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

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

This article provides an overview of the various business structure options available to acupuncturists practicing acupuncture solo in California, helping these acupuncturists 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 Acupuncturists

Summary of Practicing Acupuncture as a Sole Proprietor

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

Summary of Practicing Acupuncture with a California Professional Acupuncture Corporation

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

Choosing Between a Sole Proprietorship and a California Professional Acupuncture Corporation

For most acupuncturists, the California Professional Acupuncture 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 acupuncture as a sole proprietorship.

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

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

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

Administrative Requirements of Practicing Acupuncture as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing acupuncture 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 Acupuncturist Sole Proprietors

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

Business Income Taxation When Practicing Acupuncture as a Sole Proprietor

For acupuncturist 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 acupuncturists to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Acupuncture as a Sole Proprietor

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

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

Conclusions About Taxation of Acupuncture 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 Acupuncture as a Sole Proprietor

Practicing acupuncture 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 acupuncturist and the acupuncture practice.

Personal Liability for Professionals When Practicing Acupuncture as a Sole Proprietor

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

Person Asset Protection for Acupuncturists When Practicing Acupuncture as Sole Proprietors

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

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

Conclusions About Practicing Acupuncture as a Sole Proprietor

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

Advantages of Sole Proprietorship for Acupuncturists

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

Disadvantages of Sole Proprietorship for Acupuncturists

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

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

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

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

Practicing Acupuncture with a California Professional Acupuncture Corporation

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

Administrative Requirements of Practicing Acupuncture with a California Professional Acupuncture Corporation

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

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

Despite the additional administrative requirements of practicing acupuncture with a California Professional Acupuncture Corporation compared to practicing acupuncture 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 Acupuncture Corporation” for more information.

Taxation of California Professional Acupuncture Corporations

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

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

A California Professional Acupuncture 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 Acupuncture 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 Acupuncture Corporations.

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

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

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

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

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

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

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

Annual Franchise Tax for California Professional Acupuncture Corporations

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

Conclusions About Taxation of California Professional Acupuncture Corporations

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

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

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

Personal Liability Protection for Acupuncturists When Practicing Acupuncture with a California Professional Acupuncture Corporation

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

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

Person Asset Protection for Acupuncturists When Practicing Acupuncture with a California Professional Acupuncture Corporation

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

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

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

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

Conclusions About Practicing Acupuncture with a California Professional Acupuncture Corporation

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

Advantages of California Professional Acupuncture Corporations

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

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

Disadvantages of California Professional Acupuncture Corporations

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

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

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

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

Acupuncturists in California May Not Practice Acupuncture 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 by licensed professionals, so this topic will be briefly discussed here.

California law explicitly prohibits acupuncturists 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 acupuncturists who wish to operate in corporate form to utilize other types of California business entities, such as California Professional Acupuncture Corporations.

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

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