The type of limited liability company (LLC) you need as a mental health professional will depend on your state's licensing or certification requirements.
With a deep understanding of the legal and regulatory landscape, we’ll explore the available LLC types and their implications for mental health professionals.
In this article, we provide all the first-hand information from some of the top legal advisors to help you choose the best LLC type if you are a mental health professional.
Quick Summary
- Mental health professionals should consider forming a Professional Limited Liability Company (PLLC) when choosing an LLC type, as it provides liability protection while allowing them to maintain their licenses.
- Single-member or sole proprietorship LLCs are suitable for mental health professionals who want to run their practice independently
- Multi-member LLCs benefit mental health professionals planning to start their practice with partners, allowing shared workload, collaboration, and the potential for growth and expansion
LLC Types for Mental Health Professionals
When starting a mental health practice, one important decision is choosing the best type of LLC for your business [1].
Let's consider two common LLC types that mental health professionals can consider.
1. Single-Member or Sole Proprietorship LLCs
A single-member LLC is an LLC that has only one owner. This makes it a good option if you plan to run your mental health practice independently.
You can still hire independent contractors or employ people to assist you in your practice.
As the sole owner, you’ll have complete control and power to make decisions over the business.
One significant benefit of a single-member LLC is its simplicity. It requires fewer formalities and paperwork compared to other business entities or structures.
You'll have fewer compliance requirements and less administrative burden, allowing you to focus more on providing excellent care to your clients.
Another advantage is personal liability protection.
However, it's also important to consider that a sole proprietorship LLC has certain limitations. For example, with a single-member LLC, you might find difficulties if you plan to expand and add partners or sell the business in the future.
2. Multi-Member LLCs
This LLC option is suitable if you plan to start your mental health practice with partners or anticipate bringing in partners.
In a multi-member LLC, the owners, also known as members, can share the responsibility of managing the business and making decisions collectively.
One significant advantage of a multi-member LLC is the shared workload.
Running a mental health practice can be demanding, and having partners can help distribute the responsibilities. Each member can bring their unique skills and expertise. Therefore, more skill power will contribute to the success and growth of the practice.
However, it's important to consider that having multiple owners can sometimes lead to conflicts or disagreements.
It's crucial to have clear and well-drafted operating agreements that outline the roles, responsibilities, and decision-making processes within the LLC.
Factors to Consider in Choosing the Best LLC Type
When setting up a mental health professional LLC, several factors come into play, including:
1. Personal Liability Protection
Each profession has unique risks, and mental health professionals are no exception. You may encounter potential liabilities associated with malpractice claims or breach of confidentiality in your work.
By carefully considering these risks, you can determine the level of liability protection you require and choose an LLC type that offers adequate safeguards for your practice.
2. Tax Considerations
Different LLC types have varying tax treatments.
For example, the IRS considers a single-member LLC a "disregarded entity" [2]. The owner reports the business's income and expenses as a personal tax return.
On the other hand, multi-member LLCs usually file separate tax returns, and profit and losses are distributed among the members.
Therefore, you’ll evaluate which tax structure would be most advantageous for your mental health practice.
You may want to consult with a tax professional depending on your income, expenses, and long-term goals.
3. Management and Control
Identifying the level of control desired by the mental health professional is crucial.
If you prefer having full control over business decisions and the flexibility to make quick changes, you might consider a sole proprietor LLC the right fit.
On the other hand, if you value collaboration and want to benefit from shared expertise, consider a multi-member LLC a more suitable option.
4. Future Scalability and Growth Potential
When choosing the type of LLC business structure for your mental health profession, consider the practice's long-term goals and expansion plans.
As a mental health professional, you likely have aspirations for the growth and expansion of your practice. Therefore, you’ll want to consider an LLC type that aligns with your long-term goals.
For instance, if you plan to bring in additional partners or investors, a multi-member LLC would provide the necessary framework to accommodate such changes.
A Case Study and Example of MBI Health Service LLC
MBI Health Service LLC is a mental health practice in Washington, D.C. The company offers a wide range of services to support individuals in their journey toward mental wellness [3].
Driven by a strong commitment to providing accessible and high-quality care, they carefully considered their options before settling on the most suitable LLC business structure type.
After thorough research and consultations with legal professionals, MBI Health Service LLC established itself as a multi-member LLC. This decision allowed them to bring in additional partners and investors, enabling them to expand their services and reach more individuals in need.
By forming a multi-member LLC, they could distribute ownership among their partners and share the responsibility and decision-making process.
The outcome of MBI Health Service's decision has been highly successful. With the support of their partners and investors, they were able to enhance their resources, attract top talent, and serve a larger client base.
Their dedication to personalized care and community engagement has earned them a solid reputation, making them a trusted name in mental health services in their region.
PLLCs for Mental Health Practice
If you are a licensed mental health professional, you may want to consider forming professional limited liability companies (PLLC).
If you are not licensed, you may want to consider forming an LLC with a general partner who is licensed. This will provide protection for you and your business.
A PLLC or professional corporation is a limited liability company specifically designed to protect professionals from malpractice claims. Licensed professionals, such as doctors, lawyers, and accountants, form PLLCs.
PLLCs offer limited liability protection for the business and the professionals who own it.
As a business owner, you are protected from personal financial losses if a malpractice claim is filed against the company.
PLLCs offer several benefits for mental health professionals, including:
- Limited liability protection for the business and its owners
- Tax advantages. A PLLC reduces your overall tax liability, giving you more money to invest in your practice or personal finances.
- Ease of formation
- As a mental health professional, a professional corporation offers you the flexibility to maintain control over the operations of your practice
The Legal Protections that PLLCs Offer
Regarding legal protections, PLLCs provide a valuable shield for mental health professionals. As an individual practitioner, you may face risks and potential lawsuits.
However, with a PLLC, your personal assets are typically safeguarded. If, for example, a client were to sue your practice, their claims would only be limited to the PLLC assets and not your personal belongings.
This separation between your personal and business assets is known as the "veil of limited liability." It helps protect you from personal financial ruin due to any unexpected legal issues that may arise in your practice [4].
Of course, it's important to note that certain exceptions exist. A PLC may not cover cases involving fraud or personal negligence. But in general, creating a PLC will provide you with a strong layer of protection for your personal wealth.
Can an LLC Limit My Legal Liability?
An LLC can limit your legal liabilities. One of the key benefits of forming an LLC is the ability to limit your legal liability for the debts and actions of the LLC.
This can be a key benefit for a business owner looking to limit their personal financial risk.
- The LLC must be properly formed and registered with the state in which it resides
- You, as an individual, must not be personally liable for the actions of the LLC
- You must not be directly involved in the legal action against the LLC (i.e., you cannot sign an agreement that would put your personal assets at risk)
For professional businesses, this is typically done by including a clause in our contracts that clearly states that you are not responsible for the actions of your services company, thus protecting your personal assets.
Is An LLC A Good Choice For A Counseling Center?
An LLC is a good choice for a counseling center.
Establishing an LLC for a counseling center can offer several benefits, such as limited liability protection and flexibility in management.
As a mental health professional, your work involves providing counseling and therapy to clients. It is always possible to experience unforeseen circumstances or misunderstandings.
Therefore, by operating your counseling center as an LLC, you can protect your personal assets from risk in case of legal claims or financial obligations your business may face.
Furthermore, forming an LLC is generally less complex and requires less ongoing paperwork than other business entities like corporations.
This can save you time and money, allowing you to focus on what you do best—providing quality counseling services to your clients.
However, consulting with a legal and financial professional is essential. This will ensure that you comply with industry regulations and evaluate the counseling practice's needs.
Does LLC Lower Taxes?
An LLC can lower taxes, but its impact on tax reduction depends on various factors and individual circumstances.
As professional services are the bulk of many small business entities, tax planning plays a critical role—the self-employed face two major tax issues: income and self-employment taxes. LLCs can help with both.
Income taxes are paid on the business's profits. These taxes are usually lower for businesses than individuals because companies can take deductions that individuals cannot.
Self-employment taxes are paid on the business's profits, including Social Security and Medicare taxes.
The self-employed pay both the employee and employer portions of these taxes. LLCs can help reduce the self-employment tax bill by creating a company classified as a corporation.
An LLC can be taxed as a corporation. You'll want to check with your state's filing requirements, but most professional service corporations are PLLC or professional corporations.
As a Corporation, an LLC will pay fewer taxes than a sole proprietorship or partnership taxed.
Consulting with a qualified tax professional specializing in mental health practices is essential to determine the potential tax benefits and ensure compliance with relevant regulations.
How to form an LLC?
Forming an LLC is a relatively simple process. The steps involved in forming an LLC depend on the state in which you reside.
However, the following general steps are usually involved:
- Choose a name for your LLC. The name must be unique and cannot include words restricted by your state.
- File articles of organization with the Secretary of State (SOS) in your state of residence. If you would like, you can contact an attorney to help you through this process.
- Obtain licenses and permits required by federal and local authorities (e.g., employment license, business license). Some states may require that you post a bond.
- Draft an operating agreement. This document will outline the rights and responsibilities of the members of your LLC.
- Publish a notice of formation in a local newspaper.
- Start doing business. You can use your LLC's name once you register with the SOS and receive your Certificate of Organization.
If you would like more detailed information on how to form an LLC, please visit the website of your state Secretary of State. You can also find helpful online resources and templates for creating an LLC operating agreement.
FAQs
Can an LLC Provide Professional Services?
An LLC can generally provide professional services, subject to specific legal and licensing requirements in different jurisdictions. It is essential to consult with legal professionals or relevant authorities to ensure compliance with specific professional and location regulations.
Does a PLLC Need an EIN?
A PLLC may not require an EIN (employer identification number).
However, if your PLLC has employees, you must apply for an EIN. You may also require an EIN for filing taxes and opening business bank accounts, which helps distinguish the PLLC as a separate business entity. You can obtain an EIN from the IRS.
What Is the Best LLC Type for a Mental Health Professional?
The best LLC type for a mental health professional depends on individual circumstances and preferences.
Many mental health professionals opt for a Professional Limited Liability Company (PLLC) due to its suitability for licensed professionals. A PLLC provides liability protection while allowing professionals to maintain their licenses.
If not fully licensed, it will be best to consider starting an LLC in partnership with your already licensed colleague.
It's important to seek guidance from a legal expert specializing in healthcare law to ensure compliance with specific state regulations and address any unique considerations.
References
- https://cdn.mdedge.com/files/s3fs-public/issues/articles/0416CP_PRLS_Braslow.pdf
- https://www.irs.gov/publications/p3402
- https://www.mbihs.com/
- https://www.bu.edu/law/journals-archive/bulr/volume92n4/documents/OH.pdf
