Why LMFTs and LPCCs Should Consider Incorporation in California

Business savvy Licensed Marriage and Family Therapists and Licensed Professional Clinical Counselors in California can form Professional Corporations to take advantage of important tax and retirement savings.

Licensed Marriage and Family Therapists (LMFTs) and Licensed Professional Clinical Counselors (LPCCs) in California might consider incorporating (forming a professional corporation) for several reasons, including legal, financial, and professional benefits. Here are some key points to consider:

1. Legal Protection

• Limited Liability: Incorporation separates personal and business assets. While professionals remain personally liable for malpractice, other business-related liabilities (e.g., rent, employee disputes) may not affect personal assets.

• Compliance: California requires LMFTs and LPCCs who practice as a group or hire other licensed professionals to form a professional corporation under the state’s laws (California Corporations Code §13401).

2. Tax Benefits

• Flexible Tax Structure: Professional corporations (PCs) can elect to be taxed as an S-corporation, which may reduce self-employment taxes by splitting income into salary and dividends.

• Business Deductions: Incorporation allows for deductions of legitimate business expenses, such as rent, utilities, professional development, and retirement contributions.

3. Credibility and Professionalism

• Operating under a professional corporation adds legitimacy to your practice and may enhance trust among clients and referral sources.

4. Retirement and Benefits

• Incorporation allows for tax-advantaged retirement plans (e.g., SEP-IRA or 401(k)) and other employee benefits that may not be available to sole proprietors.

5. Growth and Scalability

• A corporation provides a structured framework for expanding your practice, such as hiring other therapists, entering partnerships, or diversifying services.

Considerations Before Incorporating

• Costs: Forming and maintaining a corporation involves filing fees, annual taxes (minimum $800 franchise tax), and administrative overhead. Many therapists find that the benefits to operating as a professional corporation in California far outweigh these formalities.

• Professional Obligations: In California, LMFTs and LPCCs must adhere to strict rules regarding ownership, as only licensed professionals can own shares in the corporation.

Incorporating can be a strategic move, but consulting a tax professional or attorney familiar with California law is crucial to ensure it aligns with your goals.