Choosing the Best LLC Type for a Mental Health Professional

Delina Chantel Yasmeh
Published by Delina Chantel Yasmeh | Author
Last updated: March 1, 2024
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Millions of individuals across the U.S. are affected by varying mental health conditions, including anxiety, depression, PTSD, Schizophrenia, and bipolar disorder, and are in need of mental health services.

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 start an LLC 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.
  • A recent report indicated that there is just one professional mental health service provider available for every 350 individuals requiring mental health services.
  • The IRS treats a single-member LLC as a "disregarded entity," simplifying tax filing for over 80% of these businesses, according to IRS data.
  • I apply my analytical skills to guide mental health professionals in choosing the optimal Professional Limited Liability Company (PLLC) structure, ensuring compliance with state-specific regulations and fostering a secure environment for mental health services.


LLC Types for Mental Health Professionals

Office members gathered around a laptop having a discussion about what type to choose for a mental health professional

When starting a mental health practice, one important decision is choosing the best type of LLC for your business entity.

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 need help 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.

"The advantage of a partnership and having a sounding board is that while it may not entirely eliminate tunnel vision, it does broaden your perspective with additional viewpoints."

- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter

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.

Forbes Adviser recommends settling any differences in ownership and management of the LLC to improve decision-making [1]. According to their research, companies that clarify these roles see up to a 35% improvement in operational efficiency.

It's crucial to have clear and well-drafted LLC operating agreements that outline the roles, responsibilities, and decision-making processes within the LLC.

Factors to Consider in Choosing the Best LLC Type

Man thinking while reading documents on clipboard

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.

According to IRS data, this simplifies tax reporting for over 80% of single-member LLCs, streamlining the filing process and potentially reducing accounting costs.

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

Holding a file and searching how long does it take to form an llc in tennessee

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.

Forming PLLCs for Mental Health Practice

An LLC owner who is a professional

If you are a licensed mental health professional, consider forming professional limited liability companies (PLLC).

If you are not licensed, consider forming an LLC with a general partner who is licensed. This will protect you and your business.

PLLC is an LLC specifically designed to protect professionals from malpractice claims. Licensed professionals, such as doctors, lawyers, and accountants, form PLLCs.

As a business owner, you are protected from personal financial losses if a malpractice claim is filed against the company.

Professional limited liability companies offer several benefits for mental health professionals, including:

  • Limited liability protection for the business and its owners
  • Tax benefits. 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

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.

As published in Boston University Law Review jornal, the separation between your personal and business assets is known as the "veil of limited liability" [4]. It helps protect you from personal financial ruin due to any unexpected legal issues that may arise in your practice.

Of course, it's important to note that certain exceptions exist. A PLLC may not cover cases involving fraud or personal negligence. But in general, creating a PLLC will provide you with a strong layer of protection for your personal wealth.

Is A PLLC A Good Choice For A Counseling Center?

A woman holding a piece of paper

A PLLC is a good choice for a counseling center.

Establishing  a PLLC 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 PLLC Lower Taxes?

A PLLC 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 businesses, tax planning plays a critical role—the self-employed face two major tax issues: Income taxes

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, making it one of the best tax benefits for a professional turned sole proprietor.

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.

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FAQs

Is an LLC the Only Business Structure Option for Mental Health Professionals?

An LLC is not the only business structure option for mental health professionals. They have other business structure options, such as sole proprietorship, limited partnership, or corporation. Each option has its pros and cons, so professionals should carefully consider their specific needs and consult with experts to make an informed decision.

Can Mental Health Professionals Benefit From Charging Order Protection as LLC Owners?

Mental health professionals can benefit from charging order protection as LLC owners if they form a multi-member LLC. In the event of personal debts or lawsuits against an individual LLC member, the charging order restricts creditors from seizing the LLC's assets or interfering with its management.

Can a Mental Health Professional Change Their LLC Type in the Future?

Yes, mental health professionals can change their LLC type in the future, but the process and implications should be thoroughly understood before making such a decision.


References:

  1. https://www.forbes.com/sites/aileron/2017/06/19/multiple-owners-tips-to-make-better-decisions/?sh=307f77674665
  2. https://www.irs.gov/publications/p3402
  3. https://www.mbihs.com/
  4. https://www.bu.edu/law/journals-archive/bulr/volume92n4/documents/OH.pdf

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