Choosing the right business structure is a critical decision for marriage and family therapists establishing their private practices in California. While California Limited Liability Companies (California LLCs) are popular for their flexibility and tax benefits, marriage and family therapy practices in California are expressly prohibited from operating as a California Limited Liability Company (California LLC).

While the question, “why is a marriage and family therapy practice not permitted to use a California LLC?” has been answered in previous articles cited and summarized below, the experienced corporate attorneys at San Diego Corporate Law inquiries on a weekly basis from marriage and family therapists receiving mixed information from other attorneys or advisors leading them to believe that in certain circumstances it might be permissible to practice marriage and family therapy in a California LLC.

This blog references and links to previous articles with regard to the business structures and business entities marriage and family therapists may use to practice marriage and family therapy in California, but the purpose of this article is to highlight and explore the specific provisions of the California Corporations Code that prohibits the use of a California LLC to render professional services as a marriage and family therapist in California.

California Corporations Code Section 13401

The Moscone-Knox Professional Corporations Act is found in California Corporations Code Sections 13400-13410. California Corporations Code Section 13401(b) provides the authority for licensed marriage and family therapists to practice in California as California Professional Marriage and Family Therapy Corporations with the purpose of rendering professional services in their practice of marriage and family therapy.

California Corporations Code Section 13401 also provides two definitions required to properly analyze the restrictions on the use of California LLCs by marriage and family therapists practicing marriage and family therapy in California.

California Corporations Code Section 13401(a)

California Corporations Code Section 13401(a) provides the definition of “Professional Services” as follows:

“‘Professional services’ means any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act.”

Thus, Professional Services under the definition provided by California Corporations Code Section 13401(a) encompasses many professions, including marriage and family therapy under California Business and Professions Code Sections 4987.5–4988.2.

California Corporations Code Section 13401(d)

California Corporations Code Section 13401(d) provides the definition of “Licensed Person” as follows:

“‘Licensed person’ means any natural person who is duly licensed under the provisions of the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act to render the same professional services as are or will be rendered by the professional corporation or foreign professional corporation of which the person is, or intends to become, an officer, director, shareholder, or employee.”

Thus, Licensed Person under the definition provided by California Corporations Code Section 13401(d) means those persons licensed in the professions listed above as providers of Professional Services under California Corporations Code Section 13401(a), which includes marriage and family therapists in California.

California Corporations Code Section 17701.04

Two subsections of California Corporations Code Section 17701.04 explicitly outline restrictions on the use of a California LLC for the provision of marriage and family therapy services.

Professional Services, as defined under California Corporations Code Section 13401(a), refers to professional services, such as the practice of marriage and family therapy, that require a license, certification, or registration by governmental agencies or other entities and regulatory boards such as the California Board of Behavioral Sciences. California Corporations Code Section 17701.04 establishes that individuals or entities practicing as a marriage and family therapist cannot form a California LLC for these purposes.

California Corporations Code Section 17701.04(b)

One of the primary legal barriers to marriage and family therapy practices utilizing a California LLC can be found in California Corporations Code Section 17701.04(b), which reads:

“A limited liability company may have any lawful purpose, regardless of whether for profit, except the banking business, the business of issuing policies of insurance and assuming insurance risks, or the trust company business. A domestic or foreign limited liability company may render services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act, if the applicable provisions of the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act authorize a limited liability company or foreign limited liability company to hold that license, certificate, or registration.”

California Corporations Code Section 17701.04(b) is one of the more confusing sections in the analysis of restrictions on using a California LLC for a marriage and family therapy practice. While the first half of the second sentence of California Corporations Code Section 17701.04(b) does read:

“A domestic or foreign limited liability company may render services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act…”

the second half of that sentence requires there to be applicable provisions the California Business and Professions Code or other applicable Act to actually authorize the use of a California LLC, which authorizing provisions do not exist at the time of this writing for the practice of marriage and family therapy.

California Corporations Code Section 17701.04(e)

Another of the legal barriers to a professional marriage and family therapy practice utilizing an LLC in California can 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.”

This section of the California Corporations Code explicitly prohibits LLCs from providing Professional Services in California under California Corporations Code 13401(a) by those Licensed Persons, including marriage and family therapists, under the definition of California Corporations Code Section 13401(d).

Secretary of State Form LLC-1 Regarding a Marriage and Family Therapy Practice Using a California LLC

California Articles of Organization Form LLC-1 Screenshot of Professional Services Notice

As shown in the image above, in order to file California Secretary of State Form LLC-1, the filer must agree to the following provision:

“A California limited liability company may not provide professional services in California. (California Corporations Code sections 13401 and 7701.04(e).) If your business is required to be licensed, certified or registered, before submitting this filing to the California Secretary of State’s office, it is recommended that you contact the appropriate licensing authority in order to determine whether your services are considered professional. For licensing requirements in California, please refer to the CalGold website at http://www.calgold.ca.gov or the California Department of Consumer Affairs website at http://www.dca.ca.gov.

A filer may successfully file California LLC Articles of Organization despite the warning depicted and quoted above, however, acceptance of Articles of Organization by the Secretary of State does not constitute the consent of the California Secretary of State to practicing marriage and family therapy with a California LLC under the California Corporations Code.

Reasons for Prohibition Against a California Limited Liability Company for California Marriage and Family Therapists

The main reason for prohibiting the use of California LLCs by licensed marriage and family therapists is to ensure compliance with professional regulations and protect the public from potential harm caused by unqualified or unethical individuals providing marriage and family therapy services by upholding public accountability standards specific to the practice of marriage and family therapy. The State of California wants to ensure that only licensed marriage and family therapists who have met certain education and training requirements are able to offer their expertise and advice in a professional capacity as a marriage and family therapist.

The reasoning behind this restriction stems from the nature of marriage and family therapy services, which requires specialized knowledge and experience, and is subject to stringent regulation by the State of California and the California Board of Behavioral Sciences. Professions such as marriage and family therapy demand accountability not just to patients but also to their professional licensing boards.

The California LLC structure, known for its liability protections and manager/member flexibility, is deemed incompatible with the heightened accountability standards the State of California applies to marriage and family therapists. Thus, marriage and family therapists practicing in California must choose alternative structures that better align with the regulatory oversight and public protection goals of the State of California.

California Professional Marriage and Family Therapy Corporations require adherence to stricter regulations regarding ownership and governance. Licensed marriage and family therapist shareholders of a California Professional Marriage and Family Therapy Corporation must be licensed to practice marriage and family therapy or certain other fields permitted under California Corporations Code Section 13401.5 (see: “Who May Be a Shareholder of a California Professional Marriage and Family Therapy Corporation?“), ensuring that ethical standards and professional expertise guide the practice of marriage and family therapy.

Permitted California Business Structures for Licensed Marriage and Family Therapists

Licensed marriage and family therapists in California are restricted in the types of business entities they may form due to California law in the California Corporations Code discussed above. These California laws are designed to ensure compliance with professional standards of practice and maintain accountability for practicing marriage and family therapy in California.

A previous article titled “Can an MFT Practice Marriage and Family Therapy Using a California LLC?” answered the question of whether a licensed marriage and family therapist could use a California LLC, discussed some of the possible consequences of practicing marriage and family therapy in California as a California LLC, and explored the options available to licensed marriage and family therapists who might already be practicing marriage and family therapy as a California LLC.

This section will provide an overview of the permitted business structures that licensed marriage and family therapists may utilize, including California Professional Marriage and Family Therapy Corporations, partnerships, and sole proprietorships, while providing links to articles containing more information about the specific requirements and considerations for each business entity structure.

Sole Proprietorships for California Licensed Marriage and Family Therapists

A sole proprietorship is the simplest and most common business structure for licensed marriage and family therapists looking to practice marriage and family therapy in California. It is an unincorporated business owned and operated by the licensed marriage and family therapist personally, making it straightforward to set up and maintain. For licensed marriage and family therapists in California, understanding how a sole proprietorship functions and the associated considerations is critical to ensuring compliance and achieving success.

Key Features of Sole Proprietorships for California Licensed Marriage and Family Therapists

One of the primary advantages of a sole proprietorship is ease of formation. There are minimal regulatory requirements compared to other business structures, which reduces the time and cost of starting a practice. Sole proprietors simply need to obtain the appropriate professional licenses and any required local permits to begin operations.

Another notable feature of a sole proprietorship is that the licensed marriage and family therapist has complete control of the business. This autonomy allows licensed marriage and family therapists to make decisions and manage their practice without needing approval from partners or shareholders.

However, sole proprietors are personally liable for all debts and obligations of their business. For California licensed marriage and family therapists, this means that personal assets can be at risk if claims arise from marriage and family therapy services or other business activities. It is crucial for sole proprietors to consider obtaining adequate liability insurance to mitigate this risk.

Tax Considerations of Sole Proprietorship for Practicing Marriage and Family Therapy

From a tax perspective, sole proprietorships are treated as “pass-through” entities. This means the business income is reported directly on the owner’s personal tax return, simplifying the tax filing process. However, sole proprietors are subject to self-employment taxes, which includes both the employer and employee portions of Social Security and Medicare taxes.

Is a Sole Proprietorship Right for You?

While a sole proprietorship may offer simplicity and independence, it is essential to weigh the potential risks and benefits relative to other business structures, such as California Professional Marriage and Family Therapy Corporations. Licensed professionals should assess their long-term business goals, liability exposure, and the administrative requirements when selecting a business entity. For more detailed guidance on sole proprietorships for licensed professionals in California, consult “Sole Proprietorship vs Professional Marriage and Family Therapy Corporation in California” and “What are the Business Structure Options for Solo Licensed Marriage and Family Therapists in California?” or schedule a consultation with the experienced corporate attorneys at San Diego Corporate Law to ensure compliance and alignment with your professional objectives.

Partnerships for California Licensed Marriage and Family Therapists

A partnership is one of the simplest business entity structures available for two or more licensed marriage and family therapists looking to collaborate professionally. For California marriage and family therapists, partnerships may offer a straightforward structure for operating a marriage and family therapy practice. However, it is essential to understand the benefits, limitations, and regulatory implications before forming a partnership for practicing marriage and family therapy.

Key Features of Partnerships for California Licensed Marriage and Family Therapists

A California General Partnership is formed when two or more individuals agree to engage in a business together for profit, without formally organizing another form of business entity. Partners share ownership, responsibilities, profits, and liabilities equally unless otherwise agreed upon through a written partnership agreement. Importantly, in California, general partnerships do not require registration with the state to be established, but they must comply with local licensing and regulatory requirements applicable to the practice of marriage and family therapy. Partners of a California General Partnership have joint and several liability for all debts, liabilities, obligations, and legal judgments against the California General Partnership.

Tax Considerations of Partnerships for Practicing Marriage and Family Therapy

One of the main considerations when choosing between these a partnership for a marriage and family therapy practice is the tax implications.

Partnerships are subject to pass-through taxation, a process that allows the income, deductions, and tax credits of the partnership to “pass through” to the individual partners rather than being taxed at the business entity level. This means that the partnership itself does not pay federal income taxes. Instead, each partner reports their share of the profits or losses of the partnership on their personal income tax return, based on their ownership interest.

In addition to income taxes, partners of a partnership are generally considered self-employed for tax purposes. This designation requires them to pay self-employment taxes, which cover Social Security and Medicare contributions. Unlike employees, who split these taxes with their employer, self-employed individuals are responsible for the full tax rate, currently 15.3% of net earnings. The self-employment tax liability of each partner is calculated based on their share of the net income of the partnership.

It is crucial for marriage and family therapists considering a partnership business structure for their marriage and family therapy practice to understand the income tax and self-employment tax obligations of partnerships and plan accordingly, as these taxes can significantly impact personal income tax liability.

Is a Partnership Right for You?

While a partnership may offer simplicity and independence, it is essential to weigh the potential risks and benefits relative to other business structures, such as California Professional Marriage and Family Therapy Corporations. Licensed marriage and family therapists should assess their long-term business goals, liability exposure, and the administrative requirements when selecting a business entity for their marriage and family therapy practice. For more detailed guidance on California General Partnerships for licensed professionals in California, consult “What are the Business Structure Options for Marriage and Family Therapy Group Practices in California?” or schedule a consultation with the experienced corporate attorneys at San Diego Corporate Law to ensure compliance and alignment with your professional objectives.

California Professional Marriage and Family Therapy Corporations for California Licensed Marriage and Family Therapists

In California, licensed marriage and family therapists have the option to form a California Professional Marriage and Family Therapy Corporation with the California Secretary of State as the business entity structure to practice marriage and family therapy. A California Professional Marriage and Family Therapy Corporation is a specialized type of California Corporation that is specifically designed for licensed marriage and family therapists.

Key Features of California Professional Marriage and Family Therapy Corporations for California Licensed Marriage and Family Therapists

One of the main advantages of forming a California Professional Marriage and Family Therapy Corporation is that it offers personal liability protection for the licensed marriage and family therapist shareholders who own the California Professional Marriage and Family Therapy Corporation. This means that all debts, liabilities, obligations, and legal judgments against the marriage and family therapy practice that are not subject to a personal guaranty or based on malpractice or professional errors and omissions will stay with the California Professional Marriage and Family Therapy Corporation and no flow to the licensed marriage and family therapist shareholder (see: “What Liability Protection Does a California Professional Marriage and Family Therapy Corporation Provide?“).

However, there are certain restrictions on who can own and manage a California Professional Marriage and Family Therapy Corporation which require only licensed marriage and family therapists to be shareholders (see: “Who May Be a Shareholder of a California Professional Marriage and Family Therapy Corporation?“).

Tax Considerations of California Professional Marriage and Family Therapy Corporations for Practicing Marriage and Family Therapy

Forming a California Professional Marriage and Family Therapy Corporation can also provide tax benefits to licensed marriage and family therapist shareholders (see: “What Tax Benefits Does a California Professional Marriage and Family Therapy Corporation Provide?“). For example, a California Professional Marriage and Family Therapy Corporation can make an S Corporation election, which allows for pass-through taxation (see: “Can a California Professional Marriage and Family Therapy Corporation Be an S-Corp?“). Electing to be taxed as an S-Corp means that the profits and losses of a California Professional Marriage and Family Therapy Corporation are passed through to the personal tax returns of the individual shareholders rather than being subject to double taxation at both the corporate and individual level.

Additionally, California Professional Marriage and Family Therapy Corporations do not subject licensed marriage and family therapist shareholders to self-employment taxes, and licensed marriage and family therapist shareholders who also provide marriage and family therapy services must only pay payroll taxes on that portion of their income from the California Professional Marriage and Family Therapy Corporation that are paid as W-2 wages.

It is important for marriage and family therapists to consult with a tax advisor when considering forming a California Professional Marriage and Family Therapy Corporation, as both the personal financial situation of the licensed marriage and family therapist shareholder and pro forma professional practice financials of each licensed marriage and family therapist will be factors in determining if a California Professional Marriage and Family Therapy Corporation is the most tax efficient structure to use when practicing marriage and family therapy.

Is a California Professional Marriage and Family Therapy Corporation Right for You?

Based upon limited liability protection and tax efficiency, a California Professional Marriage and Family Therapy Corporation is the best choice for most licensed marriage and family therapists practicing marriage and family therapy in California.

To assist in the decision about whether a California Professional Marriage and Family Therapy Corporation is the best business entity structure for your business, see “When to Use a California Professional Marriage and Family Therapy Corporation” and “When Not to Use a California Professional Marriage and Family Therapy Corporation” for more detailed information about choosing a business entity structure to practice marriage and family therapy.

If you are already practicing marriage and family therapy in a California LLC, see “10 Steps to Convert LLC to Professional Marriage and Family Therapy Corporation in California“, and “Four Reasons Not to Convert LLC to Professional Marriage and Family Therapy Corporation in California” for more detailed guidance on moving from a California LLC to a California Professional Marriage and Family Therapy Corporation.

If you are not already practicing marriage and family therapy in a California LLC, see “Four Things to Know About Starting Your Marriage and Family Therapy California Professional Corporation“, “The 7 Steps for Forming a California Professional Marriage and Family Therapy Corporation“, “How Long Does It Take to Form a California Professional Marriage and Family Therapy Corporation?” for more detailed guidance on forming a California Professional Marriage and Family Therapy Corporation for your marriage and family therapy practice.

To speak with a corporate attorney knowledgeable in matters of forming California Professional Corporations, schedule a consultation with the experienced corporate attorneys at San Diego Corporate Law.