Running your own therapy practice is rewarding, but the business side can feel overwhelming.
Many therapists start as sole proprietors because it’s simple: you report your income on Schedule C and you’re in business. But as your private practice grows, you may wonder if switching to a Limited Liability Company (LLC) or S corporation (S-Corp) could help protect your personal assets or lower your tax bill.
In this guide, I’ll explain the main differences between business structures, the tax implications, and when it makes sense to make the switch.
Along the way, you’ll see real-world examples and common mistakes to avoid so your transition is smooth.
Starting Out as a Sole Proprietor
Most therapists begin as sole proprietors because it requires almost no setup. You simply file your income and expenses on Schedule C with your personal tax return.
Self-employment taxes apply to everything you earn, including FICA contributions for Social Security and Medicare.
It’s easy and inexpensive, but there are drawbacks.
For instance, all business debts and legal claims are tied directly to you. If a client files a lawsuit or if bills go unpaid, your house, car, savings, or even your spouse’s assets could be at risk.
Often, that exposure is what pushes therapists to consider a more formal business entity.
Moving to an LLC for Liability Protection
An LLC creates a clear line between your therapy practice and your personal life. It limits your personal liability in most situations, which means if the practice is sued, only the business assets are on the line.
An LLC is treated as a pass-through entity for tax purposes by default, so the income still flows to your personal return. You’ll continue paying self-employment taxes unless you choose to elect S-Corp status later.
Some states, like California, don’t allow licensed therapists to form LLCs at all, requiring a Professional Corporation (PC) instead.
That means filing Articles of Incorporation with the Secretary of State, paying an annual franchise tax, and complying with state-specific professional licensing rules.
While it takes more effort than being a sole proprietor, the liability protection alone makes it worth considering for many therapists. It also signals that your therapy practice is a true business entity, not just a side gig.
Electing S-Corp Status for Tax Benefits
When practice income reaches a certain level, self-employment taxes start to feel heavy. An S-Corp can offer relief.
By filing IRS Form 2553, your LLC or corporation can be taxed as an S-Corp.
Here are the advantages:
- You pay yourself a reasonable salary, which is subject to payroll taxes.
- You take the rest of your earnings as shareholder distributions, which are not subject to self-employment taxes.
- You may also qualify for the Qualified Business Income (QBI) Deduction, which reduces taxable income further.
The catch is that you must handle payroll properly, maintain accurate bookkeeping, and file additional returns such as Form 1120-S and Schedule K-1. Many therapists use payroll platforms like Gusto or outsource tax preparation to make compliance manageable.
For example, let’s say your therapy practice nets $120,000 after expenses.
As a sole proprietor, you’d pay self-employment taxes on the entire amount.
On the other hand, as an S-Corp, you might set an $80,000 salary and take $40,000 as shareholder distributions.
The distributions avoid self-employment taxes, saving thousands of dollars each year.
Comparing LLC, S-Corp, and C Corporation
Each business structure has its strengths and tradeoffs.
Quick Comparison Box
| Business Structure | Taxes | Liability Protection | Ongoing Requirements | Best For |
| Sole Proprietorship | All income taxed on Schedule C; full self-employment taxes | None — personal assets at risk | Minimal paperwork | Starting out or very small practices |
| LLC | Pass-through entity by default; can elect S-Corp later | Protects personal assets from most business debts | Articles of Organization, state filings, franchise tax (in some states) | Therapists wanting liability protection |
| S-Corp | Salary taxed with payroll taxes; distributions avoid self-employment taxes; QBI deduction may apply | Protects personal assets | Payroll setup, Form 1120-S, Schedule K-1, bookkeeping | Therapists earning $80k+ net income seeking tax savings |
| C Corporation | Double taxation (corporation pays, then owner pays again on dividends) | Protects personal assets | Articles of Incorporation, Form 1120, more complex compliance | Rarely used by therapists |
Real-Life Examples
Example 1: The California Therapist
Samantha, a licensed therapist in California, wanted to form an LLC but discovered that state law requires professional corporations for her license type.
She filed Articles of Incorporation, obtained an EIN, and elected S-Corp status with Form 2553. After moving $30,000 of income into shareholder distributions, she cut her self-employment taxes by nearly $4,500 in the first year.
Example 2: The Growing Group Practice
Marcus started as a sole proprietor seeing ten clients a week. Within three years, he expanded into a group practice with two partners.
By forming an LLC and electing S-Corp taxation, the partners each took salaries and shared profits through Schedule K-1. This structure simplified payroll and protected each owner from liability if the practice faced litigation.
Example 3: The Therapist Who Waited Too Long
Jenna stayed a sole proprietor even after her income exceeded $150,000. Without liability protection, her personal savings were at risk when a landlord dispute escalated into litigation.
On top of that, she missed out on years of tax savings by not switching sooner. She eventually restructured, but not before paying an avoidable five-figure tax bill.
How and When to Make the Switch
The right time to switch depends on your practice size and financial goals. Many therapists move to an LLC once they have steady income and want liability protection.
The S-Corp election often makes sense when net income reaches $80,000–$100,000 or higher, when tax savings outweigh the cost of payroll and compliance.
Here’s a roadmap to guide the process:
- File Articles of Organization (or Articles of Incorporation for corporations) with your Secretary of State.
- Apply for an Employer Identification Number (EIN) with the IRS.
- Register a trade name if your practice will use something other than your personal name.
- File IRS Form 2553 for S-Corp election, ideally within the first 75 days of the year.
- Set up payroll to separate your owner’s salary from shareholder distributions.
- Keep professional licenses, permits, and insurance in good standing.
- Maintain organized bookkeeping to support tax preparation and growth planning.
This process isn’t difficult, but missing details — like late Form 2553 filing or miscalculating a reasonable salary — can cause headaches or penalties.
Common Mistakes Therapists Make When Switching
- Waiting too long: Delaying the move to an LLC or S-Corp means higher self-employment taxes and continued exposure to liability risks.
- Paying themselves incorrectly: Some therapists set salaries too low, which raises red flags with the IRS. Others forget to separate salary from distributions entirely.
- Ignoring state rules: States like California and New York have specific requirements for professional LLCs or corporations, and failure to follow them can cause loss of good standing.
- DIY payroll gone wrong: Managing payroll without proper software or an accountant often leads to missed FICA contributions and tax penalties.
- Forgetting ongoing compliance: Annual reports, franchise tax payments, and Articles of Organization renewals are easy to overlook but critical for staying in good standing.
Avoiding these mistakes usually comes down to working with professionals who understand the business structures and tax implications unique to therapists.
Ready to Restructure Your Practice?
If you’re weighing whether to remain a sole proprietor or move to an LLC or S-Corp, expert guidance can make the process much smoother.
Our team at LeichterCPA specializes in supporting mental health professionals with tax preparation, business registration, and ongoing bookkeeping. We’ll help you save time, reduce stress, and feel confident knowing your practice is built on a solid financial foundation.
Learn more about our mental health practice accounting services here.