What are the Business Structure Options for Occupational Therapy Group Practices in California?

Choosing the right business structure is a crucial decision for occupational therapy group practices in California. The choice of business entity determines how the occupational therapy group practice is taxed, the extent of personal liability protection and personal asset protection available to the occupational therapist professionals, and the administrative requirements the occupational therapists will need to manage in operating the occupational therapy group practice.

A recent article titled “What are the Business Structure Options for Solo Occupational Therapists in California?” discussed the business structure options available to solo occupational therapists starting a solo occupational therapy practice, however, for two or more occupational therapists starting a group occupational therapy practice together in California, there are different options available.

This article provides an overview of the various business structure options available to occupational therapists starting a group occupational therapy practice in California, helping occupational therapists to make an informed choice that aligns with their professional goals and financial and legal liability concerns in the most tax efficient format possible.

Executive Summary: Putting the Conclusion First for Busy Occupational Therapists

Summary of Practicing Occupational Therapy as a General Partnership

The primary benefit of a California General Partnership for occupational therapists is its simplicity. There are few legal formalities to establish a California General Partnership and tax reporting is equally straightforward. However, a California General Partnership is not a separate legal entity, which means that occupational therapist partners are jointly and severally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability) and the lack of a separate legal entity also means there is no distinction between personal and professional business assets for occupational therapist partners, meaning the debts, liabilities, and legal judgments for which occupational therapist partners are liable are satisfied from the personal assets of those occupational therapist partners.

Summary of Practicing with a California Professional Corporation

While slightly more complex than California General Partnerships, the complexity of a California Professional Occupational Therapy Corporation may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. As a separate legal entity, California Professional Occupational Therapy Corporations significantly reduce liability risks and are more tax efficient for most occupational therapists. For occupational therapists in high-liability practices, this reduction in risk can be substantial. The separate legal entity status of California Professional Occupational Therapy Corporations also means there is a distinction between personal and professional business assets for the occupational therapist, meaning the debts, liabilities, and legal judgments against the occupational therapy practice are not generally satisfied from the personal assets of the occupational therapist owners, and owners are not personally liable for acts of malpractice by their co-owners, but they do remain personally liable for their own acts of malpractice.

Choosing Between a California General Partnership and a California Professional Occupational Therapy Corporation

For most occupational therapists, the California Professional Occupational Therapy 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 occupational therapy as a California General Partnership.

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

Take the next step toward securing the ideal business structure for your occupational therapy practice, whether that is a California Professional Occupational Therapy 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 Occupational Therapy as a California General Partnership

Practicing occupational therapy as a California General Partnership is the simplest and most straightforward business structure for two or more occupational therapists practicing together in California. A California General Partnership requires minimal paperwork to set up compared to other business entity options and offers flexibility in managing the occupational therapy practice. However, along with these advantages come distinct disadvantages that occupational therapists must consider carefully before considering a California General Partnership as the business structure for their occupational therapy practice.

Administrative Requirements of Practicing Occupational Therapy as a California General Partnership

One of the primary benefits of a California General Partnership for practicing occupational therapy is the simplicity of establishing a California General Partnership and the continued simplicity of operating as a California General Partnership.

California General Partnerships require minimal effort to establish, but there are legal formalities involved. Typically, the initial steps of setting up a California General Partnership include optionally filing a Certificate of Partnership with the California Secretary of State, entering into a Partnership Agreement between all partners, 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).

Taxation of California General Partnerships for the Practice of Occupational Therapy

Tax considerations are a critical aspect to be examined when planning to practice occupational therapy as a California General Partnership. California General Partnerships file informational tax returns and partners are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to occupational therapy practices is essential for occupational therapists when choosing a business structure in which to operate their occupational therapy practice.

Business Income Taxation When Practicing Occupational Therapy as a California General Partnership

California General Partnerships report their business income and expenses on informational tax returns, namely IRS Form 1065 and California Franchise Tax Board Form 565, however a California General Partnership does not pay California or federal income tax on its own net profit. Instead, each partner receives a Schedule K-1 from the IRS Form 1065 tax return reporting their distributive share of profits and losses of the California General Partnership, and each partner in turn reports this on their personal income tax return using Internal Revenue Service Form 1040 and California Franchise Tax Board Form 540 to pay taxes on the net income of the California General Partnership on their personal income tax return at their household personal income tax rate.

Self-Employment Tax When Practicing Occupational Therapy as a California General Partnership

Taxation of the partners of a California General Partnership is not tax efficient. One significant consideration for occupational therapist partners of a California General Partnership is self-employment tax. Since partners of a California General Partnership do not receive a salary from their occupational therapy practice, 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 partner of a California General Partnership can deduct half of the self-employment tax paid as an adjustment on their personal tax return, which provides some financial relief.

Additional Medicare Tax When Practicing Occupational Therapy as a California General Partnership

High earning occupational therapist partners of California General Partnerships 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 occupational therapist partners of a California General Partnership filing as single, the threshold is $200,000, while it is $250,000 for occupational therapist partners 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. Partners of California General Partnerships must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high earning occupational therapists to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Occupational Therapist Partners of California General Partnerships

Understanding the tax implications of a California General Partnership 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 Occupational Therapy as a California General Partnership

Practicing occupational therapy as a California General Partnership also comes with challenges regarding personal liability protection and asset protection for partners because a California General Partnership is not a separate legal entity, and thus does not offer a legal distinction between the occupational therapists and the occupational therapy practice.

Personal Liability for Occupational Therapists When Practicing Occupational Therapy as California General Partnerships

One of the primary risks faced by occupational therapist partners of a California General Partnership is personal liability. The lack of distinction between the occupational therapist partners and the occupational therapy California General Partnership professional practice means that each of the occupational therapist partners are jointly and severally personally liable for all debts, liabilities, obligations, and legal judgments incurred by the occupational therapy practice personally, including claims for professional negligence, better known as malpractice, for errors and omissions.

Personal Asset Protection for Occupational Therapists When Practicing Occupational Therapy as California General Partnerships

The lack of distinction between the occupational therapist and the occupational therapy practice that makes personal liability a primary risk to occupational therapist partners of a California General Partnership also means that all assets of the occupational therapist partners, be they strictly personal assets or assets used in the occupational therapy practice, are subject to claims by creditors and legal claimants against the personal assets of the occupational therapists (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Occupational Therapist Partners of California General Partnerships

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 occupational therapists choosing a business structure for their occupational therapy practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Occupational Therapy as a California General Partnership

When deciding whether to establish a group occupational therapy practice as a California General Partnership, it is essential to weigh the benefits and drawbacks of this business structure. While California General Partnerships offer some simplicity to occupational therapist partners, California General Partnerships come with significant risks and limitations. The advantages and disadvantages of operating a California General Partnership are compared below together with a recommendation for when a California General Partnership is the best legal structure for practicing occupational therapy.

Advantages of California General Partnerships for Occupational Therapists

The primary benefit of a California General Partnership is its simplicity. There are relatively few legal formalities to establish a California General Partnership for a group occupational therapy practice.

Disadvantages of California General Partnerships for Occupational Therapists

While California General Partnerships are simple to establish, they carry significant risks and are not tax efficient for most occupational therapists.

A California General Partnership is not a separate legal entity, which means that occupational therapist partners are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability). For occupational therapists in high liability occupational therapy 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 occupational therapist partners, meaning the debts, liabilities, and legal judgments for which an individual occupational therapist partner of a California General Partnership is liable are satisfied from the personal assets of that occupational therapist partner.

When is a California General Partnership the Right Business Structure for Practicing Occupational Therapy?

A California General Partnership can be an ideal option for two or more occupational therapists joining together to organize a small-scale occupational therapy practice with the expectation of low net profit and low liability risks. However, before choosing to practice occupational therapy as a California General Partnership, it is essential for the occupational therapist partners to weigh the benefits of simplicity against the risks of personal liability and the future growth of the occupational therapy practice. Occupational Therapist partners in high-risk practice areas or those who anticipate rapid growth may want to avoid practicing occupational therapy as a California General Partnership 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 California General Partnerships and California Professional Occupational Therapy Corporations and when a California General Partnership is the best choice of business structure for a professional practice, see “When Not to Use a California Professional Occupational Therapy Corporation” and “What are the Disadvantages of General Partnerships in California?” for more information.

Practicing Occupational Therapy with a California Professional Occupational Therapy Corporation

Practicing occupational therapy with a California Professional Occupational Therapy Corporation is not as simple or straightforward as practicing occupational therapy as a California General Partnership, however, a California Professional Occupational Therapy Corporation provides the tax efficiency, limited liability protection, and separation of personal assets of the occupational therapist from the professional business assets of the occupational therapy practice that California General Partnerships lack.

Administrative Requirements of Practicing Occupational Therapy with a California Professional Occupational Therapy Corporation

In order to enjoy the tax efficiency, limited liability protection, and separation of personal assets a California Professional Occupational Therapy Corporation provides, occupational therapists are faced with the complexity of establishing a California Professional Occupational Therapy Corporation. While this formation process is complex, occupational therapists 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 Occupational Therapy Corporation, leaving occupational therapists with essentially the same tasks they would undertake to establish a California General Partnership. It is also worth noting that legal fees and costs of forming a California Professional Occupational Therapy Corporation are usually qualified business expenses that are tax deductible.

In addition to the initial formation of a California Professional Occupational Therapy Corporation, and every year after the initial formation of a California Professional Occupational Therapy 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 Occupational Therapy Corporation, the experienced attorneys at San Diego Corporate Law can assist in the annual requirements of practicing occupational therapy with a California Professional Occupational Therapy Corporation.

Despite the additional administrative requirements of practicing occupational therapy with a California Professional Occupational Therapy Corporation compared to practicing occupational therapy as a California General Partnership, the right 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 Occupational Therapy Corporation” for more information.

Taxation of California Professional Occupational Therapy Corporations

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

Business Income Taxation When Practicing Occupational Therapy with a California Professional Occupational Therapy Corporation

A California Professional Occupational Therapy 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 at the shareholder level (referred to as “double taxation”). However, a California Professional Occupational Therapy 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, so this article will focus on S Corporation taxation of California Professional Occupational Therapy Corporations.

Electing S Corporation status alters the tax treatment by enabling pass-through taxation. This means the profits and losses of the California Professional Occupational Therapy Corporation after payment of a reasonable salary to the occupational therapist are passed directly to the occupational therapist shareholders who report 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 Occupational Therapy Corporation to pay personal income tax of the net profits of the occupational therapy practice.

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

Self-Employment Tax When Practicing Occupational Therapy with a California Professional Occupational Therapy Corporation

Unlike occupational therapist California General Partnerships, which require the occupational therapist partners to pay self-employment tax on their distributive share of the net profit of the professional practice, the occupational therapist-shareholders of a California Professional Occupational Therapy Corporation are not subject to self-employment taxes.

Instead of self-employment taxes on the entire net profit of the occupational therapy practice, with a California Professional Occupational Therapy Corporation employee and employer contributions to payroll tax are only paid on the reasonable salary of the occupational therapists. 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 salaries of the occupational therapists only and not the net profit of the California Professional Occupational Therapy Corporation, which may result in significant annual tax savings.

Additional Medicare Tax When Practicing Occupational Therapy with a California Professional Occupational Therapy Corporation

As discussed above for occupational therapist California General Partnerships, 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 Occupational Therapy Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to occupational therapists practicing occupational therapy with a California Professional Occupational Therapy Corporation if the reasonable salary of the occupational therapists exceed those thresholds, meaning for all intents and purposes, practicing occupational therapy with a California Professional Occupational Therapy Corporation does not subject occupational therapists to the Additional Medicare Tax.

Annual Franchise Tax for California Professional Occupational Therapy Corporations

California Professional Occupational Therapy Corporations must pay an annual franchise tax California General Partnerships do not pay an annual franchise tax. The franchise tax paid by a California Professional Occupational Therapy 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 occupational therapist partners of a California General Partnership, but pales in comparison to the self-employment taxes and the Additional Medicare Taxes paid by occupational therapist partners in California General Partnerships.

Conclusions About Taxation of California Professional Occupational Therapy Corporations

Understanding the tax benefits of a California Professional Occupational Therapy Corporation is integral when deciding which of the available business entities for two or more professional to practice together 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 Occupational Therapy Corporations, see “What Tax Benefits Does a California Professional Occupational Therapy Corporation Provide?” for more information.

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

Practicing occupational therapy with a California Professional Occupational Therapy Corporation, while more complex than practicing occupational therapy as a California General Partnership, overcomes many of the personal liability protection and asset protection shortcomings of occupational therapist California General Partnerships. A California Professional Occupational Therapy Corporation is a separate legal entity distinct from the occupational therapists, thus offering a legal distinction between the occupational therapists and the occupational therapy practice as well as personal and business assets of the occupational therapists.

Personal Liability Protection for Occupational Therapists When Practicing Occupational Therapy with a California Professional Occupational Therapy Corporation

Practicing occupational therapy with a California Professional Occupational Therapy Corporation resolves most of the risks faced by occupational therapist partners of California General Partnerships for personal liability. California Professional Occupational Therapy Corporations provide a separate legal entity distinct from the occupational therapist owners, meaning the occupational therapists are generally not personally liable for the debts, liabilities, obligations, and legal judgments incurred by the occupational therapy practice.

Under California law, claims for professional negligence, better known as malpractice, for errors and omissions of occupational therapists are personal to those occupational therapists committing acts of malpractice and liability is not shielded by the existence of the California Professional Occupational Therapy Corporation. California Professional Corporations do shield occupational therapists from the malpractice liabilities created by the other occupational therapists in their occupational therapy practice; occupational therapists are only personally liable for their own acts of malpractice. Malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the occupational therapist from this risk of their own acts of malpractice.

Personal Asset Protection for Occupational Therapists When Practicing Occupational Therapy with a California Professional Occupational Therapy Corporation

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

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

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

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

Conclusions About Practicing Occupational Therapy with a California Professional Occupational Therapy Corporation

When deciding if practicing occupational therapy as a California Professional Occupational Therapy 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 Occupational Therapy Corporations are more complex, California Professional Occupational Therapy Corporations resolve many of the significant risks and limitations inherent to practicing occupational therapy as a California General Partnership. The advantages and disadvantages of operating with a California Professional Occupational Therapy Corporation are compared below together with a recommendation for when a California Professional Occupational Therapy Corporation is the best legal structure for practicing occupational therapy in a group occupational therapy practice.

Advantages of California Professional Occupational Therapy Corporations

While practicing occupational therapy as a California General Partnerships is simple to establish, doing so carries significant risks and is not tax efficient for most occupational therapists. California Professional Occupational Therapy Corporations significantly reduce liability risks and are more tax efficient for most occupational therapists.

A California Professional Occupational Therapy Corporation is a separate legal entity, which means the occupational therapists are generally shielded from personally liable for debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability for the errors and omission of each of the occupational therapists for their own, individual acts of malpractice). For occupational therapists in high liability occupational therapy 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 occupational therapists, meaning the debts, liabilities, and legal judgments against their occupational therapy practice are not generally satisfied from the personal assets of the occupational therapists (other than for their own acts of malpractice).

Disadvantages of California Professional Occupational Therapy Corporations

The primary disadvantage of a California Professional Occupational Therapy Corporation is the relative complexity of formation and operation. However, occupational therapists 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 Occupational Therapy Corporation, leaving these occupational therapists with essentially the same tasks they would undertake to establish and maintain a California General Partnership.

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

A California Professional Occupational Therapy Corporation can be an ideal option for occupational therapists starting group occupational therapy practices based upon factors such as tax efficiency, limited liability protection, and separation of personal assets from professional business assets that California Professional Occupational Therapy Corporations provide. Small-scale occupational therapy practices with the expectation of revenue growth can benefit from starting as a California Professional Occupational Therapy Corporation to avoid the future need to reestablish the occupational therapy practice as revenue grows. Similarly, small-scale occupational therapy practices in high-risk practice areas may benefit from the limited liability protection, separation of personal assets from professional business assets of a California Professional Occupational Therapy Corporation, and for occupational therapists to avoid malpractice liability for the errors and omissions of the other occupational therapists in their group occupational therapy practice regardless of revenue or profitability.

For a more detailed understanding of the differences between occupational therapist California General Partnerships and California Professional Occupational Therapy Corporations, and when a California Professional Occupational Therapy Corporation is the best choice of business structure for a professional practice, see “When to Use a California Professional Occupational Therapy Corporation” for more information.

Occupational Therapists in California May Not Practice Occupational Therapy 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 will be briefly discussed here.

California law explicitly prohibits occupational therapists from providing occupational therapy services in private practice 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.”

This restriction applies to all licensed professionals for which a California Professional Corporation may be formed. Instead, California requires occupational therapists who wish to operate in corporate form to utilize other types of business entities, such as California Professional Occupational Therapy Corporations.

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

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