Ann Tran-Lien, JD
Managing Director of Legal Affairs
The Therapist
May/June 2018
 

An important question for Licensed Marriage and Family Therapists who are contemplating private practice is whether to start out as a sole proprietor, or to consider the formation of a professional corporation. Sole proprietorships are the most common business entity utilized by therapists in private practice and they are simple to describe: A sole proprietor has total control of the business, receives all of the profits, and is responsible for the practice’s taxes and liabilities. The other popular business entity amongst therapists is the professional corporation. Understanding the purpose and structure of a professional corporation and comparing some of its fundamental advantages and disadvantages to a sole proprietorship may help you to decide whether, and when to form a professional corporation in your own circumstance. The following discussion is intended to provide a general overview of the marriage and family therapy professional corporation in California.

Q: What is a professional corporation?

A: A professional corporation is a corporation that is formed to provide a professional service that requires a license. In California, licensed professionals, including LMFTs, who wish to incorporate their practice, have one choice: a professional corporation. The law that governs professional corporations in California is also known as the “Moscone-Knox Professional Corporation Act” (Cal. Corp. Code §§13400- 13410).

Q: Can I form a limited liability company (L.L.C.) to provide psychotherapy services?

A: No. Licensed professionals, including LMFTs, are not permitted in California to form an L.L.C. to render professional services. The law specifically excludes licensed professionals from doing so.

Q: What are the advantages and disadvantages of incorporating?

A: Some advantages of incorporating include:

• Limited Liability: A corporation can generally shield you and any other owners, officers, and professional employees from personal liability against claims that are unrelated to the rendering of professional services. In the eyes of the law, a professional corporation is treated as its own legal entity. Meaning, a corporation is separate and distinct from the people who create and own them. Corporations can enter into contracts, incur debt, own property, engage in business, sue, and be sued. Because it is treated as a separate entity from its owners, the corporation will be responsible for its losses, debts, and obligations, and not the owners. LMFTs who own and run professional corporations cannot generally be held personally responsible for the debts and obligations of the corporation. For instance, if a professional corporation enters into a contract with a vendor, the contract would be between the professional corporation and the vendor. If down the road, the vendor brings an action against the corporation for breach of contract, and the corporation loses, the vendor can only reach to the assets of the corporation (the corporation’s financial accounts, investments and assets). The party cannot claim the owner’s home, car, or other personal assets. Additionally, owners of a professional corporation are not liable for negligence or malpractice claims against the other owner(s) or professional employees. However, some courts may ignore the corporate status and hold owners and officers personally liable. This legal doctrine is called “piercing the corporate veil.” This doctrine is discussed further on page 46.

Keep in mind that a corporation does not protect the owner (or professional employee) from liability claims arising from their professional services. If a patient files suit against the owner/professional employee alleging professional negligence, the professional corporation will not shield the owner/professional employee from personal liability.

- Therefore, it is strongly recommended that your corporation obtain individual malpractice insurance to cover the individual provider, as well as corporate coverage for the corporation in case a claim/lawsuit for malpractice also names the corporation in the lawsuit.

- Some malpractice carriers allow an individual policy to be upgraded to a corporate policy—check with your carrier.

• Tax-Free Benefits: Professional corporations can receive fringe benefits, such as health insurance and retirement plans. It is recommended to speak to your accountant about this matter.

Some disadvantages include:

• Corporate Formalities: The law requires corporations to engage in specific corporate formalities a professional corporation must follow to ensure the corporation is a distinct legal entity separate from its owner(s). Corporate formalities include, among other things, having board of director meetings, keeping meeting minutes, and keeping a corporate file.


• Costs: There will be initial costs in setting up the corporation, whether you do it yourself, or if you hire an attorney/CPA or other service to assist you. There are also ongoing fees for maintaining the corporation, and costs associated with accounting and other necessary corporate matters.

Q: What are the initial steps required in incorporating a professional corporation?

A: Generally, the following are initial steps required in incorporating. It is important that you consult with an attorney and accountant regarding your own specific situation and circumstances

• Choose a name for your corporation: The name of your professional corporation must comply with Board of Behavioral Sciences’s (BBS) requirements (discussed on page xx). It must also be distinguishable from the name of any other business entity on file with the California Secretary of State. You can request an initial check on the availability of your professional corporation’s name by mailing a completed Name Availability Inquiry Letter to the Secretary of State’s office in Sacramento (email and online inquiries are currently unavailable). Names can be reserved with the Secretary of State for 60 days by submitting the Name Reservation Request Form. All forms are available on the Secretary of State’s website at www.sos.ca.gov
• File Articles of Incorporation and pay the filing fee: To incorporate as a professional corporation in California, you must file the Articles of Incorporation with the Secretary of State. A form (ARTS-PC) has been created by the Secretary of State for ease in
• filing.

However, professional corporations can compose their own Articles of Incorporation. Before submitting the form or your own Articles, it is recommended you consult with a private attorney to ensure it meets your business needs and legal requirements. The fee for filing in California is currently $100

• Maintain a corporate file: Set up a file in which you keep all of your corporation’s documents, including Board of Directors’ meeting minutes and financial papers
• Appoint a Board of Directors: California professional corporations must have at least three directors on their board, unless there are fewer than three owners..

- If you are the sole owner of your professional corporation, you can also be the only director and can serve as the president and treasurer of the corporation.

- If a professional corporation has only two owners, the two owners may be appointed as directors and between the two, fill the offices of president, vice president, secretary, and treasurer of the corporation. Typically, LMFTs who are incorporating their professional corporation will be a director and also a paid employee of the corporation.

• Hold an initial Board of Directors’ meeting: Your professional corporation would need to hold an initial Board of Directors’ meeting to make certain business decisions and transactions, including but not limited to, drafting and adopting bylaws, appointing any officers, and making certain tax elections.


• File the Statement of Information and accompanying fee: The Statement of Information must be filed with the California Secretary of State within 90 days after filing the Articles of Incorporation and each year thereafter during the applicable filing period. The Statement requires disclosure of the following information: the corporation’s current address, officers, directors or managers and name and address of agent for service of process.


• Obtain an EIN: The IRS requires employers and those who operate their business as a corporation to obtain an Employer Identification Number (also known as an “EIN” or a “Federal Tax ID Number”). The EIN is used by the IRS to identify a business entity. A business needs an EIN in order to pay employees and to file business tax returns. Visit the IRS’s website at www.irs.gov to apply for an EIN online.

Q: Who can be a co-owner or employee of my professional corporation?

A: A marriage and family therapy professional corporation may have the following licensed professionals as co-owners or professional employees of the corporation: licensed marriage and family therapists, licensed clinical social workers, licensed professional clinical counselors, licensed physicians and surgeons, licensed psychologists, registered nurses, licensed chiropractors, licensed acupuncturists, and naturopathic doctors. An LMFT must own at least 51 percent of the outstanding shares of a marriage and family therapy corporation and the remaining 49 percent may be owned by another licensed professional as listed above. The number of these licensed persons cannot exceed the number of LMFTs in the corporation and cannot surpass a combined share total of 49 percent. Professional corporations are allowed to hire other employees who do not render professional services, such as a receptionist or billing assistant.

Q: What does “piercing the corporate veil” mean?

A: As stated above, professional corporations are separate legal entities that remain legally distinct from their owners. This helps protect the owner(s) from debts and obligations of the corporation. In order to maintain this separate legal existence, professional corporations must follow certain rules on the formation and operation of the corporation. However, in certain circumstances, courts may allow for claimants to “pierce the corporate veil” and hold the owner(s) liable for the corporation’s debts and obligations. California courts have considered, amongst other factors, the following when determining whether a claimant may pierce the corporate veil of a corporation:¹

• Commingling of personal and corporate funds/assets or failing to segregate personal funds from corporate funds: It is important that owners of professional corporations keep their personal funds separate from the corporation’s funds.


• Failure to follow corporate formalities, such as failing to hold Board of Directors meetings or maintaining meeting minutes.


• The representation by an owner that they are personally liable for corporate debts or obligations.

Q: Are there specific rules on what name I can use for my professional corporation?</p>

A: Yes. The LMFT licensing law requires the name of a marriage and family therapy corporation to contain one or more of the following words: “marriage,” “family,” or “child” together with one or more of the words: “counseling,” “counselor,” “therapy,” or “therapist.” In addition, the law requires a professional corporation to include in its name wording or abbreviations that are indicative of corporate existence, such as “a professional corporation,” “P.C.,”or “inc.” A marriage and family therapy corporation is required to inform patients, at the outset of treatment, that the business is conducted by a marriage and family therapy corporation. This information may be noted in the Disclosure Statement or the Informed Consent Form.

Q: Can I have a Fictitious Business Name (or “DBA”) for my professional corporation?

A: The law does not prohibit a marriage and family therapy corporation from doing business under a name that is different than the owner’s legal name. A fictitious business name is when an individual (or entity) carries on a trade of business under a name which does not include the owner’s last name. A marriage and family therapy professional corporation that conducts business under a fictitious business name must not use a name that is false, misleading, or deceptive. Some examples include, but are not limited to:

• Using the words “associates” or “center” or “group” in the name when there is one sole owner (who is providing the services) and no other owners and/or professional employees


• Using the words “psychological” or “medical” in the name for a marriage and family therapy corporation


• Using words that allude to the professional corporation as a governmental entity, such as “county” or “department”

If your corporation plans on doing business under a fictitious business name, you will need to register the Fictitious Business Name Statement with the county clerk of the county of your corporation’s principal place of business. Fictitious Business Names are not filed with the Secretary of State’s office. You would need to contact the city and/or county clerk/recorder where the principal place of business is located for more information.

Q: Can I hire Registered Associate MFTs to render services in my professional corporation?

A: Yes. A marriage and family therapy corporation may employ, at any one time, no more than a total of 15 individuals registered as Associate MFTs, Associate Professional Clinical Social Workers, or Associate Clinical Counselor. The owners of the corporation or its professional employees may supervise the associates. However, each supervisor is limited to supervising a total of three associates at any one time.

Q: My accountant advised that my professional corporation elect to be classified as an “S corporation.” Can I do that?

A: Yes. A marriage and family therapy corporation may elect to be an S corporation. A marriage and family therapy corporation that does not elect to be an S corporation remains as a C corporation. C corporations are taxed annually on their earnings and the owners pay tax on these earnings when distributed as dividends (“double-taxation”). On the other hand, an S corporation is a “hybrid business entity.” It has corporate features such as limited liability, but gives the owners tax benefits that are comparable to a partnership. This means that the taxable income or loss of the corporation flows through to the owners who report the income or loss on their returns. The special tax status of S corporations was intended for small businesses, thus the law has a few limitations on which businesses may make the election. The S corporation must be a small domestic business that does not have more than 100 owners. Under California law, the S corporation is subject to a 1.5 percent tax and $800 annual minimum franchise tax. The items of income, deductions, and credits flow through from the S corporation to each owner through the California Schedule K-1. The corporation provides each owner with a California Schedule K-1 which indicates each owner’s proportional share of the corporation’s items of income, deductions and credits. Each owner is responsible for paying taxes on their pro rata share.

Q: Do I have to register my professional corporation with the BBS?

A: No. Some regulatory agencies in California require their licensees to register their professional corporations with the agency. For example, a California law corporation must register with the State Bar of California and obtain a Certificate of Registration. The BBS does not require LMFTs to register their marriage and family therapy corporations with the Board.

Q: Does my professional corporation have to obtain a business license?

A: Most cities and counties require a business license and/or registration to do business as a corporation within their city/county limits. For example, the City of San Diego requires all businesses operating in its city limits to register for a “Business Tax Certificate.” Contact the business licensing department of the city/ county where your corporation’s principal place of business will be located for more information.

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Ann Tran-Lien, JD, is a staff attorney and the Managing Director of Legal Affairs at CAMFT. Ann is available to answer member calls regarding legal, ethical, and licensure issues.

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Endnotes

¹ Johnson v. Serenity Transportation, Inc., N.D.Cal.2015, 141 F.Supp.3d 974.

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This article is not intended to serve as legal advice and is offered for educational purposes only. The information provided should not be used as a substitute for independent legal advice and it is not intended to address every situation that could potentially arise. Please be aware that laws, regulations and technical standards change over time. As a result, it is important to verify and update any reference or information that is provided in this article.