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

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

This article provides an overview of the various business structure options available to optometrists practicing optometry solo in California, helping these optometrists 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 Optometrists

Summary of Practicing Optometry as a Sole Proprietor

The primary benefit of a sole proprietorship for optometrists 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 optometrist sole proprietors are personally liable for all business debts, liabilities, obligations, and legal judgments (including malpractice liability) against their optometric practice. The lack of a separate legal entity also means there is no distinction between personal and professional business assets for optometrist sole proprietors, so the debts, liabilities, and legal judgments for which the optometrist sole proprietor is liable are satisfied from the personal assets of the optometrist.

Summary of Practicing Optometry with a California Professional Optometric Corporation

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

Choosing Between a Sole Proprietorship and a California Professional Optometric Corporation

For most optometrists, the California Professional Optometric 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 optometry as a sole proprietorship.

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

Take the next step toward securing the ideal business structure for your optometric practice, whether that is a California Professional Optometric 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 Optometry as a Sole Proprietor

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

Administrative Requirements of Practicing Optometry as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing optometry 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 Optometrist Sole Proprietors

Tax considerations are a critical aspect to be examined when planning to practice optometry 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 optometric practices is essential for optometrists when choosing a business structure in which to operate their optometric practice.

Business Income Taxation When Practicing Optometry as a Sole Proprietor

For optometrist 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 optometrists to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Optometry as a Sole Proprietor

While simple and straightforward, taxation of optometrist sole proprietors is not tax efficient. One significant consideration for optometrist 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 Optometry as a Sole Proprietor

High-earning optometrist 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 optometrist sole proprietors filing as single, the threshold is $200,000, while it is $250,000 for optometrist 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 optometrists to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Optometrist 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 Optometry as a Sole Proprietor

Practicing optometry 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 optometrist and the optometric practice.

Personal Liability for Optometrists When Practicing Optometry as a Sole Proprietor

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

Personal Asset Protection for Optometrists When Practicing Optometry as Sole Proprietors

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

Conclusions About Personal Liability and Asset Protection for Optometrist 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 optometrists choosing a business structure for their optometric practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Optometry as a Sole Proprietor

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

Advantages of Sole Proprietorship for Optometrists

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

Disadvantages of Sole Proprietorship for Optometrists

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

A sole proprietorship is not a separate legal entity, which means that optometrist sole proprietors are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability). For optometrists in high-liability optometric 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 optometrist sole proprietors, meaning the debts, liabilities, and legal judgments for which the optometrist sole proprietor is liable are satisfied from the personal assets of the optometrist.

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

A sole proprietorship can be an ideal option for optometrists starting small-scale optometric practices with the expectation of low net profit and low liability risks. However, before choosing to practice optometry 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 optometric practice. For optometrists in high-risk optometric practice areas or those who anticipate growth in their optometric practice may want to avoid practicing optometry 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 Optometric Corporations and when a sole proprietorship is the best choice of business structure for optometric practices, see “When Not to Use a California Professional Optometric Corporation” for more information.

Practicing Optometry with a California Professional Optometric Corporation

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

Administrative Requirements of Practicing Optometry with a California Professional Optometric Corporation

In order to enjoy the tax efficiency, limited liability protection, and separation of personal assets a California Professional Optometric Corporation provides, optometrists are faced with the complexity of establishing a California Professional Optometric Corporation. While this formation process is complex, optometrists 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 Optometric Corporation, leaving optometrists 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 Optometric Corporation are usually qualified business expenses that are tax deductible.

In addition to the initial formation of a California Professional Optometric Corporation, every year after the initial formation of a California Professional Optometric 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 Optometric Corporation, San Diego Corporate Law can assist in the annual requirements of practicing optometry with a California Professional Optometric Corporation.

Despite the additional administrative requirements of practicing optometry with a California Professional Optometric Corporation compared to practicing optometry 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 Optometry Corporation” for more information.

Taxation of California Professional Optometric Corporations

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

Business Income Taxation When Practicing Optometry with a California Professional Optometric Corporation

A California Professional Optometric 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 Optometric 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 Optometric Corporations.

Electing S Corporation status alters the tax treatment by enabling pass-through taxation. This means the profits and losses of the California Professional Optometric Corporation after payment of a reasonable salary to the optometrist are passed directly to the optometrist 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 Optometric Corporation to pay personal income tax of the net profits of the optometric practice.

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

Self-Employment Tax When Practicing Optometry with a California Professional Optometric Corporation

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

Instead of self-employment taxes on the entire net profit of the optometric practice, with a California Professional Optometric Corporation employee and employer contributions to payroll tax are only paid on the reasonable salary of the optometrist. 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 optometrist only and not the net profit of the California Professional Optometric Corporation, which may result in significant annual tax savings compared to a sole proprietorship.

Additional Medicare Tax When Practicing Optometry with a California Professional Optometric Corporation

As discussed above for optometrist 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 Optometric Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to optometrists practicing optometry with a California Professional Optometric Corporation if the reasonable salary of the optometrist exceeded the thresholds, meaning for all intents and purposes, practicing optometry with a California Professional Optometric Corporation does not subject optometrists to the Additional Medicare Tax.

Annual Franchise Tax for California Professional Optometric Corporations

California Professional Optometric Corporations must pay an annual franchise tax that optometrist sole proprietorships do not pay. The franchise tax paid by a California Professional Optometric 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 optometrist sole proprietorships, the annual franchise tax is very small in comparison to self-employment taxes and the Additional Medicare Taxes paid by optometrist sole proprietors.

Conclusions About Taxation of California Professional Optometric Corporations

Understanding the tax benefits of a California Professional Optometric 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 Optometric Corporations, see “What Tax Benefits Does a California Professional Optometric Corporation Provide?” for more information.

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

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

Personal Liability Protection for Optometrists When Practicing Optometry with a California Professional Optometric Corporation

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

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

Personal Asset Protection for Optometrists When Practicing Optometry with a California Professional Optometric Corporation

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

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

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

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

Conclusions About Practicing Optometry with a California Professional Optometric Corporation

When deciding if practicing optometry as a California Professional Optometric 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 Optometric Corporations are more complex, California Professional Optometric Corporations resolve many of the significant risks and limitations inherent to practicing optometry as a sole proprietorship. The advantages and disadvantages of operating with a California Professional Optometric Corporation are compared below together with a recommendation for when a California Professional Optometric Corporation is the best legal structure for practicing optometry.

Advantages of California Professional Optometric Corporations

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

A California Professional Optometric Corporation is a separate legal entity, which means the optometrist is generally shielded from personally liable for debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability). For optometrists in high-liability optometric 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 optometrists, meaning the debts, liabilities, and legal judgments against their optometric practice are not generally satisfied from the personal assets of the optometrist.

Disadvantages of California Professional Optometric Corporations

The primary benefit of a sole proprietorship is its simplicity, and in turn the primary disadvantage of a California Professional Optometric Corporation is the relative complexity of formation and operation. However, optometrists 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 Optometric Corporation, leaving these optometrists with essentially the same tasks they would undertake to establish and maintain a sole proprietorship.

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

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

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

Optometrists in California May Not Practice Optometry 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 optometrists and other licensed 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 optometrists who wish to operate in corporate form to utilize other types of California business entities, such as California Professional Corporations.

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

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