What is the best business entity for your private practice?
/Disclaimer: This is not legal or tax advice. This information is for educational purposes only. You should consult with an attorney and a CPA to determine which type of business will best meet your needs.
Being in private practice is not just about having the autonomy to pick your own clients and set your own schedule, it is also a commitment to being an entrepreneur and a business owner. Therefore, the hats we wear day in and day out often switch from clinical to business owner several times. This transition is difficult to juggle for most, but can be even more troublesome for those of us in the helping fields because we are very rarely trained and/or exposed to the business side of things before opening our own private practices.
What is the best business entity for your private practice?
“uh….I don’t know” is usually the response to this question when asked of any counselors, therapist, life coaches or other wellness professionals. They are typically more tied to the helping side of their role and not so much the business ins and outs. BUT REMEMBER (from above) that being in private practice is a commitment to being a business owner. So, to be a competent business owner, we need to know what our options are to be able to decide what fits our individual and business needs best.
To help you get started on determining which entity fits your specific needs, I have compiled a list of the business entity options, a short summary and its common usages for private practice owners.
LLC (Limited Liability Corporation)
Summary: Designed to provide additional liability protection for the business owner compared to a sole proprietorship. By having an LLC it separates your personal assets from your business assets therefore adding an additional barrier of protection against any possible lawsuits against your business. An LLC also allows you to have multiple members/owners and in most states the taxes are passed through the individual members/owners and not the business itself.
Short hand: An LLC is a hybrid that tries to combine the benefits of a sole proprietorship and a the benefits of a corporation.
Commonly used for private practice? Yes. It provides the right amount of protection and flexibility for practice owners and though this is not legal advice, an LLC is the most commonly used entity for private practices in Kentucky.
PLLC or PC (Professional Limited Liability Corporation)
Summary: An entity for individuals with professional licenses (accountants, lawyers, healthcare professionals, architects, etc.). Dependent on your state, some do not allow those with professional licenses to form an LLC and require a PLLC (Kentucky is currently not one of those states). Often requires further documentation and approval from the Secretary of State.
Short hand: Dependent on your state, some will require individuals with professional licenses to get a PLLC and not an LLC (check with your state).
Commonly used for private practice? Most commonly used within group practices that house individuals of similar licensure.
Sole Proprietorship
Summary: Easiest and cheapest entity to form for your business. Unfortunately, with the ease, there are downsides to this entity. The financial, legal and other risks associated to your business are directly tied to you personally. There is no separation of business and personal assets (investments, home, car, etc.) therefore putting your personal assets at risk if there ever be a business lawsuit or downfall.
Short hand: Easiest and cheapest to establish for your practice but comes with risks.
Commonly used for private practice? Though you can legally run your private practice as a sole proprietor, it is not typically suggested to do so (due to the lack of protection and separation of your business and personal assets). Even if you are starting small and plan to grow your practice to a part time or full-time case load, it is suggested to start out with another entity for increased protection. Again, this is not legal advice, but if you have no personal assets (home, car, investments…) and plan to keep your case load small forever, a sole proprietorship may work for you. Please check with an attorney prior to doing so.
Partnerships
Summary: When two people enter into a business arrangement together. This entity has similar risks as sole proprietorships (lack of protection) but with some of the tax benefits of an LLC.
Short hand: Entity hybrid for two individuals entering into a business together with the downfalls of a sole proprietorship and some of the benefits of an LLC.
Commonly used for private practice? Not commonly used for private practices. Group practices or shared ownership practices are typically going to align more with an LLC or PLLC.
Corporations
Summary: Are owned by its shareholders and require a board of directors. They are also subjected to other requirements such as annual reports, business filings, etc.
Short hand: C-Corp or an S-Corp (different designations for tax purposes)
Commonly used for private practice? Most commonly, private practice owners will start with an LLC and then once they are profiting a certain amount their accountant and/or attorney may suggest an S or C-Corp for various tax benefits it can provide the company.
Non-profits
Summary: All entities listed above are “for profit” companies (meaning their sole purpose is to make money for the owners, shareholders, and members). However, a “non profit” business entity is focused on funneling the money made to provide some sort of public benefit or cause and not distributing it all back to the owners.
Short hand: A company that uses the surplus of its revenues to further achieve its ultimate objective rather than distributing more money to its owners and members.
Commonly used for private practice? This entity is sometimes used for larger private practices. There are several different options for nonprofit organizations, so it is recommended to talk with an attorney to figure out what is the best option for you.
In summary the most common business entities used for mental health and wellness professionals in private practice are an LLC, PLLC, or sole proprietorship. Growing popularity is to become an LLC compared to sole proprietorship as a private practice provider. This allows more separation of your personal assets from your business assets in case there was ever a lawsuit against your practice. However, it is important to note that this is a different type of protection than having malpractice or general liability insurance. Those insurances are also needed to protect you and provide you with the support to fight a lawsuit. But they do not set any protective lines for distinguishing between your personal and professional assets (as certain business entities would).
To begin creating your business entity, start by researching the laws of your individual state to identify any specific restrictions or policies for your field. Learn more here.
At b.mindful Louisville we provide you with the business building resources that ease the process for you in learning all things business. We have direct links, contacts, resources and numbers for you to take advantage of so you can spend less time on Google pulling your hair out and more time growing your business.
Stuart Adams is a Louisville, Kentucky based attorney who can assist you all things business and ensuring your have the appropriate entities and regulations in place to protect you and your business assets.
Disclaimer: This is not legal or tax advice. This information is for educational purposes only. You should consult with an attorney and a CPA to determine which type of business will best meet your needs.
Have additional questions about our office rentals for mental health and wellness professionals in Louisville, KY? Feel free to message me and ask!
I’m a professional counselor and understand the importance of having a safe space to practice in, consulting, networking, having a solid referral list, and being around other like-minded professionals.
Shannon Gonter, LPCC, Owner and Founder of b.mindful Louisville