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

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

This article provides an overview of the various business structure options available to occupational therapists practicing occupational therapy solo in California, helping these occupational therapists 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 Occupational Therapists

Summary of Practicing Occupational Therapy as a Sole Proprietor

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

Summary of Practicing Occupational Therapy with a California Professional Occupational Therapy Corporation

While inherently more complex than occupational therapist sole proprietorships, 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.

Choosing Between a Sole Proprietorship 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, including significant tax savings, 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 sole proprietorship.

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 Sole Proprietor

Practicing occupational therapy as a sole proprietor is the simplest and most straightforward business structure for solo occupational therapists in California. It 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 sole proprietorship as the business structure for their occupational therapy practice.

Administrative Requirements of Practicing Occupational Therapy as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing occupational therapy 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 Occupational Therapist Sole Proprietors

Tax considerations are a critical aspect to be examined when planning to practice occupational therapy 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 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 Sole Proprietor

For occupational therapist 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 to pay income tax at individual income tax rates. This allows occupational therapists to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Occupational Therapy as a Sole Proprietor

While simple and straightforward, taxation of occupational therapist sole proprietors is not tax efficient. One significant consideration for occupational therapist 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 Occupational Therapy as a Sole Proprietor

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

Conclusions About Taxation of Occupational Therapist 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 Occupational Therapy as a Sole Proprietor

Practicing occupational therapy 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 occupational therapist and the occupational therapy practice.

Personal Liability for Occupational Therapists When Practicing Occupational Therapy as a Sole Proprietor

One of the primary risks faced by occupational therapist sole proprietors is personal liability. The lack of distinction between the occupational therapist and the occupational therapy practice means that the occupational therapist sole proprietor is 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 Sole Proprietors

The lack of distinction between the occupational therapist and the occupational therapy practice that makes personal liability a primary risk to occupational therapist sole proprietors also means that all assets of the occupational therapist, 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 therapist (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Occupational Therapist 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 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 Sole Proprietor

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

Advantages of Sole Proprietorship for Occupational Therapists

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

Disadvantages of Sole Proprietorship for Occupational Therapists

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

A sole proprietorship is not a separate legal entity, which means that occupational therapist sole proprietors 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 sole proprietors, meaning the debts, liabilities, and legal judgments for which the occupational therapist sole proprietor is liable are satisfied from the personal assets of the occupational therapist.

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

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

Taxation of California Professional Occupational Therapy Corporations

As with occupational therapist sole proprietorships, 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 against the individuals receiving the dividends (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. 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 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 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 sole proprietorships, which require the occupational therapist sole proprietor to pay self-employment tax on the entire net profit of the professional practice, the occupational therapist-shareholder of a California Professional Occupational Therapy Corporation is 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 therapist. 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 occupational therapist only and not the net profit of the California Professional Occupational Therapy Corporation, which may result in significant annual tax savings compared to a sole proprietorship.

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

As discussed above for occupational therapist 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 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 therapist exceeded the 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 that occupational therapist sole proprietorships do not pay. 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 sole proprietorships, the annual franchise tax is very small in comparison to self-employment taxes and the Additional Medicare Taxes paid by occupational therapist sole proprietors.

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 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 sole proprietorship, overcomes many of the personal liability protection and asset protection shortcomings of occupational therapist sole proprietorships. A California Professional Occupational Therapy Corporation is a separate legal entity distinct from the occupational therapist, thus offering a legal distinction between the occupational therapist and the occupational therapy practice as well as personal and business assets of the occupational therapist.

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 sole proprietors for personal liability. California Professional Occupational Therapy Corporations provide a separate legal entity distinct from the occupational therapist, meaning the occupational therapist is 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 the occupational therapists and not shielded by the existence of the California Professional Occupational Therapy Corporation, however, malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the occupational therapist from this risk.

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

The separate legal entity and distinction between the occupational therapist and the occupational therapy practice provided by a California Professional Occupational Therapy Corporation means that, unlike a sole proprietorship, the California Professional Occupational Therapy Corporation separates the personal assets of the occupational therapist 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 therapist.

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 the 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 sole proprietorship. 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.

Advantages of California Professional Occupational Therapy Corporations

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

A California Professional Occupational Therapy Corporation is a separate legal entity, which means the occupational therapist is generally shielded from personally liable for debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability). 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 therapist.

Disadvantages of California Professional Occupational Therapy Corporations

The primary benefit of a sole proprietorship is its simplicity, and in turn 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 sole proprietorship.

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 occupational therapy practices based upon the 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 and separation of personal assets from professional business assets provided by a California Professional Occupational Therapy Corporation regardless of revenue or profitability.

For a more detailed understanding of the differences between occupational therapist sole proprietorships and California Professional Occupational Therapy 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 Occupational Therapy Corporation” and “Sole Proprietorship vs Professional Occupational Therapy Corporation in California” 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 topic will be briefly discussed here.

California law explicitly prohibits occupational therapists 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 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 for an occupational therapy practice 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.