Entity Formation · Newly Licensed Professionals

You Just Got Licensed. Read This Before You Form an LLC for Your Practice.

By Christopher Scott-Dixon, Esq. · State Bar of California No. 236027 · CSD Business Law

The license came through. The first clients are lining up. And the very first move most new clinicians make — form an LLC online, because that's what business owners do — is the one California quietly does not allow for what you do.

You did the hard part. Years of training, supervised hours, board exams, a license number that is finally yours. Now you are building a private practice, and there is a checklist forming in your head: get an EIN, open a business account, form the LLC. That last one feels like the obvious first step of being a real business.

Here is the thing almost no one tells a newly licensed professional in California: for most of the healing professions, the LLC is generally not an option at all. Not a worse option — an unavailable one. The good news is that starting correctly is simpler and cheaper than fixing it later, and right now, at the very beginning, is the easiest moment you will ever have to get it right.

The rule that catches almost every new practice

California's LLC statute contains a sentence that quietly excludes most of the healing professions. Under Corporations Code § 17701.04(e), a California limited liability company may not render professional services unless a licensing statute expressly authorizes it to do so.

For most professions, no such authorization exists.

So if you are a therapist, a psychologist, a physician, a dentist, a veterinarian, a chiropractor, an acupuncturist, or a similar licensee, the practical choices for holding your practice are generally a sole proprietorship or a professional corporation. If you will practice with one or more other licensees, a general partnership of licensed persons is also lawful — though it gives you no liability protection at all, which is usually the reason people wanted an entity in the first place.

What is generally not available is the LLC. And unlike lawyers, accountants, architects, engineers, and land surveyors, the healing-arts professions cannot fall back on a limited liability partnership either.

The two questions that actually decide your first entity

Forget the internet's one-size-fits-all "just form an LLC" advice. For a new practice, two questions do most of the work.

1 · Are you truly solo, or building toward a team?

If you are a genuine one-person practice for now, a sole proprietorship is a legitimate place to start. It is simple, it costs nothing to form, and it avoids the annual franchise tax. Its trade-off is that it offers no liability separation between the business and you personally, and it does not set you up cleanly for a partner or an associate.

If you expect to add a second owner, bring on an associate, or build something you might one day sell, a professional corporation is usually the structure worth setting up early — because it organizes ownership, succession, and the business liabilities of the practice from day one, instead of forcing a messy conversion later.

2 · Who, if anyone, will own a piece of it?

This is where new clinicians most often walk into trouble with the best of intentions. Under Corporations Code § 13401.5, shares in a professional corporation may generally be held only by licensed persons — and the statute is profession-specific about who else may hold any remainder.

To take one example: for a marriage and family therapy corporation, licensed MFTs must hold at least 51% of the shares. Up to 49% may be held only by a defined list of other healing-arts licensees — licensed physicians and surgeons, psychologists, clinical social workers, registered nurses, chiropractors, acupuncturists, naturopathic doctors, professional clinical counselors, and licensed midwives.

Read that list and notice who is not on it. The spouse who is supporting you while you build the practice. The friend from grad school who is not licensed. The family member offering start-up cash for a share of the business. None of them is typically an eligible owner.

The Moscone-Knox Professional Corporation Act, in plain terms

The statute that governs licensed practice as a corporation is the Moscone-Knox Professional Corporation Act, at Corporations Code §§ 13400–13410. It lets licensed professionals practice through a corporation, and it sets terms the ordinary corporation law does not — chiefly, who may own shares, who may serve as an officer or director, and what the corporation may be named.

Two details matter a great deal to a brand-new solo practice. First, Moscone-Knox accommodates one-person practices: under Corporations Code § 13403, a professional corporation with a single shareholder needs only one director — you — who also serves as president and treasurer. You do not need a board of strangers. Second, under Corporations Code § 13409, the corporation's name must comply with rules set by the agency that regulates your profession, and those naming rules differ from board to board. This is a place where generic formation services routinely get it wrong, and where a new practice can end up having to re-file.

What an entity will — and will not — do for you

It is worth being direct about this at the start, because the marketing around formation is not.

A professional corporation does not shield you from liability for your own professional negligence. No entity does. If you make a clinical error, the entity does not stand between you and the consequence. That is what professional liability insurance is for, and for a new clinician, carrying appropriate coverage is not optional. Entity choice is not a substitute for it.

What the right entity does do is organize the parts of a practice that are genuinely a business: separating the enterprise's liabilities from your personal assets, making ownership clear if a second owner joins, and setting up succession so that the practice can survive an ordinary human event — an illness, a partner leaving, an eventual sale. Starting on the right structure means never having to unwind the wrong one.

You already formed an LLC. Now what?

First: this is common among new practices, it is not a catastrophe, and it is fixable. It is dramatically easier to fix in month two than in year eight.

1. Confirm what your license actually permits. The rules are profession-specific. Start with the statute that governs your board, not with a blog post — including this one.
2. Decide sole proprietor vs. professional corporation based on whether you are truly solo and where you expect the practice to go.
3. If a corporation is right, form it correctly — articles, bylaws, and a share structure that matches the eligible-shareholder rules for your profession — and get the name right against your board's regulations.
4. Coordinate the switch with a CPA. Moving from an LLC to a corporation has tax consequences worth planning around rather than discovering.
5. Wind down the LLC properly. An abandoned entity keeps accruing obligations, including the annual $800 minimum franchise tax, whether or not you ever used it.

The bottom line for a new practice

A licensed practice in California is not a business like other businesses. The entity rules are different, the ownership rules are different, and an online form that never asks whether you hold a license cannot get this right. You are at the one moment when structuring correctly costs almost nothing extra — before the associate, before the second owner, before the practice is worth protecting the hard way.

Get the foundation right once, and it holds for everything you build on top of it.