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

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

This article provides an overview of the various business structure options available to chiropractors practicing chiropractic solo in California, helping these chiropractors 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 Chiropractors

Summary of Practicing Chiropractic as a Sole Proprietor

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

Summary of Practicing Chiropractic with a California Professional Chiropractic Corporation

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

Choosing Between a Sole Proprietorship and a California Professional Chiropractic Corporation

For most chiropractors, the California Professional Chiropractic 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 chiropractic as a sole proprietorship.

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

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

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

Administrative Requirements of Practicing Chiropractic as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing chiropractic 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 Chiropractor Sole Proprietors

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

Business Income Taxation When Practicing Chiropractic as a Sole Proprietor

For chiropractor 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 chiropractors to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Chiropractic as a Sole Proprietor

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

High-earning chiropractor sole proprietors may also be subject to the Additional Medicare Tax. This tax applies to individuals whose gross income exceeds certain thresholds, which are determined based on filing status. For chiropractor sole proprietors filing as single, the threshold is $200,000, while it is $250,000 for chiropractor 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 chiropractors to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Chiropractor 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 Chiropractic as a Sole Proprietor

Practicing chiropractic 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 chiropractor and the chiropractic practice.

Personal Liability for Chiropractors When Practicing Chiropractic as a Sole Proprietor

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

Person Asset Protection for Chiropractors When Practicing Chiropractic as Sole Proprietors

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

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

Conclusions About Practicing Chiropractic as a Sole Proprietor

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

Advantages of Sole Proprietorship for Chiropractors

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

Disadvantages of Sole Proprietorship for Chiropractors

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

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

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

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

Practicing Chiropractic with a California Professional Chiropractic Corporation

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

Administrative Requirements of Practicing Chiropractic with a California Professional Chiropractic Corporation

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

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

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

Taxation of California Professional Chiropractic Corporations

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

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

A California Professional Chiropractic 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 Chiropractic 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 Chiropractic Corporations.

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

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

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

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

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

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

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

Annual Franchise Tax for California Professional Chiropractic Corporations

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

Conclusions About Taxation of California Professional Chiropractic Corporations

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

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

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

Personal Liability Protection for Chiropractors When Practicing Chiropractic with a California Professional Chiropractic Corporation

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

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

Person Asset Protection for Chiropractors When Practicing Chiropractic with a California Professional Chiropractic Corporation

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

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

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

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

Conclusions About Practicing Chiropractic with a California Professional Chiropractic Corporation

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

Advantages of California Professional Chiropractic Corporations

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

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

Disadvantages of California Professional Chiropractic Corporations

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

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

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

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

Chiropractors in California May Not Practice Chiropractic 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 chiropractors and other licensed professionals from operating their practices as Limited Liability Companies (LLCs) or Professional Limited Liability Companies (PLLCs). This prohibition may be found in California Corporations Code Section 17701.04(e), which reads:

“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”

Instead, California requires chiropractors who wish to operate in corporate form to utilize other types of business entities, such as California Professional Chiropractic Corporations.

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

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