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What should a psychologist use - LLC, S-Corp, or sole proprietor?

South San Francisco, CA |

I am Licensed psychologist and looking to set up a private practice and am not sure if I should create an LLC, or S-Corp or just have a sole proprietor since it will be a very small private practice.


Ok so I can't have an LLC. What is the difference between an S-Corp and a professional corporation?

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Attorney answers 5


The company vs. sole proprietorship issue is a balance of cost versus benefit. The company structure provides an added level of insurance, insulating your personal assets from potential lawsuits (if followed properly), and segments your professional finances away from your personal finances. But it comes at the expense of added yearly fees (just like an insurance policy) and added formalities, which if aren't followed, eliminate the benefits just described.
In California, you can't form a LLC if you're required to be licensed by the state (i.e. lawyer, architect, and yes, psychologist). So that leaves a Professional Corporation, which can be an S Corp.



Is that true? I thought the law in California states that you can have an LLC, but before it can be formed, the manager(s) must be licensed by their respective licensing agency..



oh yea. Moscone Knox Prof Corp Act . Thanks.


Well, depending upon the nature of your practice and how many professionals you will have working with you...and how many of them will be stakeholders, the corporation is the most likely choice. In addition to the restrictions noted by the previous attorney, the legal entity of choice will be the simpliest of the decisions. If you will have other psychologists as "decision maker's, your shareholder's agreement becomes critical. When I use to work in the "helping professions", there were plenty of personalities to "work in the mix"...sometimes good and sometimes challenging.

If you would like a FREE memorandum on the advantages and disadvantages of various legal entities, including the professional corporation, just send us an email.

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You have a professional license. Therefore, in California, you are required to either practice as a sole proprietor or as a professional corporation; an LLC is not permitted.

A corporation provides two types of benefits over a sole proprietorship - limited liability and tax benefits. These can be significant or negligible, depending on your particular circumstances.

A professional corporation can be a C corporation or an S corporation. These have different tax benefits, the choice depending on your particular circumstances. You can find a summary of the tax differences between C and S corporations, and corporations vs partnerships (taxed like a sole proprietorship) at my website (see link below).


You need to form a professional corporation. Please see the links below to relevant sections of the CA Business and Professions Code.

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.


Although some of these urge limited liablity as a reason to incorporate, none of them expressly states the major factor, which is that the corp will not protect you from professional liability for your own acts. Only your e.& o. policy will do that. The main reason for a solo professional to incorporate used to be to get the more generous limits for retirement plan contributions. I don't think that reason is any longer valid, but you could ask a retirement plan specialist whether any of them are better except a defined benefit pension plan, which is expensive and doesn't ,make sense unless you want to put away a whole lot of money.
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DISCLAIMER—This answer is for informational purposes only under the AVVO system, its terms and conditions. It is not intended as specific legal advice regarding your question. The answer could be different if all the facts were known. This answer does not establish an attorney client relationship. I am admitted only in California.
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