In California, establishing a California Licensed Professional Clinical Counselor Corporation is a favored option for licensed professional clinical counselors providing clinical counselor services in California. We recently published an article titled When Not to Use a California Licensed Professional Clinical Counselor Corporation outlining when this legal structure may not be suitable for a California clinical counselor practice. This article is intended to outline the strengths that most often make the California Licensed Professional Clinical Counselor Corporation the business entity of choice for California licensed professional clinical counselors rendering clinical counselor services in California.

Liability Protection in California Licensed Professional Clinical Counselor Corporations

Licensed professional clinical counselors often choose to practice clinical counseling in a California Licensed Professional Clinical Counselor Corporation to limit personal liability. Unlike sole proprietorships or partnerships, California Licensed Professional Clinical Counselor Corporations offer a liability protection and personal asset protection by separating the personal assets of the licensed professional clinical counselor shareholder from the business debts, liabilities, obligations, and legal judgments against the California Licensed Professional Clinical Counselor Corporation.

Limited liability protection is vital for licensed professional clinical counselors who employ other licensed individuals as employees or independent contractors to render professional services, especially when there is a significant risk of malpractice claims. By forming a California Licensed Professional Clinical Counselor Corporation, licensed professional clinical counselors can safeguard their personal assets and future earnings while adhering to state regulatory requirements and complying with agencies which govern rendering professional services in California, such as the California Board of Behavioral Sciences.

Tax Benefits when Rendering Professional Service in a California Licensed Professional Clinical Counselor Corporation Taxed as an S-Corp

Selecting the ideal business structure to render professional service requires a deep understanding of tax implications. A California Licensed Professional Clinical Counselor Corporation that opts for S Corporation status can provide substantial tax benefits, especially in relation to self-employment and payroll taxes.

Self-employed licensed professional clinical counselors are responsible for covering the full Social Security and Medicare taxes, totaling 15.3% of net profit up to the statutory cap, which is $168,600 as of 2024. Beyond this cap, they must pay 2.9% on all net profit. Additionally, there is a 0.9% Medicare tax for single taxpayers earning $200,000 or more and for married taxpayers filing jointly with incomes of $250,000 or above, added to the 2.9%.

A California Licensed Professional Clinical Counselor Corporation taxed as an S-Corp offers a strategic way to minimize self-employment taxes. By providing a market-rate salary to licensed professional clinical counselor shareholders, the salary becomes subject to payroll taxes of 15.3% up to the statutory cap ($168,600 in 2024) and 2.9% for earnings above this limit. The remaining profits can then be distributed as shareholder distributions, which are not subject to payroll or self-employment taxes. This approach can result in significant tax savings for licensed professional clinical counselors who balance their salary for clinical counselor services with the distributions on their shares of stock based upon ownership of their California Licensed Professional Clinical Counselor Corporation.

When do the California Professional Corporation Benefits Make Sense for a Licensed Professional Clinical Counselor?

Most licensed professional clinical counselors would benefit from practicing with a California Licensed Professional Clinical Counselor Corporation in California, with the exceptions being very low revenue clinical counselor practices without employees that do not accept insurance and with no plans for future growth of the clinical counselor practice.

This article examines why forming a California Licensed Professional Clinical Counselor Corporation is advantageous for a licensed professional clinical counselor, whether practicing solo or with other licensed professionals. This article addresses relevant considerations to weigh when choosing the best business entity in which to practice clinical counseling, namely, federal income taxes, California corporate taxes, self-employment taxes, personal income tax, liability protection, asset protection, and ownership issues.

The goal of this article is to equip licensed professional clinical counselors with the information needed to make informed decisions. It is crucial to ensure that the chosen business entity aligns with the business goals of the licensed professional clinical counselor while adhering to California law, including the California Corporations Code, the Moscone-Knox Professional Corporations Act, the California Business and Professions Code, and other relevant regulations, as well as the rules of government agencies overseeing the practice of clinical counseling, such as the California Board of Behavioral Sciences.

Executive Summary: Putting the Conclusion First for Busy Licensed Professional Clinical Counselors

A licensed professional clinical counselor should form a California Licensed Professional Clinical Counselor Corporation if they are either:

(i) concerned about liability protection or the separation of personal and business assets; or

(ii) anticipate an immediate or future tax benefit.

Some licensed professional clinical counselors establish California Licensed Professional Clinical Counselor Corporations solely for liability protection, while many other licensed professional clinical counselors do so exclusively for the tax benefits of practicing clinical counseling using a California Licensed Professional Clinical Counselor Corporation. When either liability protection or tax benefits justify the creation of a California Licensed Professional Clinical Counselor Corporation, a licensed professional clinical counselor should consider using a California Licensed Professional Clinical Counselor Corporation, even if only one of liability protection or tax benefits are sought by the licensed professional clinical counselor.

For most licensed professional clinical counselors in most clinical counselor practices, the experienced corporate attorneys at San Diego Corporate Law recommend the use of a California Professional Corporation for the limited liability protections and tax benefits a California Licensed Professional Clinical Counselor Corporation provides.

Lower Net Income Practices without Employees or Independent Contractors

If a licensed professional clinical counselor works alone, has no employees or independent contractors, is fully insured, and runs a practice with an annual net income below $50,000 to $60,000 without the intention to grow the clinical counselor practice in the future, operating as a sole proprietorship in California may be suitable for that licensed professional clinical counselor.

Lower Net Income Practices with Employees or Independent Contractors

For licensed professional clinical counselors earning less than $50,000 to $60,000 in net income annually without plans to grow their clinical counselor practice in the future, establishing a California Licensed Professional Clinical Counselor Corporation is still recommended if the licensed professional clinical counselor has or plans to have employees or independent contractors at any point in time, because California Licensed Professional Clinical Counselor Corporations offer protection to the licensed professional clinical counselor shareholder from liabilities related to their employees and independent contractors, including vicarious liability and malpractice liability claims.

Higher Net Income Practices Regardless of Liability Concerns

A licensed professional clinical counselor earning (or planning to earn) over $60,000 in net income annually should seriously consider practicing clinical counseling in a California Licensed Professional Clinical Counselor Corporation regardless of liability concerns because the tax savings of a California Licensed Professional Clinical Counselor Corporation can outweigh the additional administrative costs associated with practicing clinical counseling in a California Licensed Professional Clinical Counselor Corporation, and these tax savings can be significant.

Starting a New Practice Without Certainty of Future Performance

Licensed professional clinical counselors planning to start practicing clinical counseling small and grow their clinical counselor practice over time should carefully consider the administrative challenges of initially operating as a sole proprietor or general partnership with plans to later convert to a California Licensed Professional Clinical Counselor Corporation. It is best to schedule a consultation with an experienced corporate attorney for advice on the challenges for converting a thriving clinical counselor practice from a sole proprietorship or general partnership to a California Licensed Professional Clinical Counselor Corporation versus forming the California Licensed Professional Clinical Counselor Corporation as a part of starting their clinical counselor practice.

Special Considerations for Licensed Professional Clinical Counselors Accepting Insurance, Working with a Regional Center, or Other Third-Party Payor Panels

A licensed professional clinical counselor whose clinical counselor practice accepts (or plans to accept) insurance, work with a regional center, or otherwise engage with third-party payor panels should weigh the administrative burden of undergoing a second round of paneling if they initially establish as a sole proprietorship or general partnership and later transition to a California Licensed Professional Clinical Counselor Corporation. Many licensed professional clinical counselors opt to form a California Licensed Professional Clinical Counselor Corporation as a part of starting their clinical counselor practice to avoid the arduous task of paneling as a sole proprietorship or general partnership only to endure the process a second time one or two years later after forming a California Licensed Professional Clinical Counselor Corporation for the tax benefits or limited liability protection.

California Professionals are Prohibited from Practicing in a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)

It is worth noting that LLCs and PLLCs are not permitted for use with clinical counselor practices in California.

Contact San Diego Corporate Law for Expert Guidance

Choosing the right business structure for your clinical counselor practice can be a complex task. For tailored advice that considers your specific circumstances, schedule a consultation with the experienced attorneys at San Diego Corporate Law. Our team is committed to assisting licensed professional clinical counselors in determining whether a California Licensed Professional Clinical Counselor Corporation or another business structure best suits their needs, maximizing tax benefits while minimizing liability risks.

Schedule a consultation today to ensure your clinical counselor practice is structured for success.

Liability Protection for Licensed Professional Clinical Counselors

Licensed professional clinical counselors often opt to practice clinical counseling as a California Licensed Professional Clinical Counselor Corporation to shield themselves from personal liability and to keep their personal assets separate and protected from business debts, liabilities, obligations, and legal judgments related to their clinical counselor practice. It is essential for licensed professional clinical counselors to understand the liability protection differences between sole proprietorships and general partnerships compared to those offered by a California Licensed Professional Clinical Counselor Corporation when deciding on the ideal business structure for their clinical counselor practice.

General Liability

Licensed professional clinical counselors selecting a business structure for their clinical counselor practice should understand the distinctions in general liability protection between sole proprietorships and general partnerships compared to California Licensed Professional Clinical Counselor Corporations.

In this section, “general liability” refers to liabilities arising from contracts with vendors, claims of bodily injury, property damage, and other liabilities not related to employment relationships, malpractice, or professional errors and omissions.

For instance, consider scenarios such as a long-term lease of office space or specialized equipment, a bodily injury resulting from a visitor slipping and falling in the office of a licensed professional clinical counselor, property damage to leased premises or neighboring properties due to the clinical counselor practice, or claims of libel, slander, and other reputational harm stemming from professional advertising.

General Liability for Sole Proprietors and General Partnerships

Sole proprietors and general partners practicing clinical counseling encounter substantial liability risks due to the absence of a distinction between personal and business assets. In a sole proprietorship, the licensed professional clinical counselor owner is personally liable for all business debts, liabilities, obligations, and legal judgments related to general liability claims against the clinical counselor practice.

Similarly, in general partnerships, all general partners share joint and several liability. Each individual general partner is personally responsible for all business debts, liabilities, obligations, and legal judgments arising from general liability against the partnership. This means that each licensed professional clinical counselor acting as a general partner for a California clinical counselor practice operating as a general partnership is personally liable for all liabilities of the clinical counselor practice.

If a visitor is injured on the premises or if the clinical counselor practice causes damage to property of a third-party property, the personal assets of a California licensed professional clinical counselor sole proprietor or each licensed professional clinical counselor general partner in a general partnership bear unlimited liability for these claims. This unlimited personal liability imposes a significant burden on a California licensed professional clinical counselor sole proprietor or individual licensed professional clinical counselor general partners of a general partnership, especially if the clinical counselor practice lacks sufficient insurance or fails to effectively manage risks. It is essential for licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners to be aware of these risks and consider protective measures, such as comprehensive insurance policies or restructuring the clinical counselor practice to limit personal liability exposure.

General Liability for California Licensed Professional Clinical Counselor Corporations

A California Licensed Professional Clinical Counselor Corporation offers significant protection against personal liability for licensed professional clinical counselors. Unlike licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners of a general partnership, who face unlimited personal liability for business debts, liabilities, obligations, and legal judgments, licensed professional clinical counselor shareholders of a California Licensed Professional Clinical Counselor Corporation generally enjoy protection from such business liabilities. This protection means the personal assets of licensed professional clinical counselor shareholders, such as homes and personal bank accounts, are typically shielded from claims related to the debts, liabilities, obligations, and legal judgments of the California Licensed Professional Clinical Counselor Corporation. As a distinct legal entity, the California Licensed Professional Clinical Counselor Corporation is accountable for its own debts, liabilities, obligations, and legal judgments, thereby insulating the personal financial exposure of its licensed professional clinical counselor shareholders.

It is important to recognize that the liability protection offered by a California Licensed Professional Clinical Counselor Corporation has its limitations. Licensed professional clinical counselor shareholders may still be personally liable for their own negligent or wrongful actions. Additionally, this protection does not cover liabilities backed by the personal guarantee of the licensed professional clinical counselor shareholder. To ensure limited liability protection for its licensed professional clinical counselor shareholders, the California Licensed Professional Clinical Counselor Corporation must be operated diligently and in compliance with California laws and regulations.

Despite the limitations mentioned above, the general liability protections afforded to licensed professional clinical counselor shareholders of California Licensed Professional Clinical Counselor Corporations are significant. These protections enable licensed professional clinical counselors to manage their clinical counselor practices confidently with the maximum liability protection available under applicable law.

General Liability Conclusion

Some general liabilities for a California clinical counselor practice, whether it is structured as a sole proprietorship, general partnership, or California Licensed Professional Clinical Counselor Corporation, are insurable risks. However, if an incident occurs that is not covered by insurance, if the insurer denies coverage, or if the liability exceeds the insurance limits, the limited liability features of a California Licensed Professional Clinical Counselor Corporation may protect a licensed professional clinical counselor shareholder whereas a California licensed professional clinical counselor sole proprietor or licensed professional clinical counselor general partner or a general partnership would be personally liable for the same claim. The limited liability of a California Licensed Professional Clinical Counselor Corporation offers protection compared to the unlimited personal liability faced by a California licensed professional clinical counselor sole proprietor or licensed professional clinical counselor general partner.

Employment Liability

Licensed professionals choosing a business structure for their practice should understand the differences in employment liability protection among sole proprietorships, general partnerships, and California Licensed Professional Clinical Counselor Corporations.

In this section, the term “employment liability” refers to both the responsibility owed to employees and independent contractors and the vicarious liability to third parties arising from the actions or inactions of employees and independent contractors.

Employment liability to employees encompasses issues such as wage and hour law, sexual harassment, hostile work environment claims, privacy and information privacy claims, discrimination, wrongful termination, and a host of other potential liabilities. In contrast, vicarious liability to third parties might involve a business being held accountable for an injury to a third party arising from an auto accident caused by an employee during company time or some similar claim.

Employment Liability for Sole Proprietors and General Partnerships

Much like general liability issues, licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners of general partnerships are significantly exposed to liability due to the absence of a clear divide between personal and business assets. In a California clinical counselor sole proprietorship, the licensed professional clinical counselor owner bears full responsibility and unlimited liability for employment-related claims made by employees or independent contractors, as well as for third-party claims concerning employee or independent contractor actions or inactions for which the licensed professional clinical counselor practice is vicariously liable.

In general partnerships, licensed professional clinical counselor general partners share joint and several liability. Each licensed professional clinical counselor general partner has unlimited personal liability for all employee-related claims against the clinical counselor practice and for all third-party claims of vicarious liability resulting from employee or independent contractor actions or inactions.

If an employee or independent contractor files a claim for a meal break violation, wrongful termination, or other common workplace issues, the personal assets of a California licensed professional clinical counselor sole proprietor or each licensed professional clinical counselor general partner in a general partnership is subject to unlimited liability. Similarly, if an employee or independent contractor assaults or injures a third party, or damages third-party property, the licensed professional clinical counselor sole proprietor or each licensed professional clinical counselor general partner faces unlimited liability for these claims under the legal principle of vicarious liability.

Unlimited personal liability places a heavy burden on licensed professional clinical counselor sole proprietors and individual licensed professional clinical counselor general partners of general partnerships, particularly when the clinical counselor practice is underinsured or poorly manages risks. It is crucial for licensed professional clinical counselor sole proprietors and individual licensed professional clinical counselor general partners to recognize these risks and explore protective measures. Options such as employment practices liability insurance can guard against employee claims, while comprehensive general liability insurance addresses vicarious liability from employee and independent contractor actions or inactions. Alternatively, restructuring the clinical counselor practice can help mitigate personal liability exposure.

Employment Liability for California Licensed Professional Clinical Counselor Corporations

A California Licensed Professional Clinical Counselor Corporation provides significant protection against personal liability for licensed professional clinical counselor shareholders, shielding them from employee-related claims. Unlike licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners of general partnerships, who face unlimited personal liability for employee and independent contractor claims and incidents caused by employees and independent contractors, licensed professional clinical counselor shareholders in a California Licensed Professional Clinical Counselor Corporation typically enjoy protection from both types of employment liability.

The liability protection provided by a California Licensed Professional Clinical Counselor Corporation ensures that the personal assets of licensed professional clinical counselor shareholders, such as their homes and bank accounts, are generally shielded from claims arising from employment liability related to the clinical counselor practice. As a separate legal entity, the California Licensed Professional Clinical Counselor Corporation assumes responsibility for employee and independent contractor claims and third-party claims based on employee and independent contractor actions or inactions under the legal theory of vicarious liability, thereby significantly reducing the personal financial exposure of licensed professional clinical counselor shareholders of a California Licensed Professional Clinical Counselor Corporation.

It is important to recognize that a California Licensed Professional Clinical Counselor Corporation holds liability for employee and independent contractor claims as well as third-party claims due to vicarious liability for the actions or inactions of employees and independent contractors. Although this is preferable to unlimited personal liability for licensed professional clinical counselors, such liability can still significantly impact a California clinical counselor practice, even as it protects the assets of the licensed professional clinical counselor shareholders.

Similar to general liability, a California Licensed Professional Clinical Counselor Corporation must operate diligently and comply with California laws and regulations to ensure its licensed professional clinical counselor shareholders receive limited liability protection. This protection extends to both employee claims and third-party vicarious liability claims.

Despite the previously mentioned limitations, licensed professional clinical counselor shareholders enjoy significant employment liability protections with California Licensed Professional Clinical Counselor Corporations, and the safeguards provided allow them to conduct their practices with confidence with the maximum liability protection available under applicable law.

Employment Liability Conclusion

Employment practices liability insurance can cover many, but not all, liabilities related to employee and independent contractor liabilities. Similarly, many general liabilities are insurable risks for a California practice whose employees may expose it to third-party claims under vicarious liability. Whether operating as a sole proprietorship, general partnership, or California Licensed Professional Clinical Counselor Corporation, having comprehensive insurance is crucial. However, if an incident is not covered by insurance, if a claim is denied by an insurer, or if liability exceeds the limits of insurance coverage, the limited liability status of a California Licensed Professional Clinical Counselor Corporation can protect a licensed professional clinical counselor shareholder from personal liability. This stands in contrast to a California licensed professional clinical counselor sole proprietor or licensed professional clinical counselor general partner of a general partnership who would face unlimited personal liability for the same claim.

Malpractice Liability

Licensed professional clinical counselors selecting a business structure for their clinical counselor practice should understand the differences in malpractice and errors and omissions liability protection offered by sole proprietorships, general partnerships, and California Licensed Professional Clinical Counselor Corporations.

In this section, “malpractice” is defined as the professional errors and omissions that occur when an individual licensed professional clinical counselor fails to meet the accepted standards of clinical counselor practice, resulting in harm or damage. Malpractice liability pertains to the legal accountability licensed professional clinical counselors may incur for not adhering to these standards, which can lead to claims and lawsuits.

For licensed professional clinical counselors selecting a business entity in which to practice clinical counseling in California, understanding the assignment of malpractice liability is vital. In a California clinical counselor practice, the consequences of malpractice can be significant. This section explores the intricacies of malpractice liability, focusing on the risks associated with professional errors and omissions, and examines the liability of clinical counselor practice owners in sole proprietorships, general partnerships, and California Licensed Professional Clinical Counselor Corporations.

Malpractice Liability for Sole Proprietors and General Partnerships

California licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners of general partnerships bear unlimited liability for their own malpractice, errors, and omissions. Consequently, these licensed professional clinical counselors are personally liable for any malpractice claims filed against them by their patients.

In a general partnership, each of the licensed professional clinical counselor general partners not only bear unlimited liability for the malpractice and errors and omissions claims against them personally, but they also have unlimited liability for the malpractice and errors and omissions of all other licensed professional clinical counselor general partners in the general partnership, giving each licensed professional clinical counselor general partner unlimited personal liability for the malpractice and errors and omissions of each other licensed professional clinical counselor general partner.

Furthermore, as previously mentioned regarding vicarious liability for employees and independent contractors, licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners of general partnerships bear unlimited liability for malpractice claims of the professional employees and professional independent contractors who practice for the sole proprietorship or general partnership. This liability stems from the alleged malpractice or errors and omissions of their professional employees under the legal theory of vicarious liability.

The unlimited personal liability associated with malpractice claims for all other professional general partners, employees, and independent contractors makes sole proprietorships and general partnerships less appealing for clinical counselor practices because these business entities expose the personal assets of licensed professional clinical counselor owners to unlimited liability for the alleged malpractice of other professionals.

Malpractice Liability for California Licensed Professional Clinical Counselor Corporations

Similar to licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners in a general partnership, licensed professional clinical counselor shareholders of a California Licensed Professional Clinical Counselor Corporation face unlimited liability for their own malpractice and professional errors and omissions. This means that licensed professional clinical counselor shareholders remain personally liable for their own acts of malpractice and errors and omissions due to their own negligence.

However, licensed professional clinical counselor shareholders of a California Licensed Professional Clinical Counselor Corporation do enjoy protection from liability related to malpractice and errors and omissions allegedly made by employees, independent contractors, and other professional shareholders. A California Licensed Professional Clinical Counselor Corporations function as a legal entity separate and apart from its shareholders, safeguarding individual shareholders and their personal assets from malpractice liability, except for their own acts of malpractice and their own errors and omissions. In essence, while licensed professional clinical counselor shareholders of a California Professional Corporation are accountable for their own professional negligence, they are not held personally liable for the malpractice or errors and omissions of employees, independent contractors, or fellow licensed professional clinical counselor shareholders within the California Licensed Professional Clinical Counselor Corporation.

This protection exists because the California Licensed Professional Clinical Counselor Corporation, not the individual licensed professional clinical counselor shareholder, is considered the employer of any employee, independent contractor, or other professional shareholder accused of malpractice. As a result, vicarious liability for malpractice falls on the California Licensed Professional Clinical Counselor Corporation rather than the individual licensed professional clinical counselor shareholder. Consequently, while the professional alleged to have committed malpractice or an error or omission and a California Licensed Professional Clinical Counselor Corporation may face lawsuits for malpractice claims due to the actions of employees, independent contractors, or other professional shareholders, the personal assets of licensed professional clinical counselor shareholders not alleged to have personally committed an act of malpractice or an error or omission are typically protected.

As with general liability and employment liability, the limited liability framework for malpractice and errors and omissions relies upon the diligent operation of the California Licensed Professional Clinical Counselor Corporation in compliance with California laws and regulations.

Malpractice Liability Conclusion

Licensed professional clinical counselors, regardless of their chosen business structure, are personally liable for their own acts of malpractice and their own errors and omissions. However, operating as a sole proprietorship or general partnership in California exposes licensed professional clinical counselors to unlimited liability for malpractice and errors and omissions committed by employees, independent contractors, and professional co-owners. In contrast, forming a California Licensed Professional Clinical Counselor Corporation provides protection from personal liability for professional negligence committed by employees, independent contractors, or fellow professional shareholders. While malpractice insurance can cover errors and omissions, its limitations and the possibility of claim denial make malpractice liability a significant concern for licensed professional clinical counselors and California Licensed Professional Clinical Counselor Corporations provide the maximum legal protection available under applicable law.

Conclusions About Liability Protections

Choosing the right business entity for a California clinical counselor practice requires careful consideration and consultation with legal experts, such as the experienced corporate attorneys at San Diego Corporate Law. It is crucial to have adequate insurance coverage, including general liability insurance, employment practices liability insurance, and malpractice liability insurance, to protect against claims regardless of the chosen professional business entity. However, insurance is limited in coverage and coverage amounts, and insurers deny claims when possible, so understanding professional liability and selecting an appropriate business structure, such as a California Licensed Professional Clinical Counselor Corporation, can offer further peace of mind for licensed professional clinical counselors and safeguard both their personal and professional assets in ways even the best insurance policies cannot.

Tax Benefits for Licensed Professional Clinical Counselors

The organizational structure of a California Licensed Professional Clinical Counselor Corporation offers significant liability protection for licensed professional clinical counselors. However, it is essential to also consider its tax implications. Establishing a California Licensed Professional Clinical Counselor Corporation may also lead to favorable tax results. By understanding the tax benefits of California Licensed Professional Clinical Counselor Corporations compared to the taxation of sole proprietorships and general partnerships, licensed professional clinical counselors can make more informed decisions when selecting a business entity for their practice of clinical counseling.

The tax benefits of a professional business entity are influenced by several factors: the net income of the practice before distributing funds to owners, additional income earned by the owners, and their overall tax strategy.

Certain tax situations can diminish the usual benefits of forming a California Licensed Professional Clinical Counselor Corporation from a tax perspective. This is especially true when the net income of the clinical counselor practice before compensation to the licensed professional clinical counselor owner is relatively low or when other income of the licensed professional clinical counselor owner already meets the FICA cap. In such cases, the tax advantages of a California Licensed Professional Clinical Counselor Corporation may be diminished.

California Licensed Professional Clinical Counselor Corporations are by default C Corporations (C-Corps) and typically face double taxation at personal service corporation rates (sometimes referred to as professional service corporation rates). However, California Licensed Professional Clinical Counselor Corporations have the option to elect S Corporation status, which is advantageous for most clinical counselor practices. This article will concentrate on the benefits of S Corporation taxation, omitting detailed discussions on professional C Corporation (C Corp) taxation and the issue of double taxation generally.

This section examines tax concerns for licensed professional clinical counselors, helping them assess whether establishing a California Licensed Professional Clinical Counselor Corporation aligns with their financial objectives and tax efficiency strategies.

FICA Tax Liability

The FICA tax is a mandatory payroll tax in the United States that funds Social Security. Both employees and employers share the responsibility of paying FICA taxes.

The FICA tax is directly deducted from the wages or salaries of employees at a rate of 6.2% of their gross income. Employers must match this contribution with an additional 6.2%, resulting in a total contribution of 12.4% per employee.

For self-employed individuals, such as licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners in general partnerships, the FICA tax is calculated differently. Instead of being based on wages or salaries, it is assessed at 12.4% of the net income attributed to the self-employed person (whether a sole proprietor or general partner) from their clinical counselor practice.

The FICA tax is applied solely to income or net income up to a specified limit, which is annually adjusted for inflation. As of 2024, this cap is set at the first $168,600 earned.

FICA Tax Liability for Sole Proprietors and General Partners

Licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners in general partnerships shoulder the entire FICA tax burden on the net income of a California clinical counselor practice, each up to their individual FICA cap. Unlike professional employees who split this tax with their employers, self-employed licensed professional clinical counselors must cover both the employer and employee portions, resulting in a total FICA rate of 12.4% for licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners in general partnerships.

The following are some examples of FICA tax liability for a licensed professional clinical counselor with various net income:

$50,000 net income x 12.4% = $6,200 FICA tax liability

$150,000 net income x 12.4% = $18,600 FICA tax liability

$300,000 net income x 12.4% = $20,906 FICA tax liability (limited by $168,600 FICA cap for 2024)

FICA Tax Liability for California Licensed Professional Clinical Counselor Corporations Taxed as S Corporations

When a California Licensed Professional Clinical Counselor Corporation opts for S Corporation status for tax purposes, it modifies the approach to handling FICA tax liability for its licensed professional clinical counselor shareholders. Unlike licensed professional clinical counselor sole proprietors or licensed professional clinical counselor general partners of general partnerships, who pay FICA taxes on their entire net income, California Licensed Professional Clinical Counselor Corporations taxed as S Corporations offer a potential reduction in FICA tax liability by distributing a portion of business profits as shareholders distributions rather than wages. However, licensed professional clinical counselor shareholders actively participating in the daily operations of the California Licensed Professional Clinical Counselor Corporation must still receive reasonable compensation which is subject to FICA taxes. This reasonable salary is taxed at the 12.4% FICA rate up to the annual wage base limit, with a 6.2% contribution deducted from the wages of the licensed professional clinical counselor shareholder as an employee and a matching 6.2% paid by the California Licensed Professional Clinical Counselor Corporation.

Licensed professional clinical counselor shareholders may receive distributions from any profits beyond their reasonable salary exempt from FICA taxes. This allows licensed professional clinical counselors in California Licensed Professional Clinical Counselor Corporations electing S Corporation taxation to strategically organize their income to reduce FICA tax liabilities as long as they adhere to Internal Revenue Service guidelines for determining reasonable compensation.

Here is an example of FICA tax liability for a licensed professional clinical counselor earning a minimum fair market value salary as determined by Internal Revenue Service guidelines:

$50,000 salary x 12.4% = $6,200 FICA tax liability

This applies regardless of whether the licensed professional clinical counselor shareholder also receives $100,000, $250,000, or any other amount as a distribution through shares of stock in the California Licensed Professional Clinical Counselor Corporation.

This approach requires planning and documentation, as non-compliance with reasonable compensation standards could lead to the reclassification of distributions as wages, incurring additional FICA tax liabilities and penalties. Nonetheless, a $50,000 salary can be considered reasonable according to Internal Revenue Service standards, regardless of the total net income of the California Licensed Professional Clinical Counselor Corporation.

FICA Tax Liability Conclusion

When comparing FICA tax liability, licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners of general partnerships are taxed on the total net income of their clinical counselor practice. In contrast, a California Licensed Professional Clinical Counselor Corporation that elects S Corporation taxation can divide its income into that which is paid to a licensed professional clinical counselor shareholder as salary subject to the FICA tax and shareholder distributions paid to the licensed professional clinical counselor shareholder through the shares of the stock of the California Licensed Professional Clinical Counselor Corporation, which distributions are not subject to the FICA tax.

Based upon the examples above, a California Licensed Professional Clinical Counselor Corporation taxed as an S Corporation that pays a $50,000 fair market salary to a licensed professional clinical counselor shareholder as an employee could save that licensed professional clinical counselor shareholder up to $14,706 per year based on the 2024 FICA tax cap of $168,600 compared that same net income being paid to a California licensed professional clinical counselor sole proprietor or licensed professional clinical counselor general partner.

Medicare Tax Liability

The Medicare tax is a mandatory payroll tax in the United States, supporting the federal Medicare insurance program. Responsibility for paying these taxes is shared between employees and employers.

For employees, the Medicare tax is deducted directly from their wages or salaries at a rate of 1.45% of their gross income. Employers must also contribute an additional 1.45% on behalf of the employee, resulting in a total contribution of 2.9% per employee.

For self-employed individuals, including licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners in general partnerships, the Medicare tax is calculated not on wages or salaries, but rather as 2.9% of the net income of the clinical counselor practice attributed to the licensed professional clinical counselor owner.

Unlike the FICA tax, which is imposed only on income up to a certain threshold, the Medicare tax has no cap on the amount owed by an employee, licensed professional clinical counselor sole proprietor, or licensed professional clinical counselor general partner.

Medicare Tax Liability for Sole Proprietors and General Partners

As licensed professional clinical counselor sole proprietors or licensed professional clinical counselor general partners of a general partnership, these licensed professional clinical counselors shoulder the entire Medicare tax burden on their net income. Unlike employees who share this responsibility with their employers, self-employed licensed professional clinical counselors must cover both the employer and employee portions of the tax, resulting in a total Medicare tax rate of 2.9%.

The following are some examples of Medicare tax liability for a licensed professional clinical counselor with various net income:

$50,000 net income x 2.9% = $1,450 Medicare tax liability

$150,000 net income x 2.9% = $4,350 Medicare tax liability

$300,000 net income x 2.9% = $8,700 Medicare tax liability

Medicare Tax Liability for California Licensed Professional Clinical Counselor Corporations Taxed as S Corporations

When a California Licensed Professional Clinical Counselor Corporation opts for S Corporation status for tax purposes, it changes how Medicare tax obligations are managed for its licensed professional clinical counselor shareholders. Unlike licensed professional clinical counselor sole proprietors or licensed professional clinical counselor general partners of a general partnership who pay Medicare taxes on their entire net income, California Licensed Professional Clinical Counselor Corporations taxed as S Corporations offer a way to potentially reduce Medicare tax liability by classifying a portion of business profits as distributions on shares of stock instead of wages. Licensed professional clinical counselor shareholders actively engaged in the daily operations of the clinical counselor practice must still receive reasonable compensation, which is subject to Medicare taxes. The Medicare tax responsibility is split, with a 1.45% contribution from the wages of the licensed professional clinical counselor shareholder as an employee and a matching 1.45% paid by the California Licensed Professional Clinical Counselor Corporation.

Licensed professional clinical counselor shareholders must receive a reasonable salary, but any additional profits can be paid as shareholder distributions to the licensed professional clinical counselor shareholder not subject to Medicare taxes. This allows licensed professional clinical counselors with California Licensed Professional Clinical Counselor Corporations taxed as S Corporations to strategically manage their income and reduce Medicare tax liabilities. It is essential, however, to adhere strictly to Internal Revenue Service guidelines when determining reasonable compensation.

Here is an example of Medicare tax liability for a licensed professional clinical counselor earning a minimum fair market value salary as determined by the Internal Revenue Service:

$50,000 salary x 2.9% = $1,450 Medicare tax liability

This applies regardless of whether the licensed professional clinical counselor shareholder receives $100,000, $250,000, or any other amount as shareholder distributions through shares of stock in the California Licensed Professional Clinical Counselor Corporation.

This approach requires planning and documentation, as non-compliance with reasonable compensation standards may lead to shareholder distributions being reclassified as wages, resulting in additional Medicare tax liabilities and penalties. Nonetheless, a $50,000 salary can be considered reasonable under Internal Revenue Service standards, regardless of the total net income of the California Licensed Professional Clinical Counselor Corporation.

Medicare Tax Liability Conclusion

When examining Medicare tax liability, licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners of general partnerships are taxed on the entire net income of their clinical counselor practice. In contrast, a California Licensed Professional Clinical Counselor Corporation that chooses S Corporation taxation can bifurcate its income to pay a reasonable salary to a licensed professional clinical counselor shareholder as an employee, which is subject to the Medicare tax, while distributing the remaining income to the licensed professional clinical counselor shareholder through the shares of stock of the California Licensed Professional Clinical Counselor Corporation, which is not subject to the Medicare tax.

Based upon the examples above, a California Licensed Professional Clinical Counselor Corporation taxed as an S Corporation that pays a $50,000 fair market salary to a licensed professional clinical counselor shareholder as an employee could save that licensed professional clinical counselor shareholder $2,900 per year based on a $150,000 annual income or $7,250 per year based on a $300,000 annual income compared to the Medicare tax liability for a California licensed professional clinical counselor sole proprietor or licensed professional clinical counselor general partner of a general partnership.

Additional Medicare Liability

The Additional Medicare Tax, introduced under the Affordable Care Act, targets high-income earners with increased taxation. Unlike the standard Medicare tax, this additional levy applies only to individuals and couples who surpass specific income thresholds. Specifically, it imposes a 0.9% tax rate on wages and self-employment income exceeding these limits, affecting only the income that surpasses the threshold.

The threshold for the Additional Medicare Tax is $200,000 for single taxpayers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately.

Additional Medicare Tax Liability for Sole Proprietors and General Partners

As licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners in general partnerships, individuals bear the full burden of the Additional Medicare tax obligation on their entire net income in excess of the thresholds.

The following are some examples of Additional Medicare tax liability for a single licensed professional clinical counselor with various net income:

$50,000 net income x 0.9% = $0 Additional Medicare tax liability (below threshold)

$150,000 net income x 0.9% = $0 Additional Medicare tax liability (below threshold)

$300,000 net income x 0.9% = $900 Additional Medicare tax liability ($100,000 above threshold)

The following are some examples of Additional Medicare tax liability for a married licensed professional clinical counselor filing jointly with various net income:

$50,000 net income x 0.9% = $0 Additional Medicare tax liability (below threshold)

$150,000 net income x 0.9% = $0 Additional Medicare tax liability (below threshold)

$300,000 net income x 0.9% = $450 Additional Medicare tax liability ($50,000 above threshold)

The following are some examples of Additional Medicare tax liability for a married licensed professional clinical counselor filing separately with various net income:

$50,000 net income x 0.9% = $0 Additional Medicare tax liability (below threshold)

$150,000 net income x 0.9% = $225 Additional Medicare tax liability ($25,000 above threshold)

$300,000 net income x 0.9% = $1,575 Additional Medicare tax liability ($175,000 above threshold)

Additional Medicare Tax Liability for California Licensed Professional Clinical Counselor Corporations Taxed as S Corporations

While the Additional Medicare tax applies to wages, including wages earned by licensed professional clinical counselor shareholders involved in the day-to-day operations of a California Licensed Professional Clinical Counselor Corporation, the fair market value wages required by the Internal Revenue Service are unlikely to come close to the thresholds for the Additional Medicare tax, regardless of marital status or tax filing status, with proper tax planning as follows:

$50,000 salary x 0.9% = $0 Additional Medicare tax liability (below threshold)

Additional Medicare Tax Liability Conclusion

While not as large as the FICA and Medicare tax examples at the net income rates used as examples above, the Additional Medicare tax is not nominal and can become quite large for the owners of large practice groups or owners of clinical counselor practices with high net income.

Deductibility of Health Insurance Premiums and Other Fringe Benefits

Deducting health insurance premiums and other fringe benefits for licensed professional clinical counselor shareholders is another consideration in tax planning when selecting a business entity for a California clinical counselor practice. This section will detail the tax implications and advantages of providing health insurance and other fringe benefits to licensed professional clinical counselor shareholders and employees. By grasping these deductions, one can engage in more strategic financial planning, significantly affecting overall tax liabilities.

Deductibility of Health Insurance Premiums and Other Fringe Benefits for Sole Proprietors and General Partners

For licensed professional clinical counselor sole proprietors and licensed professional clinical counselor general partners of general partnerships, the ability to deduct health insurance premiums and other fringe benefits can offer a tax advantage. Sole proprietors can deduct the health insurance premiums they pay for themselves as an above-the-line deduction, thereby reducing their adjusted gross income.

This deduction is available even if the sole proprietorship does not show a profit, though it cannot surpass the net profit of the clinical counselor practice. It is important to remember that these deductions do not reduce Medicare or Social Security taxes. For licensed professional clinical counselor general partners in general partnerships, similar provisions apply if the premiums are paid by the general partnership and classified as guaranteed payments.

These deductions not only reduce taxable income but also serve as incentives within the tax code, encouraging smaller business structures to offer health-related benefits.

Deductibility of Health Insurance Premiums and Other Fringe Benefits for California Licensed Professional Clinical Counselor Corporations Taxed as S Corporations

For California Licensed Professional Clinical Counselor Corporations taxed as S Corporations, understanding the deductibility of health insurance premiums and other fringe benefits for licensed professional clinical counselor shareholders is important to creating an effective tax strategy.

Shareholders who own more than 2% of the California Licensed Professional Clinical Counselor Corporation can deduct health insurance premiums and other fringe benefits for their benefit paid on their behalf by the California Licensed Professional Clinical Counselor Corporation, however, these premiums are treated as compensation to the licensed professional clinical counselor shareholders and are reported as such on their W-2 forms, underlining their inclusion in taxable income.

Proper handling of these deductions ensures that the California Licensed Professional Clinical Counselor Corporation remains compliant with tax regulations.

Deductibility of Health Insurance Premiums and Other Fringe Benefits Conclusion

Grasping these deductions is crucial for selecting the right business structure and optimizing tax responsibilities. For sole proprietorships, general partnerships, and California Licensed Professional Clinical Counselor Corporations taxed as S Corporations, health insurance premiums can qualify as business expenses. However, licensed professional clinical counselor shareholders of California Licensed Professional Clinical Counselor Corporations must include these premiums and other fringe benefits in their income tax calculations, although they are exempt from FICA and Medicare tax liabilities.

Additional Costs to Operating as a California Licensed Professional Clinical Counselor Corporation

California Franchise Tax Board Minimum Annual Franchise Tax

California Licensed Professional Clinical Counselor Corporations, when taxed as S Corporations, must pay the minimum annual franchise tax mandated by the California Franchise Tax Board. The minimum franchise tax is the greater amount between an annual $800 or 1.5% of net income.

Sole proprietorships and general partnerships are exempt from franchise taxation in California, allowing them to bypass the annual minimum tax. This exemption provides a slight financial benefit; however, the tax efficiency of California Licensed Professional Clinical Counselor Corporations far exceeds the California minimum franchise tax requirement.

Other Administrative Costs to Operate a California Licensed Professional Clinical Counselor Corporation

Operating a California Licensed Professional Clinical Counselor Corporation involves additional administrative costs beyond the minimum annual franchise tax compared to sole proprietorships and general partnerships.

For example, a California Licensed Professional Clinical Counselor Corporation will have expenses related to maintaining state and federal compliance for keeping its FinCEN Beneficial Ownership Information Report up to date, filing an annual statement of information, and the drafting of meeting minutes for its annual meetings of shareholders and its board of directors that sole proprietorships and unregistered general partnerships do not require.

For both general partnerships and California Licensed Professional Clinical Counselor Corporations, additional administrative costs for bookkeeping, legal consultation to ensure adherence to corporate governance requirements, and tax preparation are likely higher than equivalent costs for a sole proprietorship.

Sole proprietorships and general partnerships without employees will generally not incur payroll costs, but California Licensed Professional Clinical Counselor Corporations will require payroll services even if the licensed professional clinical counselor shareholder is the only employee of the California Licensed Professional Clinical Counselor Corporation, which is an added expense. However, sole proprietorships and general partnerships with employees will incur equivalent payroll costs that are comparable to those of California Licensed Professional Clinical Counselor Corporations.

The additional financial obligations of a California Licensed Professional Clinical Counselor Corporation can add up to a few thousand dollars per year depending upon the costs of tax preparation and payroll services, but these costs are often outweighed by the tax benefits provided by a California Licensed Professional Clinical Counselor Corporation taxed as an S Corporation.

Conclusions About Tax Benefits

The additional costs associated with operation as a California Licensed Professional Clinical Counselor Corporation vary but are generally a few thousand dollars per year compared to a sole proprietorship or general partnership that does not pay an annual franchise tax to the California Franchise Tax Board and does not have employees requiring payroll. In addition, sole proprietorships may enjoy lower tax preparation costs than general partnerships or California Licensed Professional Clinical Counselor Corporations.

However, depending upon the net income of the professional practice, these additional expenses may be paid for by the FICA, Medicare, and Additional Medicare tax savings possible with a California Licensed Professional Clinical Counselor Corporation.

For $50,000 of allocated net income, a California licensed professional clinical counselor sole proprietor or licensed professional clinical counselor general partner would expect to pay $7,650 in self-employment taxes ($6,200 FICA + $1,450 Medicare), equivalent to that which would be paid by a licensed professional shareholder of a California Licensed Professional Clinical Counselor Corporation.

For $150,000 of allocated net income, a California licensed professional clinical counselor sole proprietor or licensed professional clinical counselor general partner would expect to pay $22,950 in self-employment taxes ($18,600 FICA + $4,350 Medicare), compared to $7,650 in payroll taxes (employee and employer contributions combined of ($6,200 FICA + $1,450 Medicare) for a $50,000 salary from a California Licensed Professional Clinical Counselor Corporation, a tax savings of $15,300.

For $300,000 of allocated net income, a California licensed professional clinical counselor sole proprietor or licensed professional clinical counselor general partner would expect to pay $30,506 in self-employment taxes ($20,906 FICA + $8,700 Medicare + $900 Additional Medicare), compared to $7,650 in payroll taxes (employee and employer contributions combined of ($6,200 FICA + $1,450 Medicare) for a $50,000 salary from a California Licensed Professional Clinical Counselor Corporation, a tax savings of $122,856.

Thus, for lower net income, say $50,000 or below, a California Licensed Professional Clinical Counselor Corporation will likely cost more in additional administrative expenses than the tax savings realized.

At around $60,000 of net income per year, the tax savings versus additional expense of operating a California clinical counselor practice as a California Licensed Professional Clinical Counselor Corporation starts to break even depending on the costs of the additional expenses incurred.

Above the $60,000 of net income per year, the tax savings begins to exceed the additional expense of operating a California clinical counselor practice as a California Licensed Professional Clinical Counselor Corporation, resulting in the licensed professional clinical counselor shareholder keeping more of the net income earned after taxes.

The experienced corporate attorneys at San Diego Corporate Law are available to assist with the analysis of net income versus administrative expense budgeting when deciding whether or not a licensed professional clinical counselor should form a California Licensed Professional Clinical Counselor Corporation or choose another business structure for a California clinical counselor practice.

Establishing a Business Structure for Anticipated Growth

Establishing a business structure conducive to anticipated growth involves selecting a formation that not only accommodates current operations but also facilitates future expansion.

For licensed professional clinical counselors foreseeing growth of their professional practice, choosing to start as a California Licensed Professional Clinical Counselor Corporation is advantageous because it allows these licensed professional clinical counselors to establish their practice once, avoiding the establishment of a practice as a sole proprietorship or general partnership for a year or two before facing the need to establish the clinical counselor practice a second time to after net income grows and the self-employment tax burden becomes expensive.

Additionally, even when net income remains lower, the California Licensed Professional Clinical Counselor Corporation is still valuable to a licensed professional clinical counselor because it provides legal protection by separating personal assets from business liabilities, a critical consideration for risk management.

Finally, for licensed professional clinical counselors who accept insurance, work with a regional center, or otherwise engage with third-party payor panels, the insurance paneling process will need to be repeated for a licensed professional clinical counselor first establishing a sole proprietorship or general partnership and later incorporating to take advantage of the liability protections and tax benefits of a California Licensed Professional Clinical Counselor Corporation.

If within the means of such a licensed professional clinical counselor, the recommendation is to start with a California Licensed Professional Clinical Counselor Corporation formed as a part of starting the clinical counselor practice.

A Quick Note on LLCs and PLLCs

A licensed professional clinical counselor may not use a foreign or California limited liability company (LLC), nor may a foreign professional limited liability company (PLLC) be used to practice clinical counseling in California. Pursuant to California Corporations Code Section 17701.04(e):

“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.”

This comes as a surprise to many licensed professional clinical counselors, as professional limited liability companies (PLLCs) are commonly used to render professional services in other states.