LLC vs S-Corp vs PLLC: Choosing the Right Business Structure for Your Practice

Choosing the right business structure for your therapy practice is one of the most important decisions you will make as a practice owner. The structure you select affects how much you pay in taxes, how protected your personal assets are from lawsuits, and how much paperwork lands on your desk each quarter. Get it right, and you set yourself up for financial success. Get it wrong, and you could end up paying thousands more than necessary or leaving yourself exposed to unnecessary risk.

The good news? This decision is not permanent. You can change your business structure as your practice grows. But understanding the options from the start helps you make smarter choices and avoid costly restructuring down the road.

Understanding Your Business Structure Options

Before diving into comparisons, let us establish what each structure actually means for your therapy practice. Each option has distinct legal, tax, and operational implications that affect your daily life as a practice owner.

Sole Proprietorship: The Starting Point

A sole proprietorship is not really a business structure at all. It is simply you operating under your own name or a "doing business as" (DBA) name. There is no legal separation between you and your business. This is where most therapists begin, often without even realizing it. The moment you see your first private pay client, you are technically a sole proprietor.

The simplicity is appealing: no formation documents, no annual reports, no separate tax returns. You report business income on Schedule C of your personal return. However, this simplicity comes with a significant downside. Your personal assets, including your home, savings, and investments, are fully exposed if someone sues your practice.

LLC: Limited Liability Company

An LLC creates a legal wall between your personal assets and your business liabilities. If a client sues your practice and wins a judgment larger than your malpractice insurance covers, creditors cannot come after your personal bank accounts or your home (in most situations). This protection is the primary reason therapists form LLCs.

By default, a single-member LLC is taxed as a "disregarded entity," meaning the IRS treats it exactly like a sole proprietorship for tax purposes. You still file Schedule C. The LLC itself does not file a separate tax return. This gives you liability protection without adding tax complexity.

PLLC: Professional Limited Liability Company

A PLLC is simply an LLC for licensed professionals. Many states require therapists, doctors, lawyers, and accountants to form PLLCs rather than regular LLCs. The tax treatment is identical. The operational requirements are nearly identical. The main difference is that your state licensing board may need to approve your PLLC formation, and all owners must hold the relevant professional license.

One important note: A PLLC does not protect you from malpractice claims arising from your own professional negligence. It protects your personal assets from business debts, contract disputes, and the malpractice of other practitioners in your group practice. Your malpractice insurance remains your primary protection against clinical liability.

The S-Corp Election: A Tax Strategy, Not a Business Structure

Here is where many therapists get confused. An S-Corp is not a type of business entity. It is a tax election you make with the IRS. You can have an LLC (or PLLC) that elects to be taxed as an S-Corp. This gives you the liability protection of an LLC with the tax advantages of S-Corp status.

So what is the tax advantage? Self-employment tax savings. When you operate as a sole proprietor or standard LLC, you pay 15.3% self-employment tax on all your net business income. This covers Social Security and Medicare. When you elect S-Corp taxation, you pay yourself a "reasonable salary" and only pay employment taxes on that salary. The remaining profit passes through to you as a distribution, which is not subject to self-employment tax.

When S-Corp Election Makes Sense

S-Corp taxation adds complexity. You must run payroll for yourself, file quarterly payroll taxes, and submit an additional tax return (Form 1120-S) each year. You will likely need to hire an accountant or use payroll software. These costs can run $1,500 to $4,000 annually.

The general rule of thumb: S-Corp election starts making financial sense when your net business income exceeds $75,000 to $80,000 annually. Below that threshold, the administrative costs often outweigh the tax savings. Above $100,000, the savings become substantial enough that most therapists benefit from making the election.

State-Specific Requirements for Therapists

Your state determines whether you can form a standard LLC or must form a PLLC. Some states do not even offer PLLCs and require professional corporations (PCs) instead. Before filing any formation documents, check with your state licensing board and Secretary of State office.

Formation costs vary significantly by state. Filing fees range from $50 in states like Kentucky to $500 in Massachusetts. Factor in ongoing costs like annual reports, franchise taxes, and registered agent fees when making your decision.

Making Your Decision: A Practical Framework

Rather than getting lost in the details, use this framework to guide your decision based on where you are in your practice journey.

The Typical Progression

Stage 1: Starting Out (0-$30K revenue) - Operate as a sole proprietor. Focus on building your caseload rather than business structure. Make sure you have malpractice insurance.

Stage 2: Established Practice ($30K-$75K) - Form an LLC or PLLC for liability protection. Keep default tax treatment (disregarded entity). The liability protection is worth the modest cost even if tax savings are minimal.

Stage 3: Growing Practice ($75K+) - Consider S-Corp election. Run the numbers with your accountant. The savings typically justify the added complexity at this income level.

Stage 4: Group Practice - Consult with a business attorney and CPA. You may need different structures for different purposes (one entity for the practice, another for real estate if you own your building).

Common Mistakes to Avoid

Therapists often make predictable mistakes when choosing and maintaining their business structure. Here are the most costly ones to watch for.

Forming an LLC too early: If you are still building your practice and have minimal assets to protect, the annual fees may not be worth it. Focus on getting clients first.

Electing S-Corp too early: The complexity and costs of S-Corp taxation can actually cost you money if your income is not high enough. Wait until the math clearly works in your favor.

Ignoring state requirements: Forming a standard LLC when your state requires a PLLC can create problems with your licensing board and may void your liability protection.

Piercing the corporate veil: Once you form an LLC, treat it like a separate entity. Maintain a separate bank account, do not commingle personal and business funds, and keep basic records. Failing to do this can eliminate your liability protection.

Setting unreasonable S-Corp salary: The IRS scrutinizes S-Corps that pay unreasonably low salaries. Pay yourself what you would need to pay someone else to do your job. For therapists, this typically means at least 50-60% of net income.

Frequently Asked Questions

Does my business name need to include LLC or PLLC?

In most states, yes. Your legal business name typically must include your entity designation (LLC, PLLC, L.L.C., etc.). However, you can usually operate under a "doing business as" (DBA) name that does not include the designation for marketing purposes.

Can I form my LLC in a different state like Delaware or Wyoming?

You can, but it rarely makes sense for therapy practices. You will still need to register as a "foreign LLC" in your home state where you practice, meaning double the fees and complexity. The supposed benefits of Delaware or Wyoming formation typically apply to larger companies with investors, not solo practitioners.

How much can I realistically save with S-Corp election?

A rough estimate: you save about 15% in self-employment taxes on the portion of income you take as distributions rather than salary. At $100,000 net income with a $60,000 salary and $40,000 distribution, you would save approximately $6,000 annually. Subtract $2,000-$3,000 in additional accounting costs for a net savings of $3,000-$4,000.

I already have an LLC. How do I elect S-Corp taxation?

File Form 2553 with the IRS. You can do this at any time, though there are optimal timing windows. If filed within 75 days of the start of the tax year, the election applies to that year. Otherwise, it applies to the following year. Late election relief is sometimes available.

Should I form an entity before I have any clients?

Usually not necessary. Operating as a sole proprietor while building your practice is perfectly fine. Form an LLC or PLLC once you have something to protect, such as consistent income, savings, or other assets. Your malpractice insurance provides protection in the meantime.

Do I need both a business attorney and a CPA?

For most solo practitioners, a CPA who works with small businesses can handle formation and S-Corp election guidance. You would consult a business attorney for more complex situations like partnership agreements, buying a practice, or significant contract negotiations.