Choosing the right business structure is a crucial decision for solo midwives in California. The choice of business entity determines tax advantages and how the midwifery practice is taxed, the extent of personal liability protection and personal asset protection available to the midwife, and the administrative requirements the midwife will need to manage in operating the midwifery practice.

A future article titled “What are the Business Structure Options for Two or More Midwives in California?” will discuss the additional options available when two or more midwives start practicing midwifery together, however, for midwives practicing midwifery solo in California, the options are limited to sole proprietorships and California Professional Midwifery Corporations.

This article provides an overview of the various business structure options available to midwives practicing midwifery solo in California, helping these midwives to make an informed choice that aligns with their professional goals and liability concerns in the most tax efficient format possible.

Executive Summary: Putting the Conclusion First for Busy Midwives

Summary of Practicing Midwifery as a Sole Proprietor

The primary benefit of a sole proprietorship for midwives is its simplicity. There are few legal formalities to establish a sole proprietorship and tax reporting is equally straightforward. However, a sole proprietorship is not a separate legal entity, which means that midwife sole proprietors are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability) against their midwifery practice. The lack of a separate legal entity also means there is no distinction between personal and professional business assets for midwife sole proprietors, so the debts, liabilities, and legal judgments for which the midwife sole proprietor is liable are satisfied from the personal assets of the midwife.

Summary of Practicing Midwifery with a California Professional Midwifery Corporation

While inherently more complex than midwife sole proprietorships, the complexity of a California Professional Midwifery Corporation may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. As a separate legal entity, California Professional Midwifery Corporations significantly reduce liability risks and are more tax efficient for most midwives. For midwives in high-liability practices, this reduction in risk can be substantial. The separate legal entity status of California Professional Midwifery Corporations also means there is a distinction between personal and professional business assets for the midwife, meaning the debts, liabilities, and legal judgments against the midwifery practice are not generally satisfied from the personal assets of the midwife.

Choosing Between a Sole Proprietorship and a California Professional Midwifery Corporation

For most midwives, the California Professional Midwifery Corporation is the right chose because the tax benefits coupled with limited liability protection and ability to separate personal assets from professional business assets far outweighs the increased administrative complexity compared to practicing midwifery as a sole proprietorship.

Contact San Diego Corporate Law for Assistance Selecting and Forming the Best Business Structure for Your Midwifery Practice

Take the next step toward securing the ideal business structure for your midwifery practice, whether that is a California Professional Midwifery Corporation or another business structure. Contact the experienced corporate attorneys at San Diego Corporate Law today to schedule a consultation and receive personalized, expert guidance tailored to your needs. Our team is here to help you make informed decisions with confidence.

Practicing Midwifery as a Sole Proprietor

Practicing midwifery as a sole proprietor is the simplest and most straightforward business structure for solo midwives in California. It requires minimal paperwork to set up compared to other business entity options and offers flexibility in managing the midwifery practice. However, along with these advantages come distinct disadvantages that midwives must consider carefully before considering sole proprietorship as the business structure for their midwifery practice.

Administrative Requirements of Practicing Midwifery as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing midwifery is the simplicity of establishing a sole proprietorship and the continued simplicity of operating as a sole proprietor.

Sole proprietorships require minimal effort to establish, with few legal formalities involved. Typically, the initial steps of setting up a sole proprietorship include obtaining a local business license to operate legally in the municipal jurisdiction in which the practice will operate and, if applicable, registering a fictitious business name (often referred to as a d/b/a).

Unlike other business structures, there is no need to file complex paperwork or create a formal business entity, which saves both time and money, but as discussed below, there are tradeoffs in exchange for this simplicity.

Taxation of Midwife Sole Proprietors

Tax considerations are a critical aspect to be examined when planning to practice midwifery as a sole proprietor. Sole proprietors are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to midwifery practices is essential for midwives when choosing a business structure in which to operate their midwifery practice.

Business Income Taxation When Practicing Midwifery as a Sole Proprietor

For midwife sole proprietors, business income taxation is both simple and straightforward compared to that of other business entities. Sole proprietors report their business income and expenses on Schedule C (Profit or Loss from Business) to their personal income tax return, using Internal Revenue Service Form 1040. This allows midwives to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Midwifery as a Sole Proprietor

While simple and straightforward, taxation of midwife sole proprietors is not tax efficient. One significant consideration for midwife sole proprietors is self-employment tax. Since a sole proprietor does not receive a salary from their business, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate at the time of this writing totaling 15.3% of net profit in addition to federal and state income taxes (however, a sole proprietor can deduct half of the self-employment tax paid as an adjustment on their tax return, which provides some financial relief).

Additional Medicare Tax When Practicing Midwifery as a Sole Proprietor

High-earning midwife sole proprietors may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For midwife sole proprietors filing as single, the threshold is $200,000, while it is $250,000 for midwife sole proprietors filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Sole proprietors must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high-earning midwives to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Midwife Sole Proprietors

Understanding the tax implications of a sole proprietorship is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

Personal Liability Protection and Personal Asset Protection When Practicing Midwifery as a Sole Proprietor

Practicing midwifery as a sole proprietor, while simple, also comes with challenges regarding personal liability protection and asset protection because a sole proprietorship is not a separate legal entity, and thus does not offer a legal distinction between the midwife and the midwifery practice.

Personal Liability for Midwives When Practicing Midwifery as a Sole Proprietor

One of the primary risks faced by midwife sole proprietors is personal liability. The lack of distinction between the midwife and the midwifery practice means that the midwife sole proprietor is personally liable for all debts, liabilities, obligations, and legal judgments incurred by the midwifery practice personally, including claims for professional negligence, better known as malpractice, for errors and omissions.

Personal Asset Protection for Midwives When Practicing Midwifery as Sole Proprietors

The lack of distinction between the midwife and the midwifery practice that makes personal liability a primary risk to midwife sole proprietors also means that all assets of the midwife, be they strictly personal assets or assets used in the midwifery practice, are subject to claims by creditors and legal claimants against the personal assets of the midwife (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Midwife Sole Proprietors

The exposure to personal liability for debts, liabilities, obligations, and legal judgments (including those for professional negligence) coupled with the inability to separate personal assets from professional business assets underscores the importance for midwives choosing a business structure for their midwifery practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Midwifery as a Sole Proprietor

When deciding whether to practice midwifery as a sole proprietor, it is essential to weigh the benefits and drawbacks of this business structure. While midwife sole proprietorships offer simplicity to midwives, midwife sole proprietorships come with significant risks and limitations. The advantages and disadvantages of practicing midwifery as a sole proprietor are compared below together with a recommendation for when a sole proprietorship is the best legal structure for practicing midwifery.

Advantages of Sole Proprietorship for Midwives

The primary benefit of a sole proprietorship for practicing midwifery is its simplicity. There are few legal formalities to establish a sole proprietorship and tax reporting is equally straightforward.

Disadvantages of Sole Proprietorship for Midwives

While sole proprietorships are simple to establish, they carry significant risks and are not tax efficient for most midwives.

A sole proprietorship is not a separate legal entity, which means that midwife sole proprietors are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability). For midwives in high-liability midwifery practices, this risk can be substantial.

The lack of a separate legal entity also means there is no distinction between personal and professional business assets for midwife sole proprietors, meaning the debts, liabilities, and legal judgments for which the midwife sole proprietor is liable are satisfied from the personal assets of the midwife.

When is a Sole Proprietorship the Right Business Structure for Practicing Midwifery?

A sole proprietorship can be an ideal option for midwives starting small-scale midwifery practices with the expectation of low net profit and low liability risks. However, before choosing to practice midwifery as a sole proprietor, it is essential to weigh the benefits of simplicity against the risks of personal liability and the future growth of the midwifery practice. For midwives in high-risk midwifery practice areas or those who anticipate growth in their midwifery practice may want to avoid practicing midwifery as a sole proprietorship in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.

For a more detailed understanding of the differences between professional sole proprietorships and California Professional Midwifery Corporations and when a sole proprietorship is the best choice of business structure for midwifery practices, see “When Not to Use a California Professional Midwifery Corporation” for more information.

Practicing Midwifery with a California Professional Midwifery Corporation

Practicing midwifery with a California Professional Midwifery Corporation is not as simple or straightforward as practicing midwifery as a sole proprietor, however, a California Professional Midwifery Corporation provides the tax efficiency, limited liability protection, and separation of personal assets of the midwife from the professional business assets of the midwifery practice that midwife sole proprietorships lack.

Administrative Requirements of Practicing Midwifery with a California Professional Midwifery Corporation

In order to enjoy the tax efficiency, limited liability protection, and separation of personal assets a California Professional Midwifery Corporation provides, midwives are faced with the complexity of establishing a California Professional Midwifery Corporation. While this formation process is complex, midwives may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for the California Professional Midwifery Corporation, leaving midwives with essentially the same tasks they would undertake to establish a sole proprietorship. It is also worth noting that legal fees and costs of forming a California Professional Midwifery Corporation are usually qualified business expenses that are tax deductible.

In addition to the initial formation of a California Professional Midwifery Corporation, every year after the initial formation of a California Professional Midwifery Corporation a Statement of Information must be filed with the California Secretary of State and a shareholder and board of directors meeting must be held. Just as with the formation of a California Professional Midwifery Corporation, San Diego Corporate Law can assist in the annual requirements of practicing midwifery with a California Professional Midwifery Corporation.

Despite the additional administrative requirements of practicing midwifery with a California Professional Midwifery Corporation compared to practicing midwifery as a sole proprietorship, an experienced corporate attorney can make the difference in requirements comparable.

For a more detailed understanding of the administrative requirements for forming and maintaining a California Corporation, see “The 7 Steps for Forming a California Professional Midwifery Corporation” for more information.

Taxation of California Professional Midwifery Corporations

As with midwife sole proprietorships, tax considerations are a critical aspect to be examined when planning to practice midwifery with a California Professional Midwifery Corporation. While midwives practicing midwifery with a California Professional Midwifery Corporation are subject to business income taxation, payroll taxes for wages, and franchise taxes paid to the California Franchise Tax Board, midwives practicing midwifery with a California Professional Midwifery Corporation are not subject to self-employment taxation or additional Medicare taxes. Understanding how these taxes apply to midwifery practices is essential for midwives choosing a business structure in which to operate their midwifery practices.

Business Income Taxation When Practicing Midwifery with a California Professional Midwifery Corporation

A California Professional Midwifery Corporation is by default taxed as a personal service corporation (sometimes referred to as a professional service corporation), which is essentially a C Corporation (commonly referred to as a C-Corp) wherein corporate taxes applied to corporate profits are taxed directly at the federal and state levels at the corporate income tax rate, and any distributed dividends are subject to taxation again against the individuals receiving the dividends (referred to as “double taxation”). However, a California Professional Midwifery Corporation may (and almost always should) elect to be treated as an S Corporation (commonly referred to as an S-Corp), which fundamentally changes how income is taxed. This article will focus on S Corporation taxation of California Professional Midwifery Corporations.

Electing S Corporation status alters the tax treatment by enabling pass-through taxation. This means the profits and losses of the California Professional Midwifery Corporation after payment of a reasonable salary to the midwife are passed directly to the midwife as the shareholder who in turn reports those profits on their personal income tax returns to pay federal income tax and state income tax on the net profit of the California Professional Midwifery Corporation to pay personal income tax of the net profits of the midwifery practice.

For more information about the election of S Corporation status for a California Professional Midwifery Corporation, see “Can a California Professional Midwifery Corporation Be an S-Corp?” for more information.

Self-Employment Tax When Practicing Midwifery with a California Professional Midwifery Corporation

Unlike midwife sole proprietorships, which require the midwife sole proprietor to pay self-employment tax on the entire net profit of the professional practice, the midwife-shareholder of a California Professional Midwifery Corporation is not subject to self-employment taxes.

Instead of self-employment taxes on the entire net profit of the midwifery practice, with a California Professional Midwifery Corporation employee and employer contributions to payroll tax are only paid on the reasonable salary of the midwife. While the sum of the employee and employer contributions total 15.3% (the same percentage as self-employment tax), the calculation of the tax is based upon the reasonable salary of the midwife only and not the net profit of the California Professional Midwifery Corporation, which may result in significant annual tax savings compared to a sole proprietorship.

Additional Medicare Tax When Practicing Midwifery with a California Professional Midwifery Corporation

As discussed above for midwife sole proprietorships, the Additional Medicare Tax is an extra 0.9% tax applied to earned income exceeding certain thresholds. However, because the Additional Medicare Tax is only applied to earned income and the net profit of a California Professional Midwifery Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to midwives practicing midwifery with a California Professional Midwifery Corporation if the reasonable salary of the midwife exceeded the thresholds, meaning for all intents and purposes, practicing midwifery with a California Professional Midwifery Corporation does not subject midwives to the Additional Medicare Tax.

Annual Franchise Tax for California Professional Midwifery Corporations

California Professional Midwifery Corporations must pay an annual franchise tax that midwife sole proprietorships do not pay. The franchise tax paid by a California Professional Midwifery Corporation taxed as an S Corporation is 1.5% of net profit with a minimum of $800 annually. While this is a tax not paid by midwife sole proprietorships, the annual franchise tax is very small in comparison to self-employment taxes and the Additional Medicare Taxes paid by midwife sole proprietors.

Conclusions About Taxation of California Professional Midwifery Corporations

Understanding the tax benefits of a California Professional Midwifery Corporation is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

For a more detailed understanding of the taxation of California Professional Midwifery Corporations, see “What Tax Benefits Does a California Professional Midwifery Corporation Provide?” for more information.

Personal Liability Protection and Personal Asset Protection When Practicing Midwifery with a California Professional Midwifery Corporation

Practicing midwifery with a California Professional Midwifery Corporation, while more complex than practicing midwifery as a sole proprietorship, overcomes many of the personal liability protection and asset protection shortcomings of midwife sole proprietorships. A California Professional Midwifery Corporation is a separate legal entity distinct from the midwife, thus offering a legal distinction between the midwife and the midwifery practice as well as personal and business assets of the midwife.

Personal Liability Protection for Midwives When Practicing Midwifery with a California Professional Midwifery Corporation

Practicing midwifery with a California Professional Midwifery Corporation resolves most of the risks faced by midwife sole proprietors for personal liability. California Professional Midwifery Corporations provide a separate legal entity distinct from the midwife, meaning the midwife is generally not personally liable for the debts, liabilities, obligations, and legal judgments incurred by the midwifery practice.

Under California law, claims for professional negligence, better known as malpractice, for errors and omissions of midwives are personal to the midwives and not shielded by the existence of the California Professional Midwifery Corporation, however, malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the midwife from this risk.

Personal Asset Protection for Midwives When Practicing Midwifery with a California Professional Midwifery Corporation

The separate legal entity and distinction between the midwife and the midwifery practice provided by a California Professional Midwifery Corporation means that, unlike a sole proprietorship, the California Professional Midwifery Corporation separates the personal assets of the midwife from professional business assets of the midwifery practice. Therefore, claims by creditors and legal claimants against the California Professional Midwifery Corporation are generally limited to the professional business assets of the California Professional Midwifery Corporation and are not satisfied against the personal assets (such as homes, bank accounts, investments, and other property) of the midwife.

Conclusions About Personal Liability and Asset Protection When Practicing Midwifery with a California Professional Midwifery Corporation

The limitation of personal liability for debts, liabilities, obligations, and legal judgments against the California Professional Midwifery Corporation coupled with the ability to separate personal assets from professional business assets makes the use of a California Professional Midwifery Corporation the choice for midwives who wish to limit their personal liability and protect their personal wealth and future earnings from most claims arising out of their midwifery practice.

For a more detailed understanding of the liability protection and asset protection of California Professional Midwifery Corporations, see “What Liability Protection Does a California Professional Midwifery Corporation Provide?” for more information.

Conclusions About Practicing Midwifery with a California Professional Midwifery Corporation

When deciding if practicing midwifery as a California Professional Midwifery Corporation is worth the additional cost and administrative requirements, it is essential to weigh the benefits and drawbacks of this business structure. While California Professional Midwifery Corporations are more complex, California Professional Midwifery Corporations resolve many of the significant risks and limitations inherent to practicing midwifery as a sole proprietorship. The advantages and disadvantages of operating with a California Professional Midwifery Corporation are compared below together with a recommendation for when a California Professional Midwifery Corporation is the best legal structure for practicing midwifery.

Advantages of California Professional Midwifery Corporations

While practicing midwifery as a sole proprietorship is simple to establish, doing so carries significant risks and is not tax efficient for most midwifery. California Professional Midwifery Corporations significantly reduce liability risks and are more tax efficient for most midwifery.

A California Professional Midwifery Corporation is a separate legal entity, which means the midwife is generally shielded from personally liable for debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability). For midwives in high-liability midwifery practices, this reduction in risk can be substantial.

The separate legal entity status also means there is a distinction between personal and professional business assets for midwives, meaning the debts, liabilities, and legal judgments against their midwifery practice are not generally satisfied from the personal assets of the midwife.

Disadvantages of California Professional Midwifery Corporations

The primary benefit of a sole proprietorship is its simplicity, and in turn the primary disadvantage of a California Professional Midwifery Corporation is the relative complexity of formation and operation. However, midwives may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for establishing and maintaining the California Professional Midwifery Corporation, leaving these midwives with essentially the same tasks they would undertake to establish and maintain a sole proprietorship.

When is a California Professional Midwifery Corporation the Right Business Structure for Practicing Midwifery?

A California Professional Midwifery Corporation can be an ideal option for midwives starting midwifery practices based upon the tax efficiency, limited liability protection, and separation of personal assets from professional business assets that California Professional Midwifery Corporations provide. Small-scale midwifery practices with the expectation of revenue growth can benefit from starting as a California Professional Midwifery Corporation to avoid the future need to reestablish the midwifery practice as revenue grows. Similarly, small-scale midwifery practices in high-risk practice areas may benefit from the limited liability protection and separation of personal assets from professional business assets provided by a California Professional Midwifery Corporation regardless of revenue or profitability.

For a more detailed understanding of the differences between midwife sole proprietorships and California Professional Midwifery Corporations, and when a California Professional Midwifery Corporation is the best choice of business structure for a professional practice, see “When to Use a California Professional Midwifery Corporation” and “Sole Proprietorship vs Professional Midwifery Corporation in California” for more information.

Midwives in California May Not Practice Midwifery as a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)

A The experienced corporate attorneys at San Diego Corporate Law are frequently asked about limited liability companies and professional limited liability companies, so this topic will be briefly discussed here.

California law explicitly prohibits midwives and other licensed healthcare professionals from operating their practices as Limited Liability Companies (LLCs) or Professional Limited Liability Companies (PLLCs). This prohibition may be found in California Corporations Code Section 17701.04(e), which reads:

“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.”

Instead, California requires midwives who wish to operate in corporate form to utilize other types of business entities, such as California Professional Midwifery Corporations.

For a more detailed understanding of the prohibition on the use of LLCs for midwifery practices in California, see “Can a Midwife Practice Midwifery Using a California LLC?” and “Can I Use a PLLC to Practice Midwifery in California?” and for more information.

If an LLC or PLLC is currently being used for a midwifery practice in California, see “10 Steps to Convert LLC to Professional Midwifery Corporation in California” and “Four Reasons Not to Convert LLC to Professional Midwifery Corporation in California” or “12 Steps to Convert a PLLC to a California Professional Midwifery Corporation” and “Four Reasons Not to Convert Foreign LLC or PLLC to a California Professional Midwifery Corporation” for more information about bringing the professional practice into compliance with California law.