When you’re a self-employed therapist, forming a limited liability company (LLC) comes with a lot of potential benefits. You can reduce your personal financial and legal liability, give yourself the option of electing a variety of tax filing statuses, and may even save on your tax bill.
But an LLC also costs money to form, as well as annual payments to maintain LLC status. The process of becoming an LLC is time-consuming and best done with help from an accountant. Before you go ahead with it, it’s smart to make sure forming an LLC is worth your while.
Here’s a breakdown of everything self-employed therapists need to know about the LLC business structure, as well as related structures like professional LLCs (PLLCs).
What is an LLC?
An LLC is a business structure that combines the liability protection of a corporation with the tax benefits that come with filing federal taxes as a partnership or S corporation.
An LLC is owned by its members. Depending on how the LLC elects to file its taxes, those members may be treated for tax purposes as either shareholders or partners.
You don’t need multiple members to form an LLC. Many businesses are single-member LLCs, meaning they consist of just one person. Often, a sole proprietor—like a self-employed therapist who runs their own, solo practice—will form an LLC in order to reduce their personal financial and legal liability.
How can an LLC reduce your personal liability?
When it comes to corporations—specifically, C corporations—shareholders are protected from liability thanks to something called the “corporate veil.”
The corporate veil is a legal concept that separates the personality of a corporation from the personalities of its shareholders. This is partly where the idea of “corporate personhood” comes from. The shareholders are protected from being personally liable for the company’s debts and other obligations.
Members of LLCs benefit from similar protections. If your therapy practice is an LLC and you default on a loan, the lenders will go after the LLC’s assets, not your own. And if a client decides to sue you, it’s the LLC they’re suing, not you personally.
The corporate veil only protects you so long as you maintain clean, consistent accounting and bookkeeping practices. Your personal assets and the assets of your LLC must remain formally distinct—separate bank accounts, separate sets of books, separate expenses, and a clear paper trail explaining how cash leaves your LLC and ends up in your pocket.
In the event of court proceedings, if the court finds there was no true separation between the members of an LLC and the LLC itself—their income and expenses were intermingled, for instance—the court may be able to pierce the corporate veil, and hold all members personally liable for the LLC’s debts and legal proceedings.
What business structures can an LLC elect?
An LLC is able to file taxes as:
- A disregarded entity. By default, single-member LLCs are treated as disregarded entities. Similarly to sole proprietorships, the business owner and the business file their taxes together on an individual tax return.
- A partnership. If it has multiple members, an LLC can elect to be treated as a partnership for tax purposes by filing IRS Form 8832.
- An S corporation. An LLC with a single member or multiple members can elect to be treated as an S corporation for tax purposes by filing IRS Form 2553.
- A C corporation. An LLC may elect to file taxes as a C corporation. A single-member LLC that elects to file as a corporation will effectively pay two income taxes:
- Corporate income tax on income the corporation owns
- Personal income tax, on the salary of the single LLC member
For most single-member LLCs, filing as an S corporation provides the greatest liability protection as well as the most potential to save money on taxes. That being said, make sure to consult with an accountant before choosing a tax status or business entity for your therapy practice.
The difference between state and federal business structures
When you form an LLC, you register your company with the state where you do business. The exact procedure differs from state to state.
Then, you elect your business structure with the IRS—the federal government. In simplified terms, your state considers you an LLC, while the IRS considers you to be whichever business structure you elect.
You’ll file and pay state taxes according to the requirements and rates set by your state for LLCs. You’ll pay federal taxes according to the requirements and rates set by the federal government for your elected business structure.
The PLLC business structure and therapists
Some states offer an alternative business structure to the traditional LLC, the Professional Limited Liability Company (PLLC). This business structure is for licensed professionals operating within the state, such as doctors, lawyers and—in many states—therapists.
Depending on the laws of your state, the PLLC structure may be an option (an alternative to the LLC structure you can choose) or a requirement (an alternative to the LLC structure you, as a licensed professional, are required to choose).
Typically, a PLLC operates exactly as an LLC does, with some extra provisions in place related to malpractice insurance. The PLLC structure allows individual professionals within the company to be sued for malpractice, and typically requires the PLLC to carry insurance.
If an individual professional is sued, the other members of the PLLC are not legally or financially impacted as individuals. Effectively, the PLLC structure allows licensed professionals to work together, while protecting them from trouble in case their colleagues are sued.
To find out whether therapists in your state are required to form PLLCs rather than LLCs, check with your Secretary of State. Or learn how to start a therapy practice in your state.
Why form an LLC for your therapy practice?
Whether an LLC is the right choice for your therapy practice depends on many individual factors. For that reason, it’s a good idea to consult with an accountant before committing to a new business structure.
But these are the benefits most therapy practice owners look for when they choose to form an LLC.
If you’re a sole proprietor and you run your own therapy practice, you do not have liability protection built into the structure of your business (even if you may have liability insurance). Meaning, if a patient decides to sue your practice, they can sue you personally. And if you default on a loan, the lender can put a lien on your assets. In the eyes of the law, your business and your person are one and the same.
That’s why one of the biggest benefits of registering an LLC is the liability protection LLCs offer. Much like an insurance premium, the costs associated with registering and maintaining an LLC are small compared to the costs you could incur if you didn’t have one.
Control over income tax payments
Single-member LLCs that elect to be taxed as S corporations give the owners more control over how their income is taxed than they would have filing as sole proprietors or disregarded entities.
An S corporation, unlike a C corporation, does not pay taxes on its income. Rather, the shareholders pay income tax for the income they earn from the S corporation. Income may be paid as either a distribution to shareholders or a salary.
For example, suppose your therapy practice was an LLC electing S corp status. In 2022, your practice earned $100,000 in income. You paid yourself $50,000 as a salary, and the remaining $50,000 remained in the S corp.
In that case, you would only pay income tax on the $50,000 you collected as salary. The remainder stays invested in the S corporation.
There are some complexities involved here—particularly the need to pay yourself a “reasonable salary,” as it’s defined by the IRS—but S corp status can give you considerable flexibility in how you pay income tax. To learn more, check out the Complete Guide to S Corporations for Therapists.
The ability to bring on partners or shareholders
At some point during your career as a self-employed therapist, you may decide you want to share your practice with another therapist as business partners. Or maybe you will want to hire full-time employees and offer them equity in your business.
In either case, if your practice is a registered LLC, you’ll have already covered a lot of the paperwork necessary to share ownership of the business with someone else. The LLC is a business structure allowing you to bring on members who are treated either as partners (when filing as a partnership) or shareholders (when filing as an S corporation).
And, while it may feel a little morbid to consider, if you die, your LLC outlives you. It can keep operating in the hands of your partners or shareholders, or—if it’s a single-member LLC—you can name an inheritor in your will.
The Qualified Business Income (QBI) deduction
If your therapy practice is an LLC, there’s a good chance you qualify for the QBI deduction. By taking advantage of this deduction, you can deduct up to 20% of your income from your taxes. For more details, check out the IRS page on QBI, or consult with an accountant.
Drawbacks to registering an LLC for your therapy practice
Like any other business move that could benefit you, registering an LLC may have drawbacks. Caveat emptor—here’s what you need to know before you pay the registration fee.
LLCs have registration fees, and they can be significant
The cost of registering an LLC ranges from $35 to $800, depending what state you operate in. And since it’s wise to consult with an accountant before filing—particularly if you plan to include partners and shareholders when you register—you should expect to pay their hourly fee.
Most states also require you to pay yearly renewal fees to keep your LLC registered, and may charge franchise tax.
There’s paperwork involved
In most cases, the process of registering a single-member LLC is fairly straightforward. Most states allow you to register online, and many offer ample documentation to help you navigate the process.
That being said, the amount of paperwork you have to do is not zero. If you already have scant time for navigating state tax portals and filling out forms, the process could be a blocker.
On top of that, if you’re electing S corp or partnership status, you’ll no longer be filing a typical, individual Form 1040 with the IRS. Your tax filing will become more complicated, so if you’re accustomed to filing your own taxes, you’ll likely need to get used to working with an accountant.
You’ll need to set up payroll
If you elect S corp or partnership status for your LLC, and you plan on earning a personal income, you should be prepared to set up a payroll system. A payroll system withholds tax from your income, so it can be remitted to the IRS, and creates an official paper trail recording everything you’ve earned—essential in case of an audit, and in order to maintain the corporate veil.
The good news is that now, thanks to tools like Gusto, it’s easier than ever to set up payroll for your business. But you should be prepared to take on the steps involved, as well as the monthly fees such services cost.
LLC filing fees by state
How to form an LLC for your therapy practice
The steps you need to take to register an LLC vary according to your state. It’s impossible to offer a one-size-fits all guide.
But, in general, be prepared to:
- Choose a business name.
- Appoint a registered agent. This person must be over 18 and have an address within the state. They’re responsible for receiving all official communications from the state where you operate.
- File your Articles of Organization and pay the LLC registration fee to your State Secretary’s office (or equivalent).
What to include in the Articles of Organization for your therapy practice
Your Articles of Organization may also be referred to as your Certificate of Formation or Certificate of Organization. Like the process of forming an LLC, the exact format of your Articles varies according to your state. But, generally speaking, it includes:
- The name of your business: The legal name of your company must be unique. Usually it’s required to end in "LLC" or "L.L.C."
- Business purpose: What you do to make money. Depending on your state, you may not need to go into specifics—in many, a general purpose such as "to engage in all lawful business" is acceptable.
- Duration: The lifespan of your LLC. Most LLCs are set up to exist perpetually, but you can state a specific duration if you prefer.
- Registered Agent and Registered Office: Information about the person that will receive legal documents on behalf of your LLC, and the address where those documents should be sent
- Principal Place of Business: Your primary place of operation. This may be your own home.
- Management structure: Your LLC can be member-managed (all members participate in decision-making) or manager-managed (specific members or outside managers handle decisions). Names and addresses of initial members or managers are typically required.
- Organizer: The individual or entity that is creating the LLC. (That’s you.)
- Member Contributions: Details about the capital each member will contribute to the LLC.
- Dissolution process: You can choose to outline the process by which your LLC will be dissolved if or when the time comes. This is important if you have business partners or shares and need to determine how assets will be divided.
- Signatures: Depending on the state, the Articles of Organization may need to be signed by the organizer, a manager, or a member.
Your Articles of Organization is a public document. It’s different from an Operating Agreement, which multi-member LLCs use internally to determine how the business is run on a day-to-day basis.
How to elect S corporation filing status as an LLC
To elect S corporation status for your LLC, you must file IRS Form 2553.
The S corporation election deadline
The deadline for Form 2553 is the 15th day of the second month of the year for which you’re filing. For example, if you wanted to pay your taxes as an S corporation for the year 2023, you would need to file Form 2553 by February 15th, 2023.
How to fill out Form 2553
The IRS provides an electronic version of Form 2553 you can fill out your computer and print. You cannot file online, however—you must file the completed form as a hard copy by mail.
To fill out Form 2553, you’ll need the following info on hand:
- The date you incorporated, or the date you registered your LLC
- Your Employer Identification Number (EIN)
- The state where you incorporated or registered an LLC
- Your business address
- Contact information for your registered agent
- Contact info and SSN/EINs for each shareholder in your S corporation, as well as the percentage of the business each owns
Where to mail Form 2553
The address where you mail your completed Form 2553 depends upon which state you live in. The instructions for Form 2553 list the addresses and their corresponding states.
How to file taxes as with S corp status
Once you’ve elect S corporation status, you file your annual taxes using the following forms:
- IRS Form 1120-S (US Income Tax Return for S Corporations), reporting your business’s revenue, expenses, and credits
- Schedule K-1 (Form 1120-S), reporting each shareholders’ share of revenue, income, and credits
Your state will require you to complete and file different, state-level forms in order to maintain your status as an LLC.
Forming an LLC is a smart move for many therapy practices, but there’s no guarantee it would be a smart move for yours. Be sure to consult with an accountant before making any major business decisions.
For a step-by-step guide to forming a therapy practice in your state—as well as details about forming an LLC—check out our state-specific startup guides for therapists.
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.