapist.
Why separate income streams into different businesses?
It’s possible to have a broad range of income streams—for instance, individual therapy, consulting and training, and running a YouTube channel for ad revenue—and lump them all together under a single business structure.
With careful bookkeeping and tax filing, you can track all the revenue and expenses for each income stream, and effectively run each one as an unofficial mini business within your own sole proprietorship or LLC.
But there are drawbacks to this approach:
- It’s easy to make mistakes. When you have a dozen categories for revenue, for instance, you have a dozen opportunities to make a mistake when you categorize it. That can muddy the waters, and make it difficult to track how each income stream is performing.
- It makes tax filing more complicated. Reporting a large number of different expense categories on your Schedule C, filing Form 1099s for contractors who provided services for different parts of your business in different capacities, and getting all your sources of income tidied into a neat pile—it makes for complicated tax filing, and could lead to headaches for both you and your accountant.
- All your businesses share liability. All your different income streams are in the same boat, and if it starts to sink, they all sink together. Meaning, any legal or financial liability you carry as one part of your business affects all the others. For instance, if you decide to quit doing in-person therapy sessions and break the lease on your office, you’ll be using income from all your other income streams to cover the cost.
- You may blur the lines when it comes to licensing. Many therapists offer therapy in the states where they are licensed as therapists, but provide business or life coaching—which typically does not require a license—to out-of-state clients. So long as therapy and coaching services are each offered by different businesses—both owned by the therapist—there should be no issues. But if they’re both provided under the same business name by the same therapist, it could lead to issues with the licensing authority.
In contrast, when you separate different income streams into different businesses, you benefit:
- Organization is simpler. Each business has its own general ledger and its own bank account. There’s much less chance of crossover between different income streams.
- Tax filing is more straightforward. If you have three distinct income streams, it may be easier to file three simple tax returns than one complicated one.
- Your businesses don’t share liability. If one of your income streams carries debt or other liabilities, it’s typically limited to that particular business—it won’t affect your other ventures.
- You’re less likely to attract scrutiny from licensing boards. Keeping licensed and unlicensed business activities separate may save you from inquiries or even possible legal troubles.
There can be drawbacks to creating separate businesses, however. Depending on your state, you may have to pay considerable fees to create multiple LLCs and renew them year after year. It also takes an investment in time and energy to get them off the ground.
Before you begin the process of creating separate businesses for your income streams, consult with an accountant.
Separating therapist income streams while remaining a sole proprietorship
If your therapy practice is a sole proprietorship, you can separate your income streams into different businesses without registering multiple LLCs or other business structures.
Here’s how. For each income stream you’d like to turn into a business:
- Register a business name (a fictitious business name or DBA). This is done at the county or state level.
- Register an employer insurance number (EIN).
- Open a business checking account.
- Create a general ledger—or have your bookkeeper create one for you—and use it to record all your revenue and expenses for the business.
- At tax time, file a separate Schedule C for the business.
When you file your taxes, you’ll report your total income on Form 1040, and file a separate Schedule C for each income stream you’ve converted into a business.
Technically, these income streams aren’t separate businesses recognized by your state or the IRS. But having a different bank account and general ledger for each one allows you to separate their bookkeeping, so it’s easier to stay organized. And having a different DBA for each business lets you make each one distinct in the eyes of the public.
Some drawbacks to this method:
- You don’t get liability protection. All your businesses still fall under the umbrella of your sole proprietorship.
- It may not help you in case of a licensing dispute. If you’re separating your income streams for the sake of separating licensed and unlicensed work, the multiple businesses you run under the umbrella of your sole proprietorship may not be enough to convince licensing authorities your licensed and unlicensed income streams are distinct from one another.
While it’s more expensive and more time consuming, registering multiple LLCs for your multiple income streams may offer you more legal and financial protection.
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Separating therapist income streams as an LLC or LLCs
There are three ways you can separate your income streams using the LLC business structure:
- By forming a single LLC with different DBAs, EINs, bank accounts, etc. for each income stream.
- By forming a separate LLC for each income stream.
- By forming a series LLC, under which each income stream is a series or sub-LLCs.
The cost of forming an LLC varies according to state—from $50 to some states, to $800 in California. Annual renewal fees range from $0 to $800 (California again), and the rules vary when it comes to filing annual information reports with the State.
Given the potential cost and paperwork involved, it’s best to consult with your accountant before registering multiple LLCs.
Here’s more detail on each method of separating your income streams with the LLC business structure.
Forming a single LLC
It’s possible to form a single LLC under which all your different income streams operate, each with its own bank account, general ledger, and business name.
The drawbacks to this method are identical to the drawbacks of using the sole proprietorship method covered above, with one crucial difference: creating an LLC for your business protects your personal assets.
Once your therapy practice becomes a registered LLC, it’s a separate entity from your person. Meaning, debts and legal proceedings affecting your business typically won’t affect your personal finances directly.
Your degree of liability can vary according to which state your LLC is registered in, and what types of proceedings are brought against you. But it offers better protection, liability-wise, than a sole proprietorship.
Forming separate, multiple LLCs
One of the most common approaches taken to separating lines of revenue is forming multiple LLCs.
Each line of revenue exists as its own business in the eyes of your state and the IRS. That means it:
- Files its own taxes
- Files its own Articles of Organizations
- Keeps its own financial records
- Has its own EIN and bank account
Accountants often recommend business owners with multiple businesses form a single parent LLC to act as a holding company for all the other LLCs the business owner runs. This makes recordkeeping, bookkeeping, and tax filing more complex, but may have benefits when it comes to overall organization.
While forming multiple LLCs is far superior to running multiple businesses under a single LLC, it comes with drawbacks:
- Cost and time involved. Filing Articles of Organization and maintaining financial records for each LLC is time-consuming. And when you’re forming multiple LLCs, the filing and renewal fees can add up.
- You can still be sued. If someone sues your parent LLC, the assets of all the LLCs it encompasses are on the line.
One more note: Many states require therapists register their LLCs as professional limited liability companies (PLLCs), a business structure that provides professionals like doctors, attorneys, and therapists added liability protection. This requirement may affect how you organize your multiple businesses. An accountant can provide more information about PLLCs specific to your state.
Forming a series LLC
The series LLC combines a common way of organizing multiple LLCs—with a single parent LLC owning multiple LLCs under it—into one, single package.
When you form a series LLC, you split it up into multiple sub-LLCs—or series—each of which is insulated from the others in terms of liability. It offers all the protections of forming multiple LLCs, while only requiring you to form one.
A series LLC only needs to file one tax return, which encompasses all the financial activities of its series. The IRS recommends filing separate tax returns for each series, however.
Not all states recognize series LLCs. The ones that do are:
- Alabama
- Arkansas
- Delaware
- Illinois
- Indiana
- Iowa
- Kansas
- Missouri
- Montana
- Nevada
- North Dakota
- Oklahoma
- Puerto Rico
- Tennessee
- Texas
- Utah
- Virginia
- Washington, D.C.
- Wyoming
As usual, it’s best to consult with an accountant before making a final decision.
Separating therapist income streams as a corporation
In most cases, it doesn’t make good financial sense to turn your multiple income streams into separate C corporations, or to form a holding corporation for multiple LLCs.
The cost of incorporating may be considerable, it means you’ll be taxed twice—once on corporate income, and once on the draw or salary you receive—and it introduces a variety of legal and financial complexities you can avoid by forming multiple LLCs or a series LLC.
If you want to avoid the issues created by forming a C corporation, but still share ownership of your business with partners or colleagues, your LLC can elect either partnership or S corporation status. Learn more about S corporations for therapy practices.
The best way to separate income streams as a therapist
Generally speaking, the best method of separating your income streams as a therapist is by forming multiple LLCs.
The only time it may not be appropriate is if the income you earn from each income stream is so small that the cost of forming and maintaining an LLC for it would put you in the red.
But, as always, individual circumstances vary, and there are variations from one state to the next in terms of how LLCs are managed. Be sure to consult with an accountant before taking the plunge.
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Want to know how to register an LLC in your state? Check out our state-by-state startup guides for therapy practices.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.
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