In the world of business formation, the term Occupational Therapy PLLC, or Occupational Therapy Professional Limited Liability Company, refers to a special legal business entity that is designed for licensed occupational therapists for rendering professional services. However, navigating the specifics of using an Occupational Therapy PLLC can be a challenge, particularly as business structure regulations vary from state to state. This article discusses the permissibility of utilizing Occupational Therapy PLLCs in California, and the alternatives for occupational therapy practice owners.

Spoiler Alert: Occupational Therapy Cannot Be Practiced Using Any LLC in California

If you are already practicing occupational therapy in California as a California LLC or an LLC or PLLC from a state other than California, you should also read this article which includes information about how to get into compliance with California law for your occupational therapy practice.

The California Revised Uniform Limited Liability Company Act of the California Corporations Code Prohibits the Use of LLCs for the Provision of Professional Occupational Therapy Services by Licensed Occupational Therapists in California

Use of a California LLC to Render Professional Occupational Therapy Services in California

Neither a foreign nor a California limited liability company (LLC) may be used to render professional occupational therapy services in California. This comes as a surprise to many licensed occupational therapists, as Occupational Therapy Professional Limited Liability Companies are commonly used to render professional occupational therapy services in other states. However, California Corporations Code Section 17701.04(e) answers the question clearly regarding the use of a foreign or California LLC as a business entity for licensed occupational therapists in California:

“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”

Thus, licensed occupational therapists may not use or form limited liability companies for the provision of professional occupational therapy services in California.

Use of a California PLLC to Render Professional Occupational Therapy Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC to render professional occupational therapy services, because nothing in the California Corporations Code differentiates the idea of a California Occupational Therapy PLLC from the California LLC, there is nothing in California law regarding LLC formation for the provision of professional occupational therapy services, and nothing establishes a California Occupational Therapy PLLC as a business entity that may be formed under California law.

In short, there is no California Occupational Therapy PLLC as the law currently stands at the time of this writing in 2024, and thus licensed occupational therapists are unable to form a California Occupational Therapy PLLC for their professional occupational therapy services. This is a significant departure from the norm in many other states, where Occupational Therapy PLLCs are a commonly used business entities for licensed occupational therapists.

Use of a Foreign Occupational Therapy PLLC to Render Professional Occupational Therapy Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC by licensed occupational therapists to render professional occupational therapy services, and because the California Corporations Code does not differentiate between a between a foreign LLC or foreign PLLC for purposes of California Corporations Code Section 17701.04(e), neither a foreign LLC nor a foreign PLLC may be used by licensed occupational therapists to render professional occupational therapy services in California.

Professional practices that are structured as Occupational Therapy PLLCs in other states need to exercise extreme caution when offering professional occupational therapy services in California. The prohibition set forth in California Corporations Code Section 17701.04(e) means that out-of-state occupational therapy practices operating as Occupational Therapy PLLCs in their home state may encounter legal restrictions if they wish to offer their professional occupational therapy services in California. Therefore, the licensed occupational therapists practicing under these Occupational Therapy PLLCs in their home states must not use their Occupational Therapy PLLCs when rendering professional occupational therapy services in California and must do so either as a California Sole Proprietorship or California General Partnership by default, or by establishing a California Professional Occupational Therapy Corporation, as will be discussed below.

What Business Structure Options Do Occupational Therapists Have in California?

As California does not allow the use of California LLCs, foreign LLCs, or foreign Occupational Therapy PLLCs (and there is no such thing as a California PLLC!) for the provision of professional occupational therapy services in the State of California, California licensed occupational therapists seeking to practice occupational therapy in California must explore choose one of the permissible business structures, as discussed below.

Selecting the best permissible business structure option will depend on the specific professional occupational therapy services to be offered and the regulations governing those occupational therapy services. In the following subsections, we will introduce the various business entities that are permitted to render professional occupational therapy services in California, including Sole Proprietorships, General Partnerships, and Professional Occupational Therapy Corporations, each of which comes with its own set of advantages and limitations.

A California Licensed Occupational Therapist May Practice as a Sole Proprietorship in California

A Sole Proprietorship is a straightforward and uncomplicated business structure that may be utilized by licensed occupational therapists in California. In a Sole Proprietorship, the individual occupational therapist is the sole owner and operator of the occupational therapy practice.

Liability Protection for Licensed Occupational Therapist Sole Proprietors in California

Sole Proprietorships do not provide their owners with liability protection in California. In this type of business structure, the licensed occupational therapist is personally responsible for all business debts, liabilities, obligations, and all legal judgments against the occupational therapy practice. This means that if the occupational therapy practice incurs a debt or is sued, the personal assets of the licensed occupational therapist, such as their home, car, and personal bank accounts, can be used to settle these obligations.

The lack of liability protection is a significant disadvantage of operating an occupational therapy practice as a Sole Proprietorship and is a critical factor that a licensed occupational therapist should consider when deciding on the most appropriate business structure for their occupational therapy practice in California.

Taxation of Licensed Occupational Therapist Sole Proprietors in California

In California, Occupational Therapist Sole Proprietorships are subject to pass-through taxation, meaning the business itself is not separately taxed. Instead, the income or loss of the business is passed through to the licensed occupational therapist. The licensed occupational therapist reports business income and expenses on Schedule C of their personal federal income tax return (Form 1040). The net profit or loss is then reported on the personal tax return of the licensed occupational therapist and taxed at individual income tax rates.

In addition to income taxes, a licensed occupational therapist practicing as a Sole Proprietorship in California is also subject to self-employment taxes, which cover Social Security and Medicare taxes. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

At the state level, California has one of the highest state income tax rates in the country, and these rates apply to business income that passes through to the personal tax returns of the licensed occupational therapist practicing as a Sole Proprietorship.

When Should a California Licensed Occupational Therapist Practice as a Sole Proprietorship in California?

A California licensed occupational therapist should only consider practicing as a Sole Proprietorship in California when they are starting their occupational therapy practice and have limited financial resources, will not have employees, do not expect to grow their practice beyond just a few patients, and have substantial insurance coverage for the liabilities and risks associated with their occupational therapy practice.

However, as the occupational therapy practice grows, the licensed occupational therapist should reconsider the use of a Sole Proprietorship for their occupational therapy practice as revenue increases, before hiring employees, or as professional liabilities increase. Upon the first to occur of increasing revenue, hiring employees, or increases in professional liability, it will be advantageous for the licensed occupational therapist to explore other business structures that offer tax benefits and liability protection.

Two or More California Licensed Occupational Therapists Professionals May Practice as a General Partnership in California

A California General Partnership used for an occupational therapy practice is a business entity in which two or more licensed occupational therapists join together to provide professional occupational therapy services in California. In such a setup, all occupational therapist partners share equal rights and responsibilities in managing the business of the occupational therapy practice.

Liability Protection for Occupational Therapist General Partners in a California General Partnership

General Partnerships in California do not provide occupational therapist partners with liability protection. This means each occupational therapist partner has joint and several personal liability for all business debts, liabilities, obligations, and all legal judgments against the occupational therapy practice, including those incurred by other occupational therapist partners which includes acts of malpractice by the other occupational therapist partners. If the California General Partnership providing professional occupational therapy services is sued or incurs debt, the personal assets of each occupational therapist partner, such as their home, vehicles, and personal savings, could be at risk, even if they are not found personally at fault for incurring the debt or committing the act of malpractice.

This lack of liability protection is a considerable drawback for California General Partnerships rendering professional occupational therapy services and something California licensed occupational therapists should seriously factor into their decision when considering a California General Partnership for their occupational therapy practice in California.

Taxation of General Partnership Occupational Therapy Practices in California

In California, occupational therapy practices structured as General Partnerships are taxed under the pass-through taxation system. This means the California General Partnership itself does not pay income taxes. Instead, the share of the profits or losses of the California General Partnership allocated to each occupational therapist partner passes through to their personal income tax return. The individual occupational therapist partners are responsible for paying federal and state income taxes on their allocated share of the profits of the California General Partnership at their individual income tax rates.

Each occupational therapist partner is also required to pay self-employment taxes, which are Social Security and Medicare taxes for self-employed individuals. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

California General Partnership earnings are also subject to the California state income tax. The state has a progressive income tax system with rates ranging from 1% to 13.3%, depending on the income of the taxpayer. These rates apply to the allocated share of the California General Partnership income allocated to each occupational therapist partner and passed through to their personal tax returns.

When Should California Licensed Occupational Therapists Practice as a General Partnership in California?

Based upon the unlimited liability and tax structure of a California General Partnership, a California General Partnership should probably not be considered by licensed occupational therapists practicing occupational therapy in California, as there are superior options for a professional practice in California that provide more personal liability protection than a California General Partnership for occupational therapy practices.

One or More California Licensed Occupational Therapists May Practice Occupational Therapy as a California Professional Occupational Therapy Corporation in California

California Professional Occupational Therapy Corporations are a specialized form of corporate business structure designed specifically for licensed occupational therapists who seek personal liability protection and tax benefits for their occupational therapy practice. A California Professional Occupational Therapy Corporation is a separate legal entity distinct from its licensed occupational therapists owner(s) and permitted non-occupational therapist owner(s) who are licensed professionals, referred to collectively as licensed shareholders, which distinguishes it from a California Sole Proprietorship (which is an individual licensed occupational therapist personally practicing occupational therapy) or a California General Partnership (which is a group of licensed occupational therapists practicing occupational therapy together).

Liability Protection from a Professional Occupational Therapy Corporation in California

In a California Professional Occupational Therapy Corporation, the personal assets of the licensed shareholders are generally protected from business debts, liabilities, obligations, and legal judgments against the California Professional Occupational Therapy Corporation. This means that in most instances, if the California Professional Occupational Therapy Corporation is sued or incurs debt, the personal assets of the licensed occupational therapist owner(s) and other licensed shareholders (such as their home, vehicles, and personal savings) are shielded from creditors.

It is essential to note that this liability protection does not extend to professional malpractice claims against a licensed occupational therapist. The personal asset protection applies only to debts and obligations incurred by the California Professional Occupational Therapy Corporation, not to the individual actions of a licensed occupational therapist. However, when two or more licensed occupational therapists are practicing occupational therapy in a California Professional Occupational Therapy Corporation, a malpractice claim against one licensed occupational therapist is not a malpractice claim against all the other licensed occupational therapists and other licensed shareholders, which is a significant increase in personal liability protection for professional malpractice compared to a California General Partnership.

While the use of a California Professional Occupational Therapy Corporation provides liability protection, it does not eliminate the requirement for individual professionals to maintain adequate malpractice insurance coverage or for the California Professional Occupational Therapy Corporation to otherwise secure liability insurance for indemnification of its liabilities.

Taxation of Professional Occupational Therapy Corporations in California

Professional Occupational Therapy Corporations in California can opt to be taxed as personal service corporations subject to double taxation or S Corporations, which alters the tax landscape for these entities. As the vast majority of California Professional Occupational Therapy Corporations elect S Corporation taxation, this article will focus on S Corporation taxation of California Professional Occupational Therapy Corporations.

With S Corporation status, the California Professional Occupational Therapy Corporation itself does not pay income tax. Instead, the income and losses of the California Professional Occupational Therapy Corporation pass through to the personal income tax returns of the licensed shareholders.

To qualify for S Corporation status, the California Professional Occupational Therapy Corporation must meet certain requirements including having no more than 100 shareholders, all of whom must be U.S. citizens or residents, and having only one class of stock.

One of the key advantages of S Corporation status for a California Professional Occupational Therapy Corporation lies in the area of self-employment taxes. Salaries and wages paid to licensed shareholder-employees are subject to payroll taxes (Social Security and Medicare). However, any additional profits distributed to licensed shareholders are not subject to either payroll taxes or self-employment taxes. This can result in significant tax savings.

In terms of state taxes, California taxes S Corporations at a rate of 1.5% of their net income, with a minimum tax of $800 paid annually to the California Franchise Tax Board. Licensed shareholders in a California Professional Occupational Therapy Corporation taxed as an S Corporation are also required to pay state income tax on their allocated share of the income of the California Professional Occupational Therapy Corporation.

When Should California Licensed Occupational Therapists Practice Using a Professional Occupational Therapy Corporation in California?

A California licensed occupational therapist should consider practicing as a Professional Occupational Therapy Corporation in California when seeking personal liability protection and tax benefits for their occupational therapy practice. This structure is particularly advantageous if the occupational therapist wishes to shield their personal assets from business debts, liabilities, and obligations while also shielding themselves from legal judgments against the California Professional Occupational Therapy Corporation, with the exception of individual professional malpractice claims against the licensed occupational therapist personally.

If the licensed occupational therapist can meet the requirements necessary to qualify for S Corporation status, they can enjoy significant tax advantages. This includes the potential for tax savings through the having no self-employment tax liability on profits distributed to licensed shareholders, and only payroll tax liabilities on a reasonable salary paid to them as an employee of the California Professional Occupational Therapy Corporation.

Based upon the availability of both limited liability and tax benefits for the licensed occupational therapist, the California Professional Occupational Therapy Corporation should be the go-to business entity for California licensed occupational therapists.

Secure Your Future with Legal Services from Experts in California Professional Business Structures: Let San Diego Corporate Law Guide Your Business Structure Selection

Choosing the right business structure for your occupational therapy practice in California is a critical step for every California licensed occupational therapist. It can significantly influence your tax obligations, personal liability, and the overall success of your occupational therapy practice. At San Diego Corporate Law, our experienced legal team is well-versed in California business laws and can help you navigate the complexities of the Occupational Therapy Practice Act of the California Business and Professions Code and the Moscone-Knox Professional Corporations Act of the California Business and Professions Code when forming a California professional corporation. Whether you are considering a California Professional Occupational Therapy Corporation or other structure for your occupational therapy practice, we can provide the guidance necessary to make an informed decision. Contact us today to schedule a consultation and ensure your occupational therapy practice starts in California on solid legal footing.