I’m Starting a Counseling Practice… Do I Need an LLC?

For clinicians venturing into private practice, a common question is whether getting an LLC is necessary, advisable, or even possibly detrimental?

In preparing this column, I consulted with an attorney, an accountant, and the IRS in an attempt to determine whether an LLC is the best business structure choice for counselors in private practice.

What is an LLC?

A Limited Liability Company, or LLC, is a business structure allowed by state statute. Each state may use different regulations regarding starting and owning an LLC [1]. While LLCs blend elements of both partnership and corporate structures, an LLC is not a corporation, and therefore calling an LLC a corporation is technically incorrect.
An LLC is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions.

Owners of an LLC are called members. Typically, states do not restrict ownership, so members may include individuals, corporations, and even other LLCs. There is no maximum number of members an LLC may have, making it a common choice when two or more healthcare professionals start a practice. However, many LLCs are “single member” meaning they only have one owner.

Will an LLC Lower my Taxes?

According to Virginia-based CPA Bryan Johnson [2], whether or not someone with an LLC will enjoy any tax benefits, when compared to a sole proprietorship, depends on two things:

(1) the amount of income a counselor plans to make, and (2) whether the individual will elect to be taxed as an S corporation or as a single member LLC [3].

According to Johnson:

You are likely to have tax savings under current tax law if you are planning on the LLC being your main occupation and source of income, and if you elect to be taxed as an S corporation. The savings will come in the form of reduced self employment tax.

However, if one is only building a part time practice, according to Johnson, “Tax savings might not be enough to justify the cost of the yearly filing of an LLC, and the cost of an additional tax return.” Also, if one does not elect to be taxed as an S corporation, any possible tax saving will be “in general, very minimal.”

That being said, Johnson notes that tax law is nuanced and always changing, and different states will have different fees and taxes, so what makes sense for one person won’t necessarily make sense for another. He explains, “Each person needs to consult with their own tax professional to see what would be best for their situation.”

Is an LLC Desirable if I Have a Business Partner?

LLCs are particularly desirable when two or more partners are going into business together. It can serve to document how much ownership each “member” has in the company, and the LLC also provides a platform for establishing company bylaws that document what happens in the event of a member’s death, retirement, divorce, desire to sell, and more.

According to Florida-based attorney Chad Shimel [4], “An S corporation can serve to do some of this, but an LLC is more flexible.” For example, an LLC allows the members to choose how they will distribute profits, while an S corporation does not. Shimel adds, “An LLC can distribute profits in a manner not necessarily equal to ownership interests. Even when two members own 50% each, an LLC can still distribute profits to one owner more or less than the other. This is useful at times when one member is more active in the business.” In contrast, with an S corporation, if the business is owned 50-50, distribution is always 50-50.

In many states, if one doesn’t have an LLC or another business structure in place (such as an S corporation), business owners are treated under the default rules of a partnership, which are often not ideal. Shimel explains, “You don’t ever want to get into a ‘partnership structure;’ they are somewhat archaic. As a general principle, it would not be a good thing.”

Will an LLC Limit My Legal Liability?

An LLC will provide some liability protections. For instance, if someone trips and falls at your office, a person may pursue litigation against the LLC, but members will be personally protected. Or, if the LLC defaults on rent (and a member did not personally guarantee the lease) your personal liability would be limited.
However, when it comes to malpractice lawsuits, it is common that a patient (or client) will sue the company and also sue the healthcare provider personally. Shimel states, “If you find yourself in the middle of a malpractice suit, having an LLC won’t harm you, but also won’t provide protections because you are being sued personally.”

LLCs limit liability, but they don’t eliminate it. As a tip, the limited liability of an LLC holds up best when the owners (or members) are careful not to mingle/mix their personal funds and the funds of the business. The less clear the line between personal and business finances is drawn, the more likely it is for someone to “pierce the corporate veil” and pursue members personally for damages.

While an LLC is a flexible, popular, and modern corporate tool, attorney Shimel stresses:

An LLC may or may not be the best type of incorporation to do. A person may find that they are better off with an S corporation, for various reasons. It all depends on what they’re doing, how many employees they have, how they want to distribute profit, and other factors.

One of those ‘other factors’ is the state in which the counselor operates. “An S corporation could, depending on the state, have a more favorable track record in terms of protecting owners in lawsuits,” Shimel explains. One negative of an LLC, since it is a newer product, is that it has less legal precedent compared older company structures.

Decision Tree

Contrary to common hopes, an LLC won’t absolve anyone of all the professional liabilities that come with working in the mental health field. Also, an LLC won’t guarantee lower taxes.

As it is often the case in the realms of tax and law, there are few simple answers. While an LLC remains a common and often preferred business structure choice for many, it’s not the right fit for all counselors, in all cases. Ultimately, counselors will need to do their own due diligence to determine what business structure makes sense for their unique practice and financial situation.

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[1] IRS Limited Liability Company

[2] Bryan Johnson is a Certified Public Accountant, and owner of Johnson & Associates. http://johnsoncpaa.com/

[3] Tax tip: If you are a single member LLC, you can file a Form 2553, which allows you to be taxed as an S corporation without actually becoming an S corporation.

[4] Chad Shimel is a Licensed Attorney and Partner at Cramer, Price & de Armas, P.A. http://www.cramerprice.com/