Note: I'm not a lawyer or accountant. This article summarizes what I've learned from therapists who have been through entity formation and from publicly available state resources. Your specific situation, your state, and your license type all affect which structure is right. A healthcare attorney or CPA familiar with your state's requirements is worth the consultation fee before you file anything.
The most common version of this question I hear from therapists preparing to launch: "Do I need an LLC? A PLLC? Can I just start as a sole prop and figure it out later?"
Here's where things actually stand.
The three options
Sole proprietorship. No entity formation required. You operate as yourself, using your own name and Social Security Number for taxes. The simplicity is real. So is the exposure: as a sole prop, your personal assets aren't separated from your business liabilities. If something goes wrong outside the clinical context, a lease dispute, a billing error that escalates, a liability your malpractice insurance doesn't cover, you're personally exposed.
Many new therapists start as sole props because it's the path of least resistance. Some stay that way for years without problems. The risk is real even when it's unlikely.
LLC (Limited Liability Company). The entity separates your personal assets from your business liabilities. Taxes still pass through to your personal return for a single-member LLC, so the tax treatment is similar to a sole prop. Formation costs range from $50-500 depending on the state and how you file.
The catch for licensed therapists: some states don't allow LLCs to provide professional services, including therapy. Those states require a PLLC instead.
PLLC (Professional Limited Liability Company). A PLLC is an LLC variant specifically designed for licensed professionals. It provides the same liability protection as an LLC and the same pass-through tax treatment. In states that require it, you can't operate a therapy practice as a standard LLC.
The formation process is the same as an LLC, with the addition that most states require a copy of your professional license to register. In most states, PLLC membership is restricted to licensed professionals in the same field. This matters if you ever consider bringing in a business partner.
What your state requires
This isn't standardized. Each state has its own rules about which entity types are available to licensed mental health professionals and which ones are required.
California, Texas, and New York require professional entities for therapists (called Professional Corporations in some states). Some states allow standard LLCs with certain restrictions. Others allow sole proprietorships.
The definitive answer is your state licensing board's website. Look for guidance specifically about "business structure for licensed therapists" or "private practice entity requirements." If the board website isn't clear, a 30-minute consultation with a healthcare attorney in your state is worth the cost before you file anything. Don't rely on forum answers, including this article, for your state-specific requirement.
The sequence once you know your entity type
File your entity with the state (your secretary of state's website, usually).
Apply for your EIN (Employer Identification Number) at IRS.gov. Free, takes minutes.
Open a business checking account using the EIN. Never mix personal and business finances.
Get your malpractice insurance naming the entity. Update your existing policy or get a new one that lists the PLLC as the insured entity.
Update your NPI with the business name and address, not just your personal information.
That sequence has dependencies. The EIN comes after the entity is filed. The bank account comes after the EIN. Do them in order.
What malpractice covers and what it doesn't
This question often underlies the entity formation question. Malpractice insurance covers professional liability: claims related to your clinical services. It doesn't cover general business liability. A client who slips in your waiting room, a dispute with your landlord, a vendor suing you over a contract: malpractice doesn't apply to any of these.
The PLLC or LLC creates the legal separation that limits your personal exposure to business liabilities outside the clinical context. Both protections matter. They're not substitutes for each other.