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

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

This article provides an overview of the various business structure options available to osteopaths practicing osteopathic medicine solo in California, helping these osteopaths 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 Osteopaths

Summary of Practicing Osteopathic Medicine as a Sole Proprietor

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

Summary of Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

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

Choosing Between a Sole Proprietorship and a California Professional Osteopathy Corporation

For most osteopaths, the California Professional Osteopathy 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 osteopathic medicine as a sole proprietorship.

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

Take the next step toward securing the ideal business structure for your osteopathic medical practice, whether that is a California Professional Osteopathy 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 Osteopathic Medicine as a Sole Proprietor

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

Administrative Requirements of Practicing Osteopathic Medicine as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing osteopathic medicine 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 Osteopath Sole Proprietors

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

Business Income Taxation When Practicing Osteopathic Medicine as a Sole Proprietor

For osteopath 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 osteopaths to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Osteopathic Medicine as a Sole Proprietor

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

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

Conclusions About Taxation of Osteopath 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 Osteopathic Medicine as a Sole Proprietor

Practicing osteopathic medicine 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 osteopath and the osteopathic medical practice.

Personal Liability for Osteopaths When Practicing Osteopathic Medicine as a Sole Proprietor

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

Personal Asset Protection for Osteopaths When Practicing Osteopathic Medicine as Sole Proprietors

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

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

Conclusions About Practicing Osteopathic Medicine as a Sole Proprietor

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

Advantages of Sole Proprietorship for Osteopaths

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

Disadvantages of Sole Proprietorship for Osteopaths

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

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

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

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

Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

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

Administrative Requirements of Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

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

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

Despite the additional administrative requirements of practicing osteopathic medicine with a California Professional Osteopathy Corporation compared to practicing osteopathic medicine 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 Osteopathy Corporation” for more information.

Taxation of California Professional Osteopathy Corporations

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

Business Income Taxation When Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

A California Professional Osteopathy 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 Osteopathy 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 Osteopathy Corporations.

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

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

Self-Employment Tax When Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

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

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

Additional Medicare Tax When Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

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

Annual Franchise Tax for California Professional Osteopathy Corporations

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

Conclusions About Taxation of California Professional Osteopathy Corporations

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

Personal Liability Protection and Personal Asset Protection When Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

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

Personal Liability Protection for Osteopaths When Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

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

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

Personal Asset Protection for Osteopaths When Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

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

Conclusions About Personal Liability and Asset Protection When Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

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

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

Conclusions About Practicing Osteopathic Medicine with a California Professional Osteopathy Corporation

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

Advantages of California Professional Osteopathy Corporations

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

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

Disadvantages of California Professional Osteopathy Corporations

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

When is a California Professional Osteopathy Corporation the Right Business Structure for Practicing Osteopathic Medicine?

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

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

Osteopaths in California May Not Practice Osteopathic Medicine 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 osteopaths 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 osteopaths who wish to operate in corporate form to utilize other types of business entities, such as California Professional Osteopathy Corporations.

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

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