Should You Form an LLC as a Self-Employed Therapist (Mental Health Professional)?

If you’re a self-employed therapist, counselor, psychologist, or psychiatrist, you’ve probably wondered:
“Should I form an LLC for my practice?”

It’s one of the most common questions I hear from mental health professionals stepping into private practice. You see others forming LLCs, hear that it’s the “right” thing to do, and assume it’s a must-have to be legitimate. But before you spend the money or file anything, it’s worth understanding what an LLC actually does—and what it doesn’t.

Let’s clear the air so you can decide what makes sense for your situation.

What an LLC Actually Does (and Doesn’t Do)

An LLC—short for Limited Liability Company—is mainly about legal protection, not taxes.

Think of it like a shield that separates your personal life (your savings, home, or car) from your business life (your practice’s bank accounts and assets). If something goes wrong in your business, the LLC structure helps ensure only your business assets are at risk - not your personal ones.

Example: A patient trips on a rug in your waiting area, injures their wrist, and decides to sue for medical costs. The lawsuit is against your business, not you personally. That means your business assets (like your practice’s bank account or furniture) could be used to pay for damages, but your personal assets (like your investments or savings) are typically protected.

This separation is the core purpose of an LLC. It’s not about saving taxes or instantly looking more “official,” though many therapists do feel it adds credibility and professionalism to their practice—with the added bonus that this perception can help when marketing your services.

Example: “Jane Doe Psychology LLC” can sound more established and official than just “Jane Doe Psychology.”

That said, it’s important to know what an LLC doesn’t do:

• It does not protect you from malpractice claims. That’s what professional liability (malpractice) insurance is for. Every licensed mental health business and professional should have appropriate coverage.
  
• It does not change how you’re taxed (at least not automatically). If you’re self-employed, your LLC’s income is still taxed the same way as if you were operating under your own name (as a sole proprietor).

LLC vs. Sole Proprietor: What’s the Real Difference?

If you’re working for yourself but haven’t formed an LLC, you’re considered a sole proprietor. That simply means you’re doing business under your own name, not a separate legal entity.

From a tax standpoint, there’s virtually no difference between the two. You’ll still report your business income and expenses on Schedule C of your personal tax return.

The key difference is legal protection. Without an LLC, your personal assets could be at risk if your business is ever sued. With one, that “corporate veil” separates your personal and business finances, which helps protect your personal property if something happens within your practice.

The Tax Angle: What Changes with an LLC?

Here’s the short answer: nothing changes for federal taxes when you form an LLC.

You’ll still pay self-employment taxes and report your business income and expenses (deductions) on your personal tax return, typically using Schedule C.

One other thing to be aware of: in certain cities and states, forming an LLC can actually come with extra taxes or fees. For example, in New York City, LLCs are subject to the Unincorporated Business Tax (UBT) - an additional city-level tax that sole proprietors usually don’t pay. Other states may have their own annual filing fees or franchise taxes. It’s always smart to talk with a tax professional who understands the local rules before you file.

However, forming an LLC does give you future flexibility. Once your practice reaches a certain level of profitability, you can choose to change how your LLC is taxed by making what’s called an S-Corp election. This can help reduce self-employment taxes when done at the right time.

The S-Corp Election

This is where things can get interesting.

Electing S-Corp status is a tax decision, not a business entity change. You must already have an LLC (or corporation) in place before you can elect to be taxed as an S-Corp.

At a high level, this lets you pay yourself a salary as a W-2 employee and potentially reduce your self-employment taxes. But it also adds more complexity—like running payroll, filing separate business tax returns, and possibly paying additional state fees.

A general rule of thumb: once your net profit (income minus expenses) consistently exceeds around $100,000, it may make sense to elect S-Corp status for your LLC.

But timing matters. Electing S-Corp status too early can increase your costs (think payroll filings, state fees, and accounting work). Waiting too long can mean missing out on potential savings. This is one area where getting advice from a financial planner or CPA who specializes in private practices really pays off.

Costs, Paperwork, and Ongoing Requirements

Forming an LLC isn’t complicated, but the process varies by state. Generally, you’ll need to choose a compliant business name, file formation documents with your state, and keep up with annual reports and fees. Most states also require you to file something each year to stay in good standing.

It’s worth noting that each state’s process and cost vary. For example, if you’re a licensed mental health professional in New York, you’ll actually need to form a PLLC (Professional Limited Liability Company) instead of a standard LLC. This structure is designed specifically for licensed professionals (like therapists, physicians, or attorneys) and requires approval from your state’s licensing board before filing with the Secretary of State.

In states like New York, there’s also a publication requirement that can cost several hundred dollars—and that’s in addition to the state filing fees. So it’s always smart to budget for both upfront and ongoing compliance costs.

When an LLC Makes Financial Sense (and When It Doesn’t)

Forming an LLC makes sense when:

• You’re seeing patients regularly and want to protect your personal assets.
• You’re starting to earn enough that professionalism and credibility matter for referrals or insurance panels.
• You want the flexibility to elect S-Corp status later.
  

It might not make sense yet if:

• You’re just testing the waters of private practice with a few clients on the side.
• You’re in a state or city where LLCs have high fees or extra taxes (like NYC’s UBT).
• You already have strong professional liability coverage and limited exposure.
  

For many mental health professionals, the right path looks like this:
Start your mental health business as a sole proprietor → build your client base → form an LLC once your income and legal exposure grow → consider S-Corp status once profits justify it.

Final Thoughts

Forming an LLC is an exciting milestone—it means your practice is becoming something real and lasting. But it’s not a one-size-fits-all decision. The right structure depends on your goals, income, and where you practice.

If you’re unsure whether an LLC makes sense for you right now, talk with a professional who understands both the financial and clinical sides of private practice. That’s exactly where we come in.

At Marrone Wealth Management, we specialize in helping mental health professionals build, grow, and protect their private practices—from setting up the right business structure to optimizing taxes and investments. We combine financial planning with practical business strategy so you can focus on your clients, not your paperwork.

If you’re thinking about forming an LLC (or just want to make sure you’re set up the right way), reach out for a consultation about outsourcing your financial planning and we’ll walk you through your options and help you make a confident decision.