Virtual Mental Health Practice | Question for Legal Consultation:

[fancynancy2000]

Jurisdiction

California

My husband and I are planning to start a virtual mental health practice together in California. I am a licensed mental health professional (LCSW) in California, while my husband, who is not licensed, will handle the technical and administrative aspects of the business. We plan to incorporate our business in Delaware as a general corporation (Inc.) for tax benefits and liability protection. We understand that to provide professional services such as mental health care in California, a Professional Corporation (PC) designation may be mandatory.

Given our situation, we seek advice on the following:

1. Business Structure Considerations:
   • If forming a PC in California is necessary, what is the best structure for our business considering the following:
     • My husband, who is not licensed, will manage the technical and administrative sides of the business.
     • We both want to be paid through the business and utilize the pass-through tax benefits.
     • This is a virtual business but will have physical employees in California.
   • Is it feasible to have an umbrella corporation in Delaware with a subsidiary Professional Corporation (PC) in California? How would this structure work in practice?
2. Payment and Employment Structure:
   • Should my husband be paid through the Delaware corporation or the California PC as an employee, and what are the tax implications of each option?
   • What steps should we take to ensure compliance with both Delaware and California regulations while optimizing for tax benefits and liability protection?
3. Alternative Strategies:
   • Are there alternative business structures or strategies that allow us to meet our goals of incorporating in Delaware and operating in California, considering one member is licensed and the other is not?

We are looking for guidance on the most efficient and legally compliant way to set up our practice given these circumstances. Your expertise in navigating these regulations and structuring our business effectively will be highly appreciated.

 

[Zigner]

Your question is not suited for an internet forum. You ought to be speaking to an attorney/firm who specializes in business formation.

 

[adjusterjack]

We plan to incorporate our business in Delaware as a general corporation (Inc.) for tax benefits and liability protection.

Heed the words of Tax Counsel, a regular participant here., before you needlessly complicate your life.

"There are two general observations that I have about this. First, wherever it is that the company is managed and controlled is a state in which the company is considered to conduct business and thus state laws typically require that the company either be organized in that state or, if it is organized in some other state, that it register as a foreign entity (in this case, a foreign corporation). "Foreign" in this case means an entity formed any place outside the state. Filing as a foreign entity subject the firm to pretty much all the same rules, fees, and taxes that an entity organized in the state must pay. Thus, in CA, if the corporation is managed and run in that state, it will have to file as a foreign corporation if it is not organized in CA and will still be subject to the franchise tax, minimum of $800/year. What you get organizing someplace else is the privilege of paying additional fees and taxes. That's not a big deal if you do business in that other state, too, since again you must register as foreign in that state if the entity is not organized there. But in general organizing the corporation in any state where there is truly no activity, management or otherwise, conducted in that state is not worthwhile. You don't save anything by doing that; you instead just add additional complexity and cost.

Second, a lot of new business persons seem to think that they need to register their businesses in Delaware (or NV or a few other states) because large corporations often select those states to organize their entities and think if the big guys do it it must be the best way to go. But the reasons big corporations organize in Delaware in particular are things that would not matter to a small, closely held corporation. First, large corporations often do business in every state and so it doesn't really matter in which state they organize anyway. Second, the big appeal of Delaware over other states is that (1) its laws are generally more favorable to management of big corporations when it comes to disputes between the company and its shareholders and (2) Delaware has a specialized court, the Court of Chancery, that resolves such disputes very quickly. Small businesses in which the management and the owners are the same do not need that. Big corporations that have millions of shareholders that might sue the company and the management are the ones interested in that.

In short, I generally advise most of my small business clients to pick a state in which they will actually manage or conduct business to organize the business. If the business is not based in Delaware and doesn't do business there it will be the rare situation that Delaware would be a good choice. If the business will be conducted in more than one state, then the choice of which one to organize in will depend on the details of the business and the state laws of the states involved. Often there is not a huge difference.

By the way, the business is not locked into a particular state. If you organize the entity in, say California to start and later as you get bigger it makes more sense to organize in some other state, it is pretty easy to change the state in which the entity is organized."

 

[fancynancy2000]

Thank you for the reply!

This will initially get formed in california but would like to expand to a multitude of states after the first year. Also the issue of the professional side of this practice as I stated in the initial question was not addressed. He needs to be a member of the business and that is not possible with the california PC, which is why I asked also about having him be a member of the umbrella corporation in deleware (INC) along with me and him not being on the california pc. Or was there a clever workaround I have not stumbled on yet?

 

[Zigner]

Thank you for the reply!

This will initially get formed in california but would like to expand to a multitude of states after the first year. Also the issue of the professional side of this practice as I stated in the initial question was not addressed. He needs to be a member of the business and that is not possible with the california PC, which is why I asked also about having him be a member of the umbrella corporation in deleware (INC) along with me and him not being on the california pc. Or was there a clever workaround I have not stumbled on yet?

Plenty of professional firms have employees...

 

[Tax Counsel]

Thank you for the reply!

This will initially get formed in california but would like to expand to a multitude of states after the first year. Also the issue of the professional side of this practice as I stated in the initial question was not addressed. He needs to be a member of the business and that is not possible with the california PC, which is why I asked also about having him be a member of the umbrella corporation in deleware (INC) along with me and him not being on the california pc. Or was there a clever workaround I have not stumbled on yet?

Typically what states laws require when it comes to licensed occupations like lawyers, doctors, therapists, etc is the entity may only be owned by a person or group of persons who are licensed in that profession. The reason for that is to preserve professional independence. The state doesn't want an owner of a law firm, for example, making decisions on cases and other aspects of legal practice who is not a lawyer. If the owner is a lawyer he or she is subject to the same rules as all the attorneys the owner might hire to work for the firm so that risk of a conflict is greatly reduced. My quick read of the guidance given by the state BBS indicates that is what CA regulators are concerned with as well. Your husband would not be able to be an owner directly or indirectly of the practice, meaning forming a DE corporation of which he is a shareholder that then owns all the shares of the CA corporation probably won't work. Nothing prevents him from being hired as an employee of the corporation, so far as I can tell. He just can't be an owner as he's not properly licensed to provide mental health services.

There is too much at stake for you in this to rely on what you read on the internet, including forums like this one. If violate the rules one of the possible consequences could be suspension or revocation of your license. Consult an attorney whose practice is largely advising medical professionals on the statutes and regulations that govern those professions. The fees you pay for that advice are deductible as business expenses.

While it is possible to expand your practice to other states, the persons providing the mental health services in that state will have to be licensed in that state. If you plan to use a virtual set up for this, the software used will have to be able to screen for that and direct the patient to a professional in the patient's state. One thing to be careful about is expanding too fast — I've seen professional firms sink because they weren't properly prepared for the rapid expansion they tried to do. It's not as easy to do as some people think. There needs to be a good amount of planning behind the expansion for it to go smoothly. I suggest you first just focus on getting set up in CA and build that up to a point where it's sustainable before starting your expansion plans. Consulting a business attorney and an attorney who advises health care professionals in any new state you want to get into is pretty much a necessity. Those who assume that every states' laws are pretty much the same find themselves in trouble when they violate some rule in that state that they didn't know about.

Regarding the state of incorporation, Jack has already quoted what I typically tell people about that so I won't delve into that much further except to say that most small businesess, including medical practices, don't benefit from incorporating in DE if they have no business presence there. If you can't point to a specific benefit that you'd get from incorporating in DE over just incorporating in CA then incorporating in DE will just add more fees for you to pay and more paperwork to deal with every year. You will still have to register the DE corporation in CA as a foreign corporation, paying all the same fees (including the state franchise tax, which is a minimum of $800/year) and following all the same rules that corporations formed in CA do. Don't fall into the lemming mentality of following the crowd off a cliff. Just because some other company does it one way does not mean you should do it too.

The way businesses are taxed is different from individuals; the states apportion and allocate income on the basis of one or more factors which measure how much of its business is done in that state. That system largely eliminates where the business is incorporated as a major factor in the taxation of their income. For example, CA gives businesses of using either a one factor or three factor formula to apportion the income. The CA FTB has a page Help with apportionment and allocation that explains this.

Businesses face a lot of laws and regulations that nonbusiness people never deal with, and so when a first goes into business there's a lot they need to know. That's why professionals like lawyers, CPAs, tax professionals, business advisors, etc exist. Paying some money up front for that advice is very cheap compared to what it may cost you if violate some rule or simply don't know the least costly way to set up for what you want do.