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Choosing the Best Legal Structure for Your Practice

by Corporate Relations and Business Strategy Staff

There are a variety of choices for the legal organization of your practice — including sole proprietorship, general partnership, corporation and limited liability company (LLC). Each structure has its advantages and disadvantages.

If you have a business plan, reviewing that document is a good place to start the process of choosing an organizational model. It is important to consider the following factors in deciding how to structure or restructure your practice:

  • the type of services you offer

  • the size of your practice

  • the amount of control you want to have over administrative operations

  • how much organizational structure you are comfortable with

  • the likelihood of being involved in a lawsuit reflecting, for example, the types of services you provide or plan to provide

  • the practice’s expected profit or loss

  • your need to access capital

  • the tax implications of various practice models

  • plans for the future of your practice

Four basic legal structures are described below, along with their respective pros and cons.

Sole Proprietorship

This is the simplest and least expensive way of structuring your practice. You are the sole owner and there is no legal distinction between you and your practice. You have complete authority to make all business decisions and all of the practice’s assets and profits generated belong to you. However, you are also personally responsible for all of the practice’s debts and liabilities, as well as the actions of your employees. Your liability is unlimited and both your business and personal assets are at risk.


  • Low setup costs

  • Easy to form and operate

  • You have autonomy in making decisions

  • All assets and profits are yours

  • Income is reported on your own personal income tax return


  • Unlimited personal liability

  • Fewer options for accessing capital

  • Less likely to attract collaborators/partners

  • Unable to deduct costs of some employee benefits

General Partnership

A partnership is similar to a sole proprietorship, but is owned by two or more people. Like a sole proprietorship, there is no legal distinction between the practice and its owners. You are responsible for your own actions, as well the actions of your partners. It is important to clearly define various aspects of the relationship between partners and have an attorney draw up a legal partnership agreement. Unless otherwise specified in the agreement, partners share responsibility for management and decision making and distribute profit and loss equally among themselves.


  • Low setup costs

  • Relatively easy to form and operate

  • Ability to access capital may be increased compared to a sole proprietorship

  • Management responsibilities may be centralized or shared

  • Partners may bring a wider range of skills and resources to the practice

  • Each partner’s share of the income is reported on his or her own personal income tax return


  • Unlimited personal liability

  • You are legally responsible for your actions and those of any partners

  • Assets and profits are shared

  • Shared decision making can lead to disagreements

  • Unable to deduct costs of some employee benefits


This is usually the most complicated and expensive business structure to set up. A corporation is chartered by the state and is considered to be a separate legal entity from the owners (shareholders). This means that in most cases, liability for the practice’s debts is limited to the corporation’s assets and a shareholder is liable only to the extent of his or her investment in the practice. Decision-making is based on stock ownership. Additional requirements exist with regard to the establishment and functioning of a board of directors, as well as record keeping. As a corporation, your practice pays its own taxes on income and files its own tax return.


  • Limited personal liability for the corporation's debts and legal judgments against the practice in most cases

  • Management responsibility may be centralized or shared

  • Ability to raise capital through the sale of stock

  • Employee benefits may be tax deductible

  • If you meet certain requirements, tax status as an “S Corporation” can allow you to be taxed like a partnership, while still benefiting from the limited liability aspects of a corporation


  • More expensive and complicated to form

  • More paperwork, reporting requirements, and regulatory oversight

  • Corporate and personal income taxes may result in double taxation

  • Decision making is based on stock ownership

  • Psychology practices are often considered “Professional Corporations.” Unless otherwise specified by your state, all members of your Professional Corporation must be psychologists.

  • “S Corporation” status may increase your personal tax liabilities if you plan to draw a low salary and use earnings to grow the practice

Limited Liability Company (LLC)

A limited liability company is a hybrid of a corporation and a partnership that is available in most states. This structure offers limited personal liability for partners (members) but is usually treated as a partnership in terms of federal income tax. Although some states require there to be at least two members, other states are starting to allow single-member LLCs. As with a partnership, you should have an attorney draw up a formal operating agreement for members. The LLC model is relatively new, but is quickly becoming the legal structure of choice for small businesses due to the combined liability and tax advantages. In general, forming an LLC is more complicated than establishing a partnership, but avoids some of the complex and often burdensome corporate formalities.


  • Limited personal liability for the company’s debts and legal judgments against the practice in most cases

  • Management responsibility may be centralized or shared

  • Members may be involved in decision-making regardless of their financial investment in the company

  • Ability to access capital may be increased

  • Income is reported on members’ personal income tax returns


  • More complicated to set up than a sole proprietorship or partnership

  • At least two members required in some states

  • Ownership not as easily transferred as with a corporation

  • Not available in all states

Your ultimate decision about an organizational model will have many legal and financial implications. Therefore, you should consult with your attorney and accountant in making the best choice for you. (See “Using business consultants to your best advantage” for additional information.)

NOTE: The information presented in this article is for informational purposes only and does not constitute financial or legal advice.

Date created: 2004