Starting a private practice in California begins with two questions: Does your license allow independent practice, and which business structure may legally provide your clinical services? Registering an LLC, obtaining an EIN, and opening a bank account will not resolve either issue.
California LMFTs, LCSWs, and LPCCs generally cannot use an ordinary LLC or PLLC to provide licensed clinical services. For a solo therapist regulated by the California Board of Behavioral Sciences, the common choices are a sole proprietorship or a profession-specific professional corporation.
The entity decision affects payroll, taxes, bookkeeping, hiring, ownership, and how you pay yourself. This guide explains the main California rules therapists should understand before opening a practice and why a California healthcare attorney and a CPA familiar with mental health practices should review their plans.
Confirm That Your License Allows Independent Practice
A fully licensed California LMFT, LCSW, or LPCC may provide services independently within the legal scope of the license. Psychologists follow separate Board of Psychology requirements and are outside this guide’s main scope.
An AMFT, ASW, or APCC lacks independent-practice authority. Associates must work for a qualifying employer under a qualified supervisor and follow Board rules. Renting an office and hiring a supervisor does not permit an independent practice.
The Board limits associate work in a private practice or professional corporation to six years after initial registration. License status affects independent practice, billing, direct payment, and responsibility for services. Review the California Board of Behavioral Sciences’ associate guidance before building a practice plan.
California Therapists Cannot Default to an LLC.
California does not generally permit an ordinary LLC to provide licensed professional services. California Corporations Code section 17701.04 states that California’s LLC law does not authorize LLCs to render services governed by the professional corporation statutes.
A therapist should not form an LLC or PLLC merely because these structures are common elsewhere. Online filing and an S corporation election do not make an impermissible entity eligible to provide psychotherapy.
The restriction applies to the entity providing licensed clinical services. An LLC may suit a genuinely separate nonclinical business, but a California attorney should review the services, branding, contracts, and relationship between both operations. Angelo & Associates explains this distinction in its guide to LLCs and S corporations for therapists.
Choose the Right California Business Structure
A fully licensed therapist may operate as a sole proprietor. The therapist and practice are the same taxpayer, with income and expenses generally reported on Schedule C. The owner takes draws, though payroll duties begin after hiring employees.
A sole proprietorship cannot directly elect S corporation taxation. A therapist seeking this treatment usually forms a professional corporation first, requiring new banking, payroll, contracts, payer records, and corporate documents.
A professional corporation must follow the Moscone-Knox Professional Corporation Act and profession-specific rules governing its name, owners, officers, directors, and services. California Corporations Code section 13401.5 restricts ownership, so proposed shareholders and multidisciplinary arrangements need legal review before filing.
Understand California S Corporation Taxes
An S corporation is a tax classification, not a California entity. A therapist generally forms a professional corporation and files an IRS election. This does not replace entity or licensing requirements.
California taxes an S corporation at 1.5% of its California net income and generally imposes an $800 annual minimum franchise tax. After the first taxable year, the corporation ordinarily pays the greater amount. The California Franchise Tax Board states that the minimum generally applies when the corporation is active, inactive, operating at a loss, or filing for a short period. A narrow exception can apply when no California business is conducted during a taxable year of 15 days or fewer.
Before credits and assuming all net income is subject to California tax, 1.5% of $40,000 is $600, so an established S corporation would generally pay $800. At $100,000 of net income, the tax is $1,500. California waives the $800 minimum for a newly formed or qualified corporation filing its initial first-year return, but first-year net income remains subject to the 1.5% tax.
Decide Whether S Corporation Treatment Makes Sense
The possible tax benefit comes from dividing owner compensation between W-2 wages and eligible shareholder distributions. A shareholder who works in the practice cannot avoid reasonable wages by taking compensation only through distributions. IRS guidance on reasonable compensation requires reasonable compensation before non-wage distributions are made to a shareholder-employee.
Reasonable compensation should reflect clinical work, administrative duties, experience, time, and comparable pay. The IRS may reclassify low-compensation distributions as wages, creating tax, interest, and penalty exposure.
The calculation should include California entity taxes, payroll service fees, bookkeeping, tax preparation, corporate administration, and workers’ compensation where required. Angelo & Associates can assess whether S corporation taxation fits a therapy practice based on net profit and operating costs rather than revenue alone.
Complete Business and Clinical Registrations
Formation does not complete every registration. The corporation needs an EIN, separate banking, corporate records, and tax accounts. The owner should also notify the professional liability insurer and confirm that the corporation, clinicians, and services have suitable coverage.
An incorporated practice may need a Type 2 organizational NPI for payer enrollment and standard transactions, alongside the clinician’s Type 1 NPI. An NPI does not complete licensure or credentialing. CMS guidance on NPIs also states that it does not guarantee payment or enrollment with a health plan.
Cities and counties may require a business tax certificate, zoning approval, home-occupation permit, or fictitious business name filing. A telehealth-only practice may still face local requirements. Contracts, accounts, insurance policies, payer records, payment systems, and client documents should use the correct legal entity name.
Build Telehealth and Privacy Compliance Into the Practice
California’s telehealth regulation requires a BBS licensee or registrant serving a client physically located in California to hold a current and active California license or registration, apart from limited exceptions. At the start of care, the clinician must obtain informed consent, explain risks and limitations, provide license information, and document reasonable efforts to identify relevant resources near the client.
At every telehealth session, the therapist must verbally obtain and document the client’s full name and present-location address. The clinician must assess whether telehealth remains appropriate and follow applicable privacy, confidentiality, and security rules. A California license does not authorize care for a client elsewhere unless the therapist meets that jurisdiction’s requirements. Review the Board’s telehealth regulation effective January 1, 2026.
HIPAA applies to covered entities and business associates, not automatically to every therapist. California confidentiality and professional rules may still apply outside HIPAA. Federal rules also generally require good faith estimates for uninsured clients and clients not using insurance.
Prepare Before Hiring Clinicians
Hiring creates licensing, payroll, supervision, insurance, and employment duties. Before an associate begins, verify registration, supervisor qualifications, supervision documents, advertising, work setting, and the six-year limit.
Calling a clinician an independent contractor or issuing Form 1099 does not determine worker status. California generally uses the ABC test for employee classification, subject to statutory exceptions. The practice may need to prove that the worker is free from its control, performs work outside its usual business, and operates an independently established business of the same nature.
A business generally must register with the Employment Development Department within 15 days after paying more than $100 in quarterly wages. Employers also generally need workers’ compensation coverage if they have one or more employees. Budgets should include wages, payroll taxes, supervision, billing, insurance, and administration.
Set Up Accounting Before Accepting Clients
The accounting system must match the legal and tax structure. A sole proprietor generally takes owner draws. A professional corporation taxed as an S corporation normally pays a working shareholder through payroll and may issue distributions after reasonable compensation has been addressed.
Separate business and personal transactions. The books should identify clinical revenue, supervision income, insurance adjustments, refunds, payroll, distributions, merchant fees, software, licensing costs, and professional fees. Clean records support tax, cash-flow, compensation, and hiring decisions.
Angelo & Associates provides bookkeeping and accounting services for therapists designed for solo and group practices. Accurate accounting helps owners compare entities, maintain payroll, plan taxes, and decide when the practice can support another clinician.
Start With the Decision That Can Make Everything Else Wrong
The correct sequence is to confirm independent-practice authority, choose between a sole proprietorship and professional corporation, review ownership and naming restrictions, and then evaluate S corporation taxation. Starting with a generic LLC can create a structure that is not permitted to provide the intended clinical services.
A California S corporation generally pays the greater of the $800 minimum or 1.5% of California net income after its first taxable year. The first-year waiver removes the $800 minimum, but it does not remove the 1.5% tax on net income.
Before creating or changing a California practice, contact Angelo & Associates to review how the structure may affect payroll, taxes, bookkeeping, and long-term plans. A California healthcare attorney should review entity, ownership, licensing, and employment questions before formation.