Understanding Business Structures: LLCs, Sole Proprietors, and S Corps

One of the most common questions I hear from therapists is: “What’s the difference between an LLC, Sole Proprietor, and S Corp?” 

The LLC Connection

First, it’s important to understand that an LLC (Limited Liability Company) is a legal structure, while “Sole Proprietor” and “S Corporation” refer to tax classifications. This is where many get confused!

Key point: You can form an LLC and then choose how you want that LLC to be taxed – either as a Sole Proprietor (the default for single-member LLCs) or as an S Corporation.

Sole Proprietor vs. S Corporation Taxation

Sole Proprietor Taxation (Default for most therapists)

As a Sole Proprietor:

  • All business income passes directly to your personal tax return
  • You’ll report business income and expenses on Schedule C
  • You pay self-employment tax (15.3%) on ALL of your business profits
  • You make quarterly estimated tax payments that include both income tax and self-employment tax
  • This is simple but can result in higher tax bills as your practice grows

S Corporation Taxation

With S Corporation taxation:

  • Your business income still passes through to your personal tax return
  • But you must pay yourself a “reasonable salary” as an employee of your business
  • You only pay employment taxes (similar to self-employment tax) on your salary, not on distributions
  • Remaining profits can be taken as distributions, which aren’t subject to self-employment tax
  • This can create significant tax savings, especially when your practice is profitable

When Does S Corp Election Make Sense?

Generally, therapists should consider S Corporation taxation when:

  • Your practice consistently nets at least $60,000-$80,000 in profit (this is very dependent on your marital status and personal tax situation)
  • You’re willing to handle additional administrative requirements
  • You plan to keep some profits in the business rather than taking all earnings as personal income

Making the Switch: S Corporation Election

If you want to elect S Corporation status for 2025:

  • You must file Form 2553 with the IRS by March 15, 2025
  • You’ll need to set up payroll for yourself (I use Gusto*)
  • You’ll have more complex bookkeeping and tax filing requirements
  • Consult with a tax professional familiar with therapist practices

Additional S Corp Requirements to Consider

Before making the switch, be aware that S Corporations require:

  • Separate payroll processing (including quarterly payroll tax filings, your payroll software should take care of this)
  • More detailed bookkeeping
  • Annual corporate tax returns
  • Separate business bank accounts (which you should have anyway!)

Questions to Ask Your Accountant

If you’re considering the switch, ask your accountant:

  1. Given my specific financial situation, would S Corp election save me money?
  2. Do the tax savings justify the additional administrative costs?
  3. What would be a “reasonable salary” for me in my geographic area?
  4. What additional services would I need from you, and what would they cost?

Remember, the right choice varies for each practice owner. What works for your colleague might not be the best option for you.

I hope this helps demystify some of the tax confusion! If you’re considering making changes to your business structure, I strongly recommend consulting with an accountant who specializes in working with therapists.

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