Should you be a Sole Proprietor or LLC? The Pros and Cons you Need to Know

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What is a “business entity” and how do you know which to choose? When I started in private practice I had no idea what sole proprietorships or LLCs were, and chances are you might be in a similar place! Don’t worry, in this video I’m going to break down these entities to help you understand how to move forward in private practice.

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This video is geared for therapists of all kinds, including psychologists, MFTs, LPCCs, social workers, and others in the clinical counseling field.

Welcome to Private Practice Skills! I’m Dr. Marie Fang, psychologist in private practice. I post videos offering tools I learned the hard way about starting and growing private practice so that you don’t have to.

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This video is not intended as professional or legal advice. Be sure to seek the services of a professional if you are in need of them.

What is a business entity? It’s a legal categorization that helps define what type of business you run for tax and liability services. The business entity you file for helps the IRS know what kind of relationship you have with your business.

The main factors to take into consideration when selecting a business entity is how it will impact your liability and your taxes.

There are an array of possible business entities to enter into. However, there are two that are most common in solo private practice: Sole Proprietorships and Limited Liability Companies.

To cut to the chase: I personally believe filing as an LLC is the best option, which will make sense as we get into it.

Okay, let’s explain the differences as well as pros and cons of each of these.

Sole proprietorship:
this is kind of the default business entity. If you’re licensed to practice as a therapist in your state, and you have a city business license, BOOM, you’re a sole proprietor. There’s no extra paperwork to fill out. You simply have to keep track of your income and file taxes appropriately.
If you are a sole proprietor, you and your business are legally considered to be the same entity. That means that when your therapy business makes income, it’s the same as you making income. You and your business are the same unit.
Pros: The pros of being a sole proprietor are that it’s easy to manage, there aren’t additional costs to file, and no additional taxes to pay above and beyond your typical income tax.
Cons: You are held liable for all of your business dealings! This is a HUGE con. What this means is that if you get sued for something that happens related to your professional practice, someone can go after your personal assets like your house or car, because you and your business are the same entity.
Liability insurance doesn’t resolve this issue as it only covers your professional assets and also doesn’t apply in an array of situations, particularly if you lose a law suit.

Limited Liability Company (LLC):
There is a little bit of application process to become an LLC, but it could be reasonably completed in a day or two.
If you file as an LLC, you and your business are considered separate entities.
Pros: Limited liability! This means that if someone sues your business, your personal assets are protected! People cannot go after your house or car. Similarly, If someone sues you personally, they can’t go after your business assets either.
Taxes! Unlike some of the other business entities that offer limited liability, filing as an LLC does not require that you pay double on certain taxes. If you file as an LLC, you can opt to file taxes as a “pass through entity,” which allows profit and loss to go straight to the business owner and only pay taxes on those profits once.
Cons: There’s a bit more upkeep here. It’s imperative that in addition to the initial application process, you are diligent about keeping your business and personal bookkeeping separate. You need separate bank accounts in order to make clear that your business and personal money are separate entities. If you don’t do so and aren’t diligent about keeping a paper trail of your costs, it can be easy for someone to claim in a lawsuit that you are effectively not running like an LLC.

I hope you found this video helpful to give you an idea of where to go next in choosing a business entity.