July 30, 2021
When starting your private practice, oftentimes the act of finding clients is enough of a battle. Then, the world of small business hits, and you’re suddenly throwing around terms like “entities” and “corporations”, when in reality, you just want to see your clients. We're here to bridge the gap between therapist and small business, and make it a bit more digestible.
One of the most important decisions you’ll make in your journey as a therapist and private practice owner is what your business entity will be––a “sole proprietor” or an “S-corporation”. The difference between these two entities comes mainly from how you’ll be taxed.
A sole proprietor means that you are the one in control of your private practice. You own it and you personally pay its taxes. You’ll report any profits on your own personal tax return at the end of the tax year.
An S corporation is a tax designation that is granted by the IRS. To keep things simply, this legally separates your company from you as an individual. There are also tax benefits. S corporations, like sole proprietors, are pass-through entities. That means that your practice income passes through you as the owner of your S corporation; you don’t have to pay separate taxes on your business. The owner then pays the taxes on the income. Income passed through to an owner from an S corporation is not subject to self-employment tax. The owner only pays income tax on their business income.
Being taxed as an S corp can provide a variety of other benefits:
If switching to an S corp is something you may be interested in, there’s nothing to fear; converting your business entity may sound difficult, but it is actually fairly easy. The process can take 4 to 6 weeks. You can do so by following the below steps:
There are perks to filing with S corp status, but many choose to stick with sole proprietorship due to how easy it is to use. If you are hoping to gain more protection but keep that “pass through entity” side to your business, an S corp is great to look into!
Making these decisions about your business is never easy, and can be especially difficult to stomach on top of your full caseload of clients. Always consult with an attorney or accountant before making complex business changes.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.