Solopreneur Logistics: From LLC to PC

Most clinicians who leave a W-2 job to go solo lose money in their first year, and a fair number of them don’t even notice until they sit down with a tax preparer the following March and realize the math never worked. The clinical side of the practice can be running fine, the schedule can be full, the patients can be happy, and the business mechanics underneath all of that can still be quietly bleeding out because nobody taught you in school what a PC actually is, or when an S-corp election saves you money versus when it just creates more paperwork, or that malpractice insurance for a solo practice is a different animal than the W-2 group policy you’ve been ignoring on your benefits page for a decade.

This isn’t a sales pitch for going solo, and it isn’t a warning against it either. This is the stuff nobody explains before you quit your W-2, written for clinicians who want to know what actually happens after the paperwork is signed, not the version where you “build your dream practice.” A practice is a business. The clinical work doesn’t subsidize sloppy business mechanics, no matter how good a clinician you are.

The fork in the road: sole proprietorship, LLC, or PC

When you set up shop you have to pick a legal entity, which is the container the business lives inside, and there are three you’ll hear about most often. A sole proprietorship is the default, meaning if you do nothing and just start seeing patients under your own name and depositing checks into your personal account, you are a sole proprietor by operation of law. There’s no paperwork, there’s no separate tax return, the income just flows onto your personal 1040 on a Schedule C. It’s the simplest and also the worst option for a licensed clinician, because there’s no liability shield between the business and your personal assets, and a lot of states won’t even let licensed professionals operate that way for clinical work.

An LLC, which stands for limited liability company, is the next step up. It’s a state-level entity that puts a legal wall between the business and you personally, so if the business gets sued for something non-clinical (a slip-and-fall in your waiting room, a lease dispute, a vendor going after you for non-payment), the plaintiff is going after the business, not your house. The important thing nobody tells you is that an LLC does NOT shield you from malpractice claims. Malpractice attaches to the individual licensed clinician who did the clinical act, full stop, and no business entity in the country protects you from that. The LLC protects you from the OTHER stuff, which still matters, but it isn’t the malpractice umbrella people sometimes assume it is.

A PC, professional corporation, or its newer cousin the PLLC (professional limited liability company), is the version of these entities specifically designed for licensed professions. Most states require you to use one if you’re going to incorporate a clinical practice, and the difference between a regular LLC and a PLLC is mostly about who’s allowed to be an owner (only other licensed people in the same profession, typically) and the fact that the state licensing board has a hook into the entity. The protections are otherwise broadly similar to a normal LLC or corporation.

State-by-state quirks that catch people off guard

Whether you need a PC, a PLLC, or whether you can just use a regular LLC depends entirely on what state you’re licensed in, and the answer is genuinely different in different states, so do not take a friend’s setup in another state as gospel. California, for example, requires a professional corporation for licensed clinical work and does not allow a regular LLC to deliver professional services. New York is similar but uses the PLLC form. Texas allows PLLCs for many professions but has specific rules about who can own shares. Oregon and Washington, where a lot of the people reading this are licensed, both allow PLLCs for healthcare professionals and the setup is relatively painless, but the annual report and registered-agent requirements are real and people forget them and then get their entity administratively dissolved, which is a mess to unwind.

The other state-by-state thing that bites people is the difference between your business entity and your individual professional license. The license is yours, the entity is its own thing, and you have to maintain BOTH separately. Renewing your nursing license or your medical license does not renew your PLLC, and vice versa, and if you let the entity lapse you can find yourself technically operating without a business license while you’re seeing patients, which is the kind of thing that becomes a problem at exactly the moment you don’t want a new problem.

Here’s the rough version of what you’re actually choosing between when you set up. The details vary by state and by your specific situation but this is the shape of it.

The S-corp election, which is where the actual tax math lives

Here’s the thing about LLCs and PCs that confuses people: the entity itself doesn’t determine how you’re taxed. Federal taxation is a separate election you make with the IRS, and the most consequential one for a small clinical practice is the S-corporation election, which you make by filing Form 2553. You can be an LLC taxed as an S-corp. You can be a PC taxed as an S-corp. The entity is the legal container, the tax election is what the IRS does with the money inside it.

What an S-corp election actually does is split your income into two buckets, a reasonable salary that you pay yourself through payroll (subject to payroll taxes, the 15.3% combined Social Security and Medicare bite), and the rest as a distribution (not subject to payroll taxes). The savings come from the chunk you take as distribution rather than salary, because that chunk skips the 15.3% payroll tax. The catch is that the IRS expects “reasonable compensation” for the work you actually do, and if you try to pay yourself a $20,000 salary and take $200,000 as distribution to dodge payroll tax, the IRS will eventually notice and the audit experience is not fun.

The actual math: S-corp election typically starts saving you real money when your net practice income is somewhere above $40,000 to $60,000 a year over and above what you’d reasonably be paid as a clinician doing your work, and the savings scale up from there. Below that threshold the additional payroll administration, the extra tax return (you file a separate 1120-S for the business), and the cost of running payroll for yourself tend to eat the savings. Above it the savings get real, and at $150K of practice income above reasonable comp you might be looking at real five-figure annual tax savings. This is the single most common move a small clinical practice makes, and it’s also the place where bad advice does the most damage, because the “right” salary number is genuinely subjective and the IRS guidance is “facts and circumstances” which means a defensible number is the actual goal, not the lowest possible number.

The clinical work doesn’t subsidize sloppy business mechanics. A full schedule of well-cared-for patients can’t paper over a practice that’s losing money because nobody set up the entity right, nobody elected the right tax treatment, and nobody opened a separate bank account in the first quarter.

Malpractice insurance, which is the cost surprise nobody is ready for

If you’re coming from a W-2 job, your malpractice cover was almost certainly paid by your employer and you probably never saw the line item, which means when you go solo and start shopping the actual market you’re going to get sticker shock. For psychiatry and psychiatric nursing the typical range for solo practice cover runs roughly $3,000 to $15,000 per year depending on a few variables, mostly your state, your scope of practice, your claims history, and whether you prescribe controlled substances. Therapy-only practices (LMFT, LPC, LCSW) run lower, often in the $1,000 to $3,000 range. Group practices and prescribers in higher-risk states sit at the top of the range.

The thing nobody warns you about is the difference between occurrence and claims-made policies, which sounds like fine print but determines whether you’re going to get blindsided by a five-figure bill the day you change carriers or close the practice. An occurrence policy covers any incident that happened while the policy was active, no matter when the claim is filed. A claims-made policy only covers claims that are filed while the policy is active, which means when you cancel a claims-made policy you have to buy something called tail coverage to keep yourself protected for incidents from your active years, and tail coverage typically costs 1.5 to 2.5 times your annual premium as a one-time payment. So if your claims-made premium was $8,000 a year and you decide to close the practice, expect to write a check for somewhere between $12,000 and $20,000 to cover the tail. Occurrence policies are generally more expensive year over year but you don’t need tail coverage, so the total cost over a career often comes out similar, and you’re not writing a surprise five-figure check the day you close. If you can get occurrence at a price that isn’t wildly higher than claims-made, take it.

One more thing on malpractice: the LLC or PC does not cover you. Your individual policy does. The entity protects against non-clinical liability and that’s it.

Business banking and accounting, the boring stuff that wrecks people

Open a separate business bank account on day one. Not day thirty. Not after you’ve earned your first revenue. Day one, before a single patient walks through the door. The reason is that the legal liability shield your LLC or PC gives you depends, in the eyes of a court, on you treating the business as a separate entity, and if you’re commingling business and personal money you’re handing any plaintiff’s attorney the argument that the shield should be pierced. It’s called piercing the corporate veil and it is a real thing that happens to people who got lazy about bank accounts.

Most banks will open a business account for a small practice without much fuss as long as you have your entity formation documents and your EIN (employer identification number, which is the business equivalent of a Social Security number, and you get it free from the IRS website in about ten minutes). Pick a bank with decent online banking and an integration to whatever accounting software you’re going to use, because the bookkeeping piece becomes very painful very quickly if you can’t pull transactions in automatically.

On the accounting side, the three main contenders for small practices are QuickBooks Online, Xero, and FreshBooks. QuickBooks is the default, has the widest support among CPAs (which matters when you’re handing off your books at tax time), and runs roughly $30 to $90 a month depending on tier. Xero is the cleaner interface, generally better for people who like a less cluttered UI, similar price range. FreshBooks is the easiest to start with and the one with the weakest accounting features, fine if your practice is genuinely simple but you’ll outgrow it. For most clinical practices, QuickBooks Online at the Essentials or Plus tier is the path of least resistance.

On hiring a bookkeeper, the rough rule is that as soon as your practice is generating more than $100,000 to $150,000 a year in revenue, the time you’re spending on bookkeeping is more expensive than the cost of a part-time bookkeeper, even at clinician hourly rates. A good bookkeeper for a small practice runs $150 to $500 a month depending on volume and complexity, and it’s almost always worth it. A CPA is a different thing, you use them for tax filing and strategic advice, typically once or twice a year, and a healthcare-fluent CPA is worth paying a premium for because the rules are weird enough that a generalist will miss things.

The HIPAA infrastructure and the BAA chain

HIPAA (Health Insurance Portability and Accountability Act) compliance is the thing solo clinicians most consistently underbuild, partly because it feels abstract until it isn’t and partly because the vendor ecosystem makes it confusing. The core concept you need is the Business Associate Agreement, or BAA, which is a contract that says when a vendor touches your protected health information they’re agreeing to handle it according to HIPAA’s rules and they’re on the hook if they don’t. You need a signed BAA from every vendor in your stack that touches patient data, and the chain is longer than people realize.

A typical BAA chain for a solo psychiatric or therapy practice looks something like this: your EHR vendor (electronic health record system, the place clinical notes live) signs a BAA, your billing software vendor signs one if it’s separate from the EHR, your video platform for telehealth signs one (Doxy.me, Zoom for Healthcare, and SimplePractice’s built-in telehealth all offer BAAs; consumer Zoom and consumer FaceTime do NOT), your email and calendar provider signs one (Google Workspace and Microsoft 365 both offer BAAs but you have to be on the right tier and you have to actually sign the BAA, not just assume it), your scheduling tool signs one if it stores patient info (Calendly’s HIPAA tier, Acuity’s HIPAA tier, etc.), your fax service signs one, your secure messaging or texting tool signs one, your cloud storage signs one if you’re using it for any patient data. If any link in that chain doesn’t have a signed BAA in place, you have a compliance gap.

The single most common gap is email. People sign up for the free version of Google Workspace, or they use their personal Gmail, and then they send a patient an appointment reminder or a note from a colleague that mentions a patient by name, and now they have PHI on an unsigned platform. Get on Google Workspace Business Standard or higher, request and sign the BAA inside the admin console, and use it for all clinical communication.

Payroll mechanics, credentialing timelines, and when not to go solo

If you elect S-corp treatment, you have to actually run payroll for yourself, which means picking a payroll provider (Gusto, ADP, Paychex, OnPay are the common options for small practices), setting up your reasonable compensation, withholding the right taxes, paying employer-side taxes, and filing quarterly payroll returns. Gusto is the go-to for most small clinical practices because the setup is friendly and the cost is reasonable, roughly $40 to $80 a month for a one-person payroll. If you stay default-taxed as a sole prop or single-member LLC, you don’t run payroll, you take distributions (called owner’s draws), and you pay self-employment tax on the full net income through quarterly estimated taxes. Quarterly estimated taxes are non-optional and people forget them, then get hit with underpayment penalties, then get angry about it. Calendar them, pay them, move on.

On credentialing, which is the process of getting on insurance panels so you can bill commercial insurance, expect 90 to 180 days from initial application to active billing, sometimes longer. Each insurance company runs its own credentialing process, you have to apply separately to each one, and CAQH (the Council for Affordable Quality Healthcare’s central database) is the upstream service most of them pull from, so set up your CAQH profile early and keep it current. Medicare enrollment runs through PECOS (Provider Enrollment, Chain, and Ownership System) and is its own beast, typically 60 to 90 days but it can stretch. Medicaid is state by state. The cash-flow implication of all this is that if you’re going solo and planning to bill insurance, you should have somewhere between three and six months of operating expenses in the bank before you start, because the gap between opening the doors and getting the first commercial-insurance check can easily run that long.

So when is going solo NOT the right move? The numbers have to work, and the numbers for going solo look something like this: your current W-2 total compensation (salary plus benefits plus employer-paid malpractice plus the employer-side payroll tax that you don’t see), divided by the hours you actually work, gives you your effective hourly rate as an employee. To match that as a solo clinician you have to bill enough patient-facing hours at your rate to cover all of the following, your draw or salary, malpractice premium, accounting and legal, software stack ($300 to $800 a month for a typical small practice), payroll provider, retirement contributions you used to get matched on, health insurance you used to get subsidized on, the empty hours on your schedule when patients no-show or cancel, the credentialing gap before insurance pays, and the unpaid administrative hours that don’t show up in your billable count. If the math doesn’t clear your current effective hourly rate with margin, going solo is a quality-of-life choice, not a financial one, and you should make that choice knowing that. There’s nothing wrong with making it for quality-of-life reasons. The mistake is thinking it’ll be more lucrative when it usually isn’t, at least in year one and often year two.

Running a clinical practice is two jobs, the clinical one you trained for and the business one nobody mentioned in school, and the second one will quietly eat your weekends and your tax refund if you don’t take it seriously from the start. Set up the right entity for your state. Elect S-corp treatment if and only if the math actually clears. Buy enough malpractice. Open the bank account on day one. Sign every BAA. Keep books that a CPA can read without grimacing. Run payroll if you have to, take draws if you don’t, pay your quarterlies either way. Get credentialed before you need the income.

None of this is exciting, and the clinical work is, which is exactly why you need the boring stuff to not be a recurring emergency. The business mechanics exist so you’re not spending Sunday nights untangling QuickBooks and wondering why the schedule is full but the account is flat, and when you skip them that’s exactly what happens. Set it up right once and you mostly never have to think about it again, which is the whole point.

This is general information for clinicians thinking about the move from employment to solo or small-group practice. It is not legal, tax, or financial advice for your specific situation. Before you set up an entity, elect a tax treatment, or sign a malpractice policy, talk to a CPA who knows healthcare and a lawyer who knows professional entities in your state. The money you spend on those conversations up front is the cheapest money you’ll spend on the practice.