Choosing the right business structure for their own business is a crucial decision for solo registered nurses and nurse practitioners in California. The choice of business entity determines how the nursing practice is taxed, the extent of personal liability protection and personal asset protection available to the registered nurse or nurse practitioner, and the administrative requirements the registered nurse or nurse practitioner will need to manage in operating the nursing practice.

A future article titled “What are the Business Structure Options for Two or More Registered Nurses and Nurse Practitioners in California?” will discuss the additional options available when two or more registered nurses and nurse practitioners start practicing nursing together, however, for registered nurses and nurse practitioners practicing nursing solo in California, the options are limited to sole proprietorships and California Professional Nursing Corporations.

This article provides an overview of the various business structure options available to registered nurses and nurse practitioners practicing nursing solo in California, helping these registered nurses and nurse practitioners 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 Registered Nurses and Nurse Practitioners

Summary of Practicing Nursing as a Sole Proprietor

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

Summary of Practicing Nursing with a California Professional Nursing Corporation

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

Choosing Between a Sole Proprietorship and a California Professional Nursing Corporation

For most registered nurses and nurse practitioners, the California Professional Nursing 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 nursing as a sole proprietorship.

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

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

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

Administrative Requirements of Practicing Nursing as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing nursing 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 Registered Nurse and Nurse Practitioner Sole Proprietors

Tax considerations are a critical aspect to be examined when planning to practice nursing 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 nursing practices is essential for registered nurses and nurse practitioners when choosing a business structure in which to operate their nursing practice.

Business Income Taxation When Practicing Nursing as a Sole Proprietor

For registered nurse or nurse practitioner 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 registered nurses and nurse practitioners to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Nursing as a Sole Proprietor

While simple and straightforward, taxation of registered nurse or nurse practitioner sole proprietors is not tax efficient. One significant consideration for registered nurse or nurse practitioner 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 Nursing as a Sole Proprietor

High-earning registered nurse or nurse practitioner 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 registered nurse or nurse practitioner sole proprietors filing as single, the threshold is $200,000, while it is $250,000 for registered nurse or nurse practitioner 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 registered nurses and nurse practitioners to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Registered Nurse and Nurse Practitioner 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 Nursing as a Sole Proprietor

Practicing nursing 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 registered nurse or nurse practitioner and the nursing practice.

Personal Liability for Registered Nurses and Nurse Practitioners When Practicing Nursing as a Sole Proprietor

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

Personal Asset Protection for Registered Nurses and Nurse Practitioners When Practicing Nursing as Sole Proprietors

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

Conclusions About Personal Liability and Asset Protection for Registered Nurse and Nurse Practitioner 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 registered nurses and nurse practitioners choosing a business structure for their nursing practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Nursing as a Sole Proprietor

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

Advantages of Sole Proprietorship for Registered Nurses and Nurse Practitioners

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

Disadvantages of Sole Proprietorship for Registered Nurses and Nurse Practitioners

While sole proprietorships are simple to establish, they carry significant risks and are not tax efficient for most registered nurses and nurse practitioners.

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

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

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

Practicing Nursing with a California Professional Nursing Corporation

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

Administrative Requirements of Practicing Nursing with a California Professional Nursing Corporation

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

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

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

Taxation of California Professional Nursing Corporations

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

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

A California Professional Nursing 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 Nursing 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 Nursing Corporations.

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

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

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

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

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

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

As discussed above for registered nurse or nurse practitioner 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 Nursing Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to registered nurses and nurse practitioners practicing nursing with a California Professional Nursing Corporation if the reasonable salary of the registered nurse or nurse practitioner exceeded the thresholds, meaning for all intents and purposes, practicing nursing with a California Professional Nursing Corporation does not subject registered nurses and nurse practitioners to the Additional Medicare Tax.

Annual Franchise Tax for California Professional Nursing Corporations

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

Conclusions About Taxation of California Professional Nursing Corporations

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

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

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

Personal Liability Protection for Registered Nurses and Nurse Practitioners When Practicing Nursing with a California Professional Nursing Corporation

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

Under California law, claims for professional negligence, better known as malpractice, for errors and omissions of registered nurses and nurse practitioners are personal to the registered nurses and nurse practitioners and not shielded by the existence of the California Professional Nursing Corporation, however, malpractice is an insurable risk and appropriately apportioned malpractice insurance may be used to indemnify the registered nurse or nurse practitioner from this risk.

Personal Asset Protection for Registered Nurses and Nurse Practitioners When Practicing Nursing with a California Professional Nursing Corporation

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

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

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

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

Conclusions About Practicing Nursing with a California Professional Nursing Corporation

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

Advantages of California Professional Nursing Corporations

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

A California Professional Nursing Corporation is a separate legal entity, which means the registered nurse or nurse practitioner is generally shielded from personally liable for debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability). For registered nurses and nurse practitioners in high-liability nursing 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 registered nurses and nurse practitioners, meaning the debts, liabilities, and legal judgments against their nursing practice are not generally satisfied from the personal assets of the registered nurse or nurse practitioner.

Disadvantages of California Professional Nursing Corporations

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

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

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

For a more detailed understanding of the differences between registered nurse or nurse practitioner sole proprietorships and California Professional Nursing 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 Nursing Corporation” and “Sole Proprietorship vs Professional Nursing Corporation in California” for more information.

Registered Nurses and Nurse Practitioners in California May Not Practice Nursing 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 registered nurses and nurse practitioners and their professional employees from providing nursing services 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 registered nurses and nurse practitioners who wish to operate in corporate form to utilize other types of California business entities, such as California Professional Nursing Corporations.

For a more detailed understanding of the prohibition on the use of LLCs for nursing practices in California, see “Can a Registered Nurse Practice Nursing Using a California LLC?” and “Can a Nurse Practitioner Practice Nursing Using a California LLC?” and “Can I Use a PLLC to Practice Nursing in California?” and for more information.

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