In the world of business formation, the term Licensed Clinical Social Worker PLLC, or Licensed Clinical Social Worker Professional Limited Liability Company, refers to a special legal business entity that is designed for licensed clinical social workers for rendering professional services in a private practice or as an independent contractor. However, navigating the specifics of using a Licensed Clinical Social Worker PLLC can be a challenge, particularly as business structure regulations vary from state to state. This article discusses the permissibility of utilizing Licensed Clinical Social Worker PLLCs in California, and the alternatives for licensed clinical social work practice owners.

Spoiler Alert: Licensed Clinical Social Work Cannot Be Practiced Using Any LLC in California

If you are already practicing licensed clinical social work 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 licensed clinical social work practice.

The California Revised Uniform Limited Liability Company Act of the California Corporations Code Prohibits the Use of LLCs for the Provision of Professional Licensed Clinical Social Worker Services by Licensed Clinical Social Workers in California

Use of a California LLC to Render Professional Licensed Clinical Social Worker Services in California

Neither a foreign nor a California limited liability company (LLC) may be used to render professional licensed clinical social work services in California. This comes as a surprise to many licensed clinical social workers, as Licensed Clinical Social Worker Professional Limited Liability Companies are commonly used to render professional licensed clinical social work 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 clinical social workers 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 clinical social workers may not use or form limited liability companies for the provision of professional licensed clinical social work services in California.

Use of a California PLLC to Render Professional Licensed Clinical Social Worker 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 licensed clinical social work services, because nothing in the California Corporation Code differentiates the idea of a California Licensed Clinical Social Worker PLLC from the California LLC, there is nothing in California law regarding LLC formation for the provision of professional licensed clinical social work services, and nothing establishes a California Licensed Clinical Social Worker PLLC as a business entity that may be formed under California law.

In short, there is no California Licensed Clinical Social Worker PLLC as the law currently stands at the time of this writing in 2024, and thus licensed clinical social workers are unable to form a California Licensed Clinical Social Worker PLLC for their professional licensed clinical social worker services. This is a significant departure from the norm in many other states, where Licensed Clinical Social Worker PLLCs are a commonly used business entities for licensed clinical social workers.

Use of a Foreign Licensed Clinical Social Worker PLLC to Render Professional Licensed Clinical Social Worker Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC by licensed clinical social workers to render professional licensed clinical social worker 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 clinical social workers to render professional licensed clinical social worker services in California.

Professional practices that are structured as Licensed Clinical Social Worker PLLCs in other states need to exercise extreme caution when offering professional licensed clinical social worker services in California. The prohibition set forth in California Corporations Code Section 17701.04(e) means that out-of-state licensed clinical social work practices operating as Licensed Clinical Social Worker PLLCs in their home state may encounter legal restrictions if they wish to offer their professional licensed clinical social worker services in California. Therefore, the licensed clinical social workers practicing under these Licensed Clinical Social Worker PLLCs in their home states must not use their Licensed Clinical Social Worker PLLCs when rendering professional licensed clinical social worker 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 Licensed Clinical Social Worker Corporation, as will be discussed below.

What Business Structure Options Do Licensed Clinical Social Workers Have in California?

As California does not allow the use of California LLCs, foreign LLCs, or foreign Licensed Clinical Social Worker PLLCs (and there is no such thing as a California PLLC!) for the provision of professional licensed clinical social worker services in the State of California, California licensed clinical social workers seeking to practice licensed clinical social work 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 licensed clinical social worker services to be offered and the regulations governing those licensed clinical social worker services. In the following subsections, we will introduce the various business entities that are permitted to render professional licensed clinical social worker services in California, including Sole Proprietorships, General Partnerships, and Professional Licensed Clinical Social Worker Corporations, each of which comes with its own set of advantages and limitations.

A California Licensed Clinical Social Worker May Practice as a Sole Proprietorship in California

A Sole Proprietorship is a straightforward and uncomplicated business structure that may be utilized by licensed clinical social workers in California. In a Sole Proprietorship, the individual licensed clinical social worker is the sole owner and operator of the licensed clinical social work practice.

Liability Protection for Licensed Clinical Social Worker Sole Proprietors in California

Sole Proprietorships do not provide their owners with liability protection in California. In this type of business structure, the licensed clinical social worker is personally responsible for all business debts, liabilities, obligations, and all legal judgments against the licensed clinical social work practice. This means that if the licensed clinical social work practice incurs a debt or is sued, the personal assets of the licensed clinical social worker, 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 a licensed clinical social work practice as a Sole Proprietorship and is a critical factor that a licensed clinical social worker should consider when deciding on the most appropriate business structure for their licensed clinical social work practice in California.

Taxation of Licensed Clinical Social Worker Sole Proprietors in California

In California, Licensed Clinical Social Worker 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 clinical social worker. The licensed clinical social worker 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 clinical social worker and taxed at individual income tax rates.

In addition to income taxes, a licensed clinical social worker 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 clinical social worker practicing as a Sole Proprietorship.

When Should a California Licensed Clinical Social Worker Practice as a Sole Proprietorship in California?

A California licensed clinical social worker should only consider practicing as a Sole Proprietorship in California when they are starting their licensed clinical social work 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 licensed clinical social work practice.

However, as the licensed clinical social work practice grows, the licensed clinical social worker should reconsider the use of a Sole Proprietorship for their licensed clinical social work 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 clinical social worker to explore other business structures that offer tax benefits and liability protection.

Two or More California Licensed Clinical Social Workers Professionals May Practice as a General Partnership in California

A California General Partnership used for a licensed clinical social work practice is a business entity in which two or more licensed clinical social workers join together to provide professional licensed clinical social worker services in California. In such a setup, all licensed clinical social worker partners share equal rights and responsibilities in managing the business of the licensed clinical social work practice.

Liability Protection for Licensed Clinical Social Worker General Partners in a California General Partnership

General Partnerships in California do not provide licensed clinical social worker partners with liability protection. This means each licensed clinical social worker partner has joint and several personal liability for all business debts, liabilities, obligations, and all legal judgments against the licensed clinical social work practice, including those incurred by other licensed clinical social worker partners which includes acts of malpractice by the other licensed clinical social worker partners. If the California General Partnership providing professional licensed clinical social worker services is sued or incurs debt, the personal assets of each licensed clinical social worker 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 licensed clinical social worker services and something California licensed clinical social workers should seriously factor into their decision when considering a California General Partnership for their licensed clinical social work practice in California.

Taxation of General Partnership Licensed Clinical Social Worker Practices in California

In California, licensed clinical social work 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 licensed clinical social worker partner passes through to their personal income tax return. The individual licensed clinical social worker 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 licensed clinical social worker 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 licensed clinical social worker partner and passed through to their personal tax returns.

When Should California Licensed Clinical Social Workers 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 clinical social workers practicing licensed clinical social work 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 licensed clinical social work practices.

One or More California Licensed Clinical Social Workers May Practice Licensed Clinical Social Work as a California Professional Licensed Clinical Social Worker Corporation in California

California Professional Licensed Clinical Social Worker Corporations are specialized forms of professional corporations designed specifically for licensed clinical social workers who seek personal liability protection and tax benefits for their licensed clinical social work practice. A California Professional Licensed Clinical Social Worker Corporation is a separate legal entity distinct from its licensed clinical social workers owner(s) and permitted non-licensed clinical social worker owner(s) who are other licensed professionals or professional employees, such as licensed marriage and family therapists, referred to collectively as licensed shareholders, which distinguishes it from a California Sole Proprietorship (which is an individual licensed clinical social worker personally practicing licensed clinical social work) or a California General Partnership or California LLP (which is a group of licensed clinical social workers practicing licensed clinical social work together).

Liability Protection from a Professional Licensed Clinical Social Worker Corporation in California

In a California Professional Licensed Clinical Social Worker Corporation, the personal assets of the licensed shareholders are generally protected from business debts, liabilities, obligations, and legal judgments against the California Professional Licensed Clinical Social Worker Corporation. This means that in most instances, if the California Professional Licensed Clinical Social Worker Corporation is sued or incurs debt, the personal assets of the licensed clinical social worker 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 clinical social worker. The personal asset protection applies only to debts and obligations incurred by the California Professional Licensed Clinical Social Worker Corporation, not to the individual actions of a licensed clinical social worker. However, when two or more licensed clinical social workers are practicing licensed clinical social work in a California Professional Licensed Clinical Social Worker Corporation, a malpractice claim against one licensed clinical social worker is not a malpractice claim against all the other licensed clinical social workers 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 Licensed Clinical Social Worker Corporation provides liability protection, it does not eliminate the requirement for individual professionals to maintain adequate malpractice insurance coverage or for the California Professional Licensed Clinical Social Worker Corporation to otherwise secure liability insurance for indemnification of its liabilities.

Taxation of Professional Licensed Clinical Social Worker Corporations in California

Professional Licensed Clinical Social Worker 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 Licensed Clinical Social Worker Corporations elect S Corporation taxation, this article will focus on S Corporation taxation of California Professional Licensed Clinical Social Worker Corporations.

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

To qualify for S Corporation status, the California Professional Licensed Clinical Social Worker 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 Licensed Clinical Social Worker 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 Licensed Clinical Social Worker 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 Licensed Clinical Social Worker Corporation.

When Should California Licensed Clinical Social Workers Practice Using a Professional Licensed Clinical Social Worker Corporation in California?

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

If the licensed clinical social worker 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 Licensed Clinical Social Worker Corporation.

Based upon the availability of both limited liability and tax benefits for the licensed clinical social worker, the California Professional Licensed Clinical Social Worker Corporation should be the go-to business entity for California licensed clinical social workers.

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 licensed clinical social work practice in California is a critical step for every California licensed clinical social worker. It can significantly influence your tax obligations, personal liability, and the overall success of your licensed clinical social work 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 forming a California professional corporation or other business entities. Whether you are considering a California Professional Licensed Clinical Social Worker Corporation or other structure for your licensed clinical social work practice, we can provide the guidance necessary to make an informed decision. Contact us today to schedule a consultation and ensure your licensed clinical social work practice starts in California on solid legal footing.