You’ve studied hard, achieved your professional licensing, and embarked on a career in a field that provides vital services. Perhaps now, you aspire to start a private therapy practice and become your own boss.
The idea is exciting, and possibly, very overwhelming! If you feel some trepidation, that’s natural. After all, launching a private practice requires attention to many details.
In this post, I hope to help you confidently move forward by breaking down the typical legal steps to get your new mental health business off the ground.
10 Steps for Starting a Private Therapy or Counseling Practice
Note that the process of creating a business can vary depending on the state where it will operate and other factors. I recommend that therapists and counselors discuss the legal and tax-related aspects of business ownership with a trusted attorney, accountant, or tax advisor. Those professionals can provide critical information, answer questions, and help ensure no critical requirements are missed.
In the meantime, I’ve listed the general steps that apply to most new businesses.
1. Select a Business Name
Consider what you’d like to call your practice and do a name search to determine whether that name is available. The state may not allow you to use a name if it’s the same (or deceptively similar) to another business’s name (particularly if your business and the one using the name are in the same industry).
Therapists who choose to operate as a Sole Proprietorship or Partnership will have to file a DBA (fictitious name) if the desired name doesn’t include the owners’ legal name (i.e., first and last name of the sole proprietor or last names of partners). If forming a Limited Liability Company (LLC) or Corporation, the business name gets registered via the entity formation paperwork. I’ll cover more on business entities in steps 2 and 4.
2. Choose a Business Entity
In a recent post, I described what to consider when selecting a business structure for your practice. That article details the entity types (including Sole Proprietorship, Partnership, Limited Liability Company, Limited Liability Partnership, C Corporation, and S Corporation) that many therapists choose for their practices.
Therapists and counselors will also have the option of registering their new private practice as a Professional Corporation and Professional Limited Liability Company. These two entity types are available to businesses where the professionals require licensing.
Each business entity has pros and cons, so it’s important to consider your specific situation when choosing the best legal structure to serve your needs.
3. Designate a Registered Agent
LLCs and Corporations must appoint a registered agent (sometimes called a resident agent or statutory agent) to receive important legal and state documents on their behalf.
The registered agent you select must meet certain criteria, which may vary depending on the state. Typical requirements include:
- Maintain a physical address in the state (not a P.O. box).
- Be Available Monday through Friday from 8 a.m. to 5 p.m. to receive documents.
- Be an individual of at least 18 years of age or a business that provides registered agent services.
Here’s a list of the types of paperwork and notifications registered agents receive on behalf of the businesses they serve:
- Federal and state government correspondence
- Tax notices from the IRS, state, and local tax authorities
- Service of process and summonses (to notify defendants they’ve been sued and required to appear in court)
- Subpoenas for information
- Corporate filing notices
- Wage garnishment notices (to withhold a portion of an employee’s wages and send it to an individual or organization — e.g., for child or spousal support)
4. File Formation Documents
Business owners must file Articles of Incorporation for a Corporation or Articles of Organization for an LLC (sometimes states have other names for those documents) with the state where they wish to establish (domicile) their company. The state’s business registration fee is due when submitting the filing.
Sole Proprietorships and Partnerships do not have formation paperwork to deal with, however, remember that those business structures do not provide any personal liability protection for their owners, so their simplicity comes with a sacrifice.
When filing paperwork to form an LLC or Corporation, you may also have other registration requirements depending on the state’s rules for business entities. For example, Corporations must have a board of directors and adopt bylaws.
And if you intend to conduct business in states beyond your home state, you may have to file for foreign qualification to have permission to provide your services there.
5. Obtain an EIN
LLCs, Corporations, and any business that hires employees must obtain a federal tax ID number called an Employer Identification Number (EIN) by filing IRS Form SS-4. There is no fee to get an EIN from the IRS.
Besides being used for tax filing purposes, an EIN is typically required to set up a business bank account and apply for business licenses and permits.
6. File an Initial Report
Several states require newly formed LLCs and Corporations to file an initial report (sometimes called a Statement of Information). Initial reports lay the foundation for annual report filings, which many states require. They help states keep track of a business entity’s vital information (such as the name of the business; where its principal office is located; its registered agent’s information; and names of members, officers, and directors).
Ensure you know whether your state requires an initial report by checking with the Secretary of State office (or comparable agency).
7. Open a Business Bank Account
LLCs and Corporations must maintain separate financial records and accounts from their owners’ personal accounts. This applies to bank accounts, as well as accounts such as credit cards, PayPal, Venmo, and Zelle.
Commingling business and personal funds not only pose a bookkeeping nightmare but also jeopardizes the company’s status of good standing in their state. Moreover, it risks the personal liability protection that shields owners’ personal assets from the business’s debts.
For example, suppose someone sues a therapy practice that hasn’t maintained a separation between the business’s monies and the owner’s personal funds. A court could deem the “corporate veil” was pierced and hold the owner personally liable, thus threatening their personal assets like their home, car, retirement savings, and more.
8. Apply for Business Licenses and Permits
In addition to any professional licensing and credentials required as a therapist or counselor, the therapy practice may need to obtain business licenses and pay the associated fees to operate legally in their state and local jurisdictions.
Examples:
- Building permit
- Zoning permit
- General business license
9. Register for Payroll Taxes
If a therapy practice will have employees, it will need to register for payroll taxes. This involves establishing accounts with various government tax agencies to report and remit employee tax deductions.
Federal employment-related taxes are associated with a business’s EIN. State and local payroll tax registration varies depending on the jurisdiction.
Common taxes a therapy practice may need to withhold from employees’ pay and then send to a tax agency:
- Federal income tax
- State income tax
- Local income tax
- FICA tax (Social Security and Medicare) – Note that the employee and the employer are responsible for paying this on a 50/50 basis. The employer withholds half of the tax due from the employee’s paycheck and then pays the other half from the business’s bank account.
Some taxes that the employer must pay entirely (i.e., they are not deducted from employees’ pay):
- FUTA (Federal Unemployment Tax)
- SUI (State Unemployment Insurance) — Some states also require employees to contribute.
10. Put Upcoming Compliance Tasks on Your Calendar
Depending on the business entity you form and where you’re operating your practice, you will likely have ongoing business compliance obligations to handle.
Examples on ongoing compliance items for therapists and counselors:
- Filing an annual report
- Holding LLC member or shareholder meetings (and creating meeting minutes)
- Renewing business licenses and permits
- Renewing a DBA
- Reporting and paying estimated income taxes quarterly
- Filing annual tax returns
- Maintaining a registered agent at all times
To ensure your start-up and ongoing business filings get done accurately and on-time, consider working with a company that provides registered agent services, business formation, and compliance services. Online business filing companies that prepare and submit business formation documents, EIN applications, DBA filings, state payroll tax registration, annual reports, etc. can give business owners peace of mind, save time, and potentially avoid costly legal fees.
Set Up Your Therapy Practice for Success
Starting a private practice begins with dotting all the i’s and crossing all the t’s when setting it up. Research local and state laws and determine your federal, state, and local tax obligations to make sure you set yourself up for success. Government websites provide a lot of helpful information and consider getting expert guidance from an attorney and tax advisor who can help you understand your responsibilities and compliance deadlines.
Need Help Determining the Best Business Structure for Your Therapy or Counseling Business?
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