Choosing the right business structure is a crucial decision for solo audiologists in California. The choice of business entity determines how the audiology practice is taxed, the extent of personal liability protection and personal asset protection available to the audiologist, and the administrative requirements the audiologist will need to manage in operating the audiology practice and managing its tax obligations.

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

This article provides an overview of the various business structure options available to audiologists practicing audiology solo in California, helping these audiologists 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 Audiologists

Summary of Practicing Audiology as a Sole Proprietor

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

Summary of Practicing Audiology with a California Professional Audiology Corporation

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

Choosing Between a Sole Proprietorship and a California Professional Audiology Corporation

For most audiologists, the California Professional Audiology 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 audiology as a sole proprietorship.

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

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

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

Administrative Requirements of Practicing Audiology as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing audiology 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 Audiologist Sole Proprietors

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

Business Income Taxation When Practicing Audiology as a Sole Proprietor

For audiologist 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 audiologists to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Audiology as a Sole Proprietor

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

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

Conclusions About Taxation of Audiologist 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 Audiology as a Sole Proprietor

Practicing audiology 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 audiologist and the audiology practice.

Personal Liability for Licensed Professionals When Practicing Audiology as a Sole Proprietor

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

Person Asset Protection for Audiologists When Practicing Audiology as Sole Proprietors

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

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

Conclusions About Practicing Audiology as a Sole Proprietor

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

Advantages of Sole Proprietorship for Audiologists

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

Disadvantages of Sole Proprietorship for Audiologists

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

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

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

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

Practicing Audiology with a California Professional Audiology Corporation

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

Administrative Requirements of Practicing Audiology with a California Professional Audiology Corporation

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

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

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

Taxation of California Professional Audiology Corporations

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

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

A California Professional Audiology 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 Audiology 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 Audiology Corporations.

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

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

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

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

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

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

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

Annual Franchise Tax for California Professional Audiology Corporations

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

Conclusions About Taxation of California Professional Audiology Corporations

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

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

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

Personal Liability Protection for Audiologists When Practicing Audiology with a California Professional Audiology Corporation

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

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

Person Asset Protection for Audiologists When Practicing Audiology with a California Professional Audiology Corporation

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

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

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

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

Conclusions About Practicing Audiology with a California Professional Audiology Corporation

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

Advantages of California Professional Audiology Corporations

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

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

Disadvantages of California Professional Audiology Corporations

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

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

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

For a more detailed understanding of the differences between audiologist sole proprietorships and of California Professional Audiology 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 Audiology Corporation” and “Sole Proprietorship vs Professional Audiology Corporation in California” for more information.

Audiologists in California May Not Practice Audiology 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 audiologists and their professional employees 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 audiologists who wish to operate in corporate form to utilize other types of business entities, such as California Professional Audiology Corporations.

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

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