How to Form a California Psychology / Behavioral Health Professional Corporation: The Complete Guide

If you’re a licensed psychologist, marriage and family therapist, clinical social worker, or professional clinical counselor in California planning to establish your own practice, you face entity structure restrictions that don’t apply to most other businesses. California prohibits mental health professionals from providing clinical services through standard Limited Liability Companies or most other flexible business structures. Your options are limited: sole proprietorship, general partnership, or professional corporation.

For solo practitioners and group practices, the professional corporation offers distinct advantages that sole proprietorships and partnerships can’t match. The corporate structure enables tax planning through S-Corporation election, provides liability separation between co-owners for each other’s independent malpractice, creates a formal entity for bringing in associates and planning succession, and maintains the professional credibility that clients and referral sources expect.

But California doesn’t provide a single, unified professional corporation structure for all mental health professionals. Instead, the law establishes four separate corporation types, each governed by profession-specific statutes within the Business and Professions Code: psychological corporations for psychologists, marriage and family therapy corporations for LMFTs, licensed clinical social worker corporations for LCSWs, and professional clinical counselor corporations for LPCCs. Each type has distinct naming requirements, slightly different cross-ownership rules, and separate regulatory oversight.

This guide walks you through the entire formation process for all four entity types, from pre-formation strategic decisions through Secretary of State filing, board-level compliance, tax elections, and ongoing regulatory obligations. Whether you’re forming a solo practice or a multi-disciplinary integrated behavioral health clinic, you’ll find the specific statutory requirements and practical guidance you need.

Why Mental Health Professionals Cannot Use LLCs in California

California’s prohibition on Limited Liability Companies for licensed mental health practice stems from the corporate practice of medicine doctrine and related healing arts restrictions. While the exact statutory prohibition varies by profession, the policy is consistent: corporations practicing healing arts professions must be structured as professional corporations under the Moscone-Knox Professional Corporation Act (Corporations Code sections 13400-13410) and comply with profession-specific regulations.

The Moscone-Knox Act creates a framework where professional services requiring state licensure can only be provided through corporations meeting specific ownership, governance, and regulatory requirements. This ensures that licensed professionals—not business investors or management companies—control clinical decision-making and maintain accountability to their respective licensing boards.

For psychologists, the authorization for corporate practice comes from Business and Professions Code sections 2995-2999, which define “psychological corporations” and specify that they must comply with Moscone-Knox. For LMFTs, LCSWs, and LPCCs, similar provisions appear in sections 4987.5-4987.8 (MFT), 4998-4998.6 (LCSW), and 4999.123-4999.129 (LPCC).

None of these statutes authorize LLC formation for clinical practice. The LLC Act itself contains restrictions, and the licensing boards have consistently taken the position that clinical mental health services must be provided through professional corporations if practitioners want entity-level liability protection and tax advantages.

This creates a stark choice: if you want the liability separation and tax benefits of an entity structure, you must form a professional corporation and comply with all associated requirements. Sole proprietorships and partnerships remain options, but they don’t provide the same protections or planning opportunities.

Understanding the Four Professional Corporation Types

California law establishes four distinct professional corporation structures for behavioral health professionals. While they share the common Moscone-Knox foundation, each has profession-specific requirements you must understand before forming your entity.

Psychological Corporations (Business and Professions Code §§2995-2999)

Psychological corporations are professional corporations organized to provide psychological services. Section 2995 defines a psychological corporation as one formed under the Moscone-Knox Act where at least 51% of the shares are owned by licensed psychologists. The corporation can provide psychological services as defined in section 2903: the application of psychological principles, methods, and procedures for purposes including understanding, predicting, or influencing behavior, or of diagnosing or treating mental, nervous, educational, emotional, or behavioral disorders.

The Board of Psychology regulates psychological corporations and has authority to investigate violations of corporate practice requirements. Section 2998 establishes specific naming requirements, and section 2995 enumerates which other healing arts licensees may be shareholders, directors, or employees of the corporation.

Marriage and Family Therapy Corporations (Business and Professions Code §§4987.5-4987.8)

Marriage and family therapy corporations are professional corporations organized to provide MFT services. Section 4987.5 defines these corporations as entities formed under Moscone-Knox where at least 51% of shares are owned by licensed marriage and family therapists. The corporation may provide services within the MFT scope of practice as defined in sections 4980.02 and 4980.50: psychotherapy and counseling with individuals, couples, and families for purposes of treating mental and emotional disorders and relationships between spouses, couples, and family members.

The Board of Behavioral Sciences (BBS) regulates MFT corporations. Section 4987.7 establishes strict naming requirements, and the statutes specify which other healing arts licensees may participate in ownership and governance.

Licensed Clinical Social Worker Corporations (Business and Professions Code §§4998-4998.6)

LCSW corporations are professional corporations organized to provide clinical social work services. Section 4998 defines these entities as corporations formed under Moscone-Knox where at least 51% of shares are owned by licensed clinical social workers. The corporation may provide services within the LCSW scope of practice as defined in section 4996.9: psychosocial assessment, diagnosis, treatment, prevention, and evaluation of mental, emotional, or behavioral conditions through the application of social work principles, methods, and techniques.

The Board of Behavioral Sciences regulates LCSW corporations. Section 4998.2 establishes naming requirements that are particularly strict—requiring the words “licensed clinical social worker” in the corporate name. Cross-ownership provisions allow certain other healing arts licensees to own minority interests.

Professional Clinical Counselor Corporations (Business and Professions Code §§4999.123-4999.129)

Professional clinical counselor corporations (also called LPCC corporations) are professional corporations organized to provide professional clinical counseling services. Section 4999.123 defines these corporations as entities formed under Moscone-Knox where at least 51% of shares are owned by licensed professional clinical counselors. The corporation may provide services within the LPCC scope as defined in sections 4999.20 and 4999.40: counseling and psychotherapy focused on mental, emotional, or behavioral disorders, assessment and diagnosis, and treatment planning.

The Board of Behavioral Sciences regulates LPCC corporations. Section 4999.125 establishes naming requirements, and cross-ownership provisions mirror those for LMFT and LCSW corporations.

The 51/49 Ownership Rule and Cross-Licensed Shareholders

All four professional corporation types operate under the same fundamental ownership restriction, codified in Corporations Code section 13401.5: at least 51% of the outstanding shares and voting power must be held by licensees in the “core” profession that the corporation is organized to practice. For a psychological corporation, psychologists must own at least 51%. For an MFT corporation, licensed marriage and family therapists must own at least 51%. The same applies for LCSW and LPCC corporations.

The remaining 49% may be owned by certain other specified healing arts licensees. These enumerated licensees vary slightly by profession but generally include physicians and surgeons, psychologists, LMFTs, LCSWs, LPCCs, registered nurses, optometrists, podiatrists, and chiropractors. Section 13401.5 contains the detailed lists, with cross-references in the profession-specific corporation articles.

This cross-ownership framework enables multi-disciplinary group practices while maintaining professional accountability. A psychological corporation with 60% psychologist ownership could have 20% owned by an LMFT, 10% by an LCSW, and 10% by an LPCC—creating an integrated behavioral health clinic under single corporate ownership. Each professional would practice within their own scope of practice, but the unified entity could share administrative infrastructure, office space, billing systems, and marketing.

The ownership restrictions extend to board composition. The number of directors who are licensees of “other” healing arts professions (not the core profession) cannot exceed the same proportion as their share ownership. In practical terms, if psychologists own 60% of a psychological corporation, at least 60% of the board must be psychologists.

One critical restriction: non-licensed individuals cannot own shares in these professional corporations except in extremely limited circumstances. When a shareholder dies or becomes disabled, their personal representative or trust may hold shares temporarily, but only for the period necessary to transfer those shares to qualified licensees or redeem them. You cannot give equity to non-licensed administrative staff, marketing consultants, or outside investors. Every shareholder must hold an active professional license in an enumerated healing arts profession.

Naming Requirements: Getting It Right for Each Profession

The naming requirements for behavioral health professional corporations are among the strictest in California professional practice law. Each profession has specific statutory language that must appear in your corporate name, and violations can result in denial of corporate formation or discipline by your licensing board.

Psychological Corporation Naming (Business and Professions Code §2998)

Your psychological corporation’s name must contain at least one of the following words specified in section 2902(c): “psychology,” “psychological,” “psychologist,” “psychotherapist,” “psychoanalysis,” “psychoanalyst,” “psychotherapy,” or “psychotherapeutic.” You must also include wording or abbreviations denoting corporate existence such as “Incorporated,” “Inc.,” “Corporation,” “Corp.,” “A Professional Corporation,” or “APC.”

Examples of compliant names: “Smith Psychological Corporation,” “Bay Area Psychology Group, Inc.,” “Jones Psychotherapy Associates, A Professional Corporation,” or “Coastal Psychological Services Corp.”

If you use a fictitious business name (DBA) different from your registered corporate name, that fictitious name cannot be false, misleading, or deceptive. More importantly, you must inform all patients before providing treatment that the business is conducted by a psychological corporation. This disclosure requirement typically appears in intake paperwork, informed consent documents, and office signage.

Marriage and Family Therapy Corporation Naming (Business and Professions Code §4987.7)

Your MFT corporation’s name must contain at least one word from the following group: “marriage,” “family,” or “child,” AND at least one word from this group: “counseling,” “counselor,” “therapy,” or “therapist.” You must also include a corporate designator.

Examples of compliant names: “Smith Marriage and Family Therapy Corporation,” “Family Counseling Associates, Inc.,” “Child and Family Therapists, A Professional Corporation,” or “Coastal Marriage Therapy Group, APC.”

The naming requirement is an “and” construction—you need words from both categories. “Family Services Corporation” doesn’t comply because it lacks a therapy/counseling term. “Counseling Services Corporation” doesn’t comply because it lacks the family/marriage/child requirement.

As with psychological corporations, fictitious business names must not be false or misleading, and you must disclose to patients that services are provided by a marriage and family therapy corporation.

Licensed Clinical Social Worker Corporation Naming (Business and Professions Code §4998.2)

LCSW corporation naming requirements are perhaps the most restrictive. Your corporate name and any fictitious business name must contain the words “licensed clinical social worker” plus a corporate designator. Unlike the other professions that offer multiple compliant terms, LCSW corporations must use this specific phrase.

Examples of compliant names: “Smith Licensed Clinical Social Worker Corporation,” “Bay Area Licensed Clinical Social Worker Group, Inc.,” or “Coastal Licensed Clinical Social Worker Services, APC.”

You cannot abbreviate to “LCSW Corporation” in your formal corporate name—the statute requires the full phrase “licensed clinical social worker.” The abbreviation “LCSW” may appear in marketing materials and signage, but your registered corporate name must spell out the full professional designation.

The patient disclosure requirement applies here as well: clients must be informed that services are provided by a licensed clinical social worker corporation.

Professional Clinical Counselor Corporation Naming (Business and Professions Code §4999.125)

LPCC corporation names must contain either “licensed professional clinical counselor” or “professional clinical counselor” plus a corporate designator. The statute offers two alternatives, giving slightly more flexibility than LCSW requirements.

Examples of compliant names: “Smith Professional Clinical Counselor Corporation,” “Licensed Professional Clinical Counselor Group, Inc.,” “Bay Area Professional Clinical Counseling, APC,” or “Coastal Licensed Professional Clinical Counselor Services Corp.”

As with the other professions, fictitious business names cannot be false or misleading, and you must disclose to patients that services are provided by a professional clinical counselor corporation.

General Corporate Naming Rules (Corporations Code §§201, 202)

Beyond profession-specific requirements, all corporate names must comply with general California corporate law. Your name must be distinguishable from existing business names on Secretary of State records. Search the Secretary of State’s business database at bizfileonline.sos.ca.gov before finalizing your name choice.

You cannot use certain restricted words without authorization: “bank,” “trust,” “trustee” (without approval from the Department of Financial Protection and Innovation), “cooperative” (unless actually a cooperative corporation), “Olympic” (federally protected), or “United States” without federal approval.

Reserve your chosen corporate name through the Secretary of State’s name reservation system if you want to lock it in while preparing formation documents. Reservation costs $10 and holds the name for 60 days.

Step-by-Step Formation Process

Step 1: Verify Your License Status and Core Profession

Before filing anything, confirm that you hold an active, unrestricted license with your licensing board. For psychologists, verify your license with the Board of Psychology. For LMFTs, LCSWs, and LPCCs, verify with the Board of Behavioral Sciences.

Your license must be in active status, not inactive, suspended, or subject to any restrictions that would prohibit you from practicing through a professional corporation. If you have any license issues—even pending investigations or probationary terms—resolve those before attempting to form a professional corporation.

If you’re forming a multi-disciplinary practice, verify the license status of all proposed shareholders. Every shareholder must hold an active license in one of the enumerated healing arts professions, and the core profession (psychologists for psychological corporations, LMFTs for MFT corporations, etc.) must constitute at least 51% of ownership and voting power.

Step 2: Choose Your Corporate Name and Verify Compliance

Select a corporate name that complies with both your profession’s specific naming requirements and general corporate naming rules. Review the statutory language for your profession carefully—psychological corporations need psychology-related terms from section 2902(c), MFT corporations need family/marriage/child terms plus counseling/therapy terms, LCSW corporations must include “licensed clinical social worker,” and LPCC corporations must include “professional clinical counselor” or “licensed professional clinical counselor.”

Search existing business names through the Secretary of State’s business database to ensure your chosen name is distinguishable from existing entities. Pay attention not just to exact matches but to names that might be confusingly similar.

If you want to use a fictitious business name (DBA) different from your registered corporate name, ensure that fictitious name also complies with your profession’s naming requirements. You’ll need to file a separate fictitious business name statement with the county where your principal place of business is located.

Consider reserving your name through the Secretary of State for $10 if you’re concerned about availability while you prepare formation documents. The reservation holds the name for 60 days.

Step 3: Prepare and File Articles of Incorporation

Your Articles of Incorporation are filed with the California Secretary of State using Form ARTS-PC (Articles of Incorporation of a Professional Corporation). The filing fee is $100. If you submit in person at the Sacramento office, add a $15 counter drop-off fee.

The Articles must specifically indicate that you’re forming a professional corporation to practice your particular profession. Your corporate purpose clause should state something like:

For psychological corporations: “The specific purpose of this corporation is to engage in the practice of psychology in the State of California.”

For MFT corporations: “The specific purpose of this corporation is to provide marriage and family therapy services in the State of California.”

For LCSW corporations: “The specific purpose of this corporation is to provide licensed clinical social work services in the State of California.”

For LPCC corporations: “The specific purpose of this corporation is to provide professional clinical counseling services in the State of California.”

Your Articles must also indicate that shares will be issued only to persons licensed to practice the profession (or enumerated other healing arts professions permitted under section 13401.5). This restriction implements the ownership requirements we discussed earlier.

You can file articles using the Secretary of State’s standard Form ARTS-PC or draft custom articles with additional provisions. The standard form works for most professional corporations if you include the required professional purpose language and share restrictions. Custom-drafted articles can include enhanced indemnification provisions, specific procedures for share transfers and mandatory redemption, and other protective provisions the standard form doesn’t address.

File through the Secretary of State’s BizFile Online portal for fastest processing. Standard mail-in processing takes approximately five business days, though this fluctuates with volume. For faster turnaround, expedited services are available: 24-hour processing costs an additional $500 beyond the base filing fee, while 4-hour same-day service costs $750.

Step 4: Obtain Federal Employer Identification Number

Once the Secretary of State approves your Articles of Incorporation, apply for an Employer Identification Number (EIN) from the IRS. This federal tax ID is required for opening business bank accounts, filing employment and income tax returns, and establishing yourself as a separate entity for tax purposes.

Apply online at irs.gov through the EIN Assistant. The application is free and you’ll receive your EIN immediately upon completion. You’ll need your corporation’s exact legal name as shown on the filed Articles, your California business address, and your personal Social Security Number as the responsible party.

Don’t delay this step. You cannot open corporate bank accounts without an EIN, and maintaining complete separation between personal and corporate finances is essential for preserving your liability protection.

Step 5: Draft Corporate Bylaws with Required Provisions

Corporate bylaws govern the internal operations of your professional corporation: how meetings are conducted, how officers are elected and removed, how shares can be transferred, and how decisions are made. While bylaws aren’t filed with any agency, they’re legally required and must contain specific provisions for professional corporations.

Moscone-Knox mandates certain share transfer restrictions. Under Corporations Code section 13406, shares in a professional corporation can only be transferred to individuals licensed to practice the profession (or enumerated other healing arts professionals), to the corporation itself, or to shareholders who already own shares in the corporation. Section 13407 requires that share certificates contain conspicuous legends noting these restrictions.

Your bylaws should implement these statutory requirements with specific procedures addressing what happens when a shareholder loses their license through suspension or disbarment, how shares will be valued if mandatory redemption is triggered, what payment terms apply for redemptions, and how disputes over valuation will be resolved.

For psychological corporations specifically, your bylaws should reference the requirements of sections 2995-2999 and ensure compliance with Board of Psychology oversight. For MFT, LCSW, and LPCC corporations, reference the relevant BBS statutes and board authority.

If you’re forming a multi-disciplinary practice with shareholders holding different licenses, your bylaws must clearly establish that each professional practices only within their own scope of practice and that the core profession maintains at least 51% ownership and voting control at all times.

Standard corporate bylaws templates won’t include the professional corporation-specific provisions you need. Use bylaws specifically designed for California behavioral health professional corporations, or work with a business attorney experienced in mental health practice structures.

Step 6: Hold Organizational Meeting and Issue Shares

After the Secretary of State approves your Articles, hold your organizational meeting of the board of directors. At this meeting you’ll adopt the corporate bylaws, elect officers (president, secretary, treasurer, and any vice-presidents), authorize the issuance of shares to initial shareholders, designate the corporation’s principal office address, authorize opening of corporate bank accounts, and appoint the registered agent for service of process.

Document everything in formal minutes. These minutes become part of your corporate records book and demonstrate that you’ve properly organized the corporation’s governance structure.

Issue share certificates to all shareholders in accordance with the bylaws and organizational meeting resolutions. Each certificate must contain the transfer restriction legend required by Corporations Code section 13407. A typical legend reads: “The shares represented by this certificate are subject to transfer restrictions. These shares may be transferred only to persons licensed to practice [psychology/marriage and family therapy/clinical social work/professional clinical counseling] in the State of California, or to persons holding other healing arts licenses as specified in Corporations Code section 13401.5, to existing shareholders of this corporation, or to the corporation itself. Transfer to any other person is void.”

Maintain a stock ledger in your corporate records book showing all share issuances, the name of each shareholder, their professional license type and number, number of shares held, dates of issuance, and certificate numbers. This ledger must be kept current and should be available for board inspection if questions arise about ownership compliance.

Step 7: File Initial Statement of Information

Within 90 days of filing your Articles of Incorporation, you must file a Statement of Information with the California Secretary of State. The filing fee is $25. Corporations must file annually (unlike LLCs which file biennially).

The Statement of Information provides the Secretary of State with current information about your corporation’s officers, directors, registered agent, and principal business address. You can file online through BizFile or by mail.

Mark your calendar for annual Statement of Information filings. Missing this filing results in penalties and eventual suspension of your corporate powers. The Secretary of State will mail reminders, but don’t rely solely on receiving those notices—track the deadline independently.

Step 8: Register with Your Licensing Board (If Required)

Board-level registration requirements vary by profession. Psychological corporations have historically been subject to specific registration requirements with the Board of Psychology under the statutory framework in sections 2995-2999. The Board regulates psychological corporation composition, naming, and compliance with Moscone-Knox provisions.

For MFT, LCSW, and LPCC corporations regulated by the Board of Behavioral Sciences, the statutes define each corporation type and incorporate Moscone-Knox requirements, but the BBS doesn’t maintain a separate corporate registration system analogous to the Board of Psychology’s approach. Instead, compliance is enforced through individual license discipline and investigation of corporate structure violations.

Regardless of which board regulates your profession, all shareholders who will be practicing through the corporation must maintain active individual licenses. Your corporation cannot practice on behalf of suspended or unlicensed individuals, and violations can result in discipline of both the corporation and the individual licensees involved.

Step 9: Establish Required Records and Compliance Systems

Set up systems for maintaining the records your profession requires. All behavioral health professionals must maintain client records consistent with their profession’s practice act and applicable regulations. These records must be kept confidential and secure, with appropriate safeguards for electronic records.

If you’re accepting credit cards, establish a merchant account under the corporation’s name and EIN. If you’re billing insurance, register as a group practice with payers and ensure all credentialing is under the corporate entity rather than individual practitioners’ names where appropriate.

Establish accounting systems that maintain complete separation between personal and corporate finances. Every business expense must be paid from the corporate account. Every dollar of business income must be deposited to the corporate account. Pay yourself through formal payroll and documented shareholder distributions—never just withdraw cash from the corporate account when you need money.

Tax Election: S-Corporation Status

Most California behavioral health professional corporations elect S-Corporation tax treatment for both federal and California purposes. This election is made at the federal level by filing IRS Form 2553 (Election by a Small Business Corporation) within 75 days of your incorporation date, or within 75 days of the start of the tax year in which you want the election to take effect.

S-Corporation taxation allows profits to pass through to shareholders without entity-level federal income tax, avoiding the double taxation that C-Corporations face. More importantly for behavioral health professionals, S-Corporation status enables the salary-versus-distribution tax strategy that reduces self-employment tax exposure.

Here’s how it works: you pay yourself a reasonable salary as an employee of the corporation. This salary is subject to all standard payroll taxes (Social Security, Medicare, federal and state withholding). But any additional profits you distribute to yourself as a shareholder aren’t subject to self-employment tax—they’re treated as investment returns, not compensation. The IRS defines “reasonable salary” based on what similar professionals in similar practice areas and geographic locations earn, so you can’t game the system by paying yourself $20,000 and taking $200,000 in distributions. But legitimate salary-distribution splits can produce meaningful tax savings.

California recognizes federal S-elections but imposes its own entity-level tax on S-Corporation income. The California Franchise Tax Board charges 1.5% on California-source net income for S-Corporations. This is far lower than the 8.84% that C-Corporations pay, and it applies in addition to (not in place of) the individual income tax you’ll pay on passthrough income.

File California Form 100S (California S Corporation Franchise or Income Tax Return) annually to report your corporation’s income and pay the 1.5% entity tax. Your personal income tax return will include your share of passthrough income from the corporation.

Work with a tax professional experienced with mental health practice taxation to structure your compensation optimally, ensure timely estimated tax payments, and maintain proper documentation supporting your salary determination. The IRS increasingly scrutinizes S-Corporation salary levels, and underpayment can trigger audits, assessments of additional employment taxes, and penalties.

Multi-Disciplinary Practice Structures: Making Cross-Ownership Work

One of the most powerful features of California’s professional corporation framework for behavioral health is the ability to create integrated, multi-disciplinary practices through cross-ownership provisions. Understanding how to structure these arrangements can transform your practice from a solo office into a comprehensive behavioral health clinic.

Example 1: Psychology-Led Integrated Practice

Dr. Smith is a licensed psychologist who wants to create a full-service behavioral health clinic offering psychology, marriage and family therapy, clinical social work, and professional clinical counseling services. She forms Smith Psychological Corporation with the following ownership structure:

Dr. Smith (psychologist): 60% ownership Dr. Jones (LMFT): 20% ownership Dr. Williams (LCSW): 10% ownership Dr. Taylor (LPCC): 10% ownership

This structure complies with all requirements. Psychologists own more than 51%, satisfying the core ownership rule. The other shareholders hold licenses enumerated in Business and Professions Code section 2995 as permitted shareholders in psychological corporations. The board of directors would need to be at least 60% psychologists (three of five directors, for example, would be psychologists).

Each professional practices within their own scope of practice. Dr. Smith provides psychological assessments and therapy. Dr. Jones provides marriage and family therapy. Dr. Williams provides clinical social work services. Dr. Taylor provides professional clinical counseling. But they share administrative staff, office space, billing systems, and marketing—creating economies of scale impossible in solo practice.

Example 2: LMFT-Led Group Practice

Consider an LMFT who wants to create a family-focused practice but include psychology consultation services. The structure might be:

Principal LMFT: 55% ownership Two associate LMFTs: 20% ownership (10% each) Licensed psychologist: 25% ownership

This works because LMFTs own more than 51%. The psychologist is an enumerated permissible shareholder under the cross-ownership provisions. The corporation would be a marriage and family therapy corporation with a name complying with section 4987.7 requirements (containing family/marriage/child terms plus counseling/therapy terms).

The psychologist could provide psychological assessment services, consultation on complex cases, and psychological treatment within scope—but the LMFT majority maintains control over the corporation’s overall direction and ensures compliance with BBS oversight.

Example 3: Equal Partner Structure (Doesn’t Work)

What doesn’t work: two LCSWs and two LPCCs attempting to form a corporation with 25% ownership each. This violates the 51% core profession rule. You cannot have equal ownership across different professional licenses—one profession must constitute the majority.

If these four professionals want to practice together, they’d need to determine which profession will be the core (making it either an LCSW corporation with LCSWs owning at least 51%, or an LPCC corporation with LPCCs owning at least 51%), or they’d need to operate as separate professional corporations with shared administrative services through a management services organization.

Management Services Organization Overlay

Some multi-disciplinary practices use a two-entity structure: separate professional corporations for each profession, plus a management services organization (MSO) that provides administrative services to all the professional corporations. The MSO handles billing, scheduling, HR, marketing, and facility management. Each professional corporation pays the MSO a management fee for services rendered.

This structure avoids cross-ownership complications when you have many professionals across multiple disciplines, or when ownership percentages would violate the 51% rule. The tradeoff is increased complexity—you’re maintaining multiple corporate entities rather than one unified professional corporation.

Ongoing Compliance Obligations

Annual Statement of Information with Secretary of State

Every year, California corporations must file a Statement of Information with the Secretary of State updating the corporation’s officer, director, and registered agent information. The fee is $25.

Your filing window is determined by the month you filed your original Articles of Incorporation. For example, if you incorporated in April, your annual Statement of Information is due during the January-to-April period each year. File online through the Secretary of State’s BizFile portal for fastest processing.

Failure to file results in penalties initially, then eventual suspension of your corporate powers. A suspended corporation cannot legally conduct business, and during the suspension period your personal liability protection is compromised.

California Franchise Tax Obligations

All California corporations, including professional corporations, must pay the minimum $800 annual franchise tax to the California Franchise Tax Board. This is due for each taxable year the corporation is in existence, with one exception: newly incorporated corporations are exempt from the $800 minimum in their first taxable year. You’ll still owe tax on any net income at the applicable rate (1.5% for S-Corps, 8.84% for C-Corps), but not the minimum if you have no or minimal income.

The first franchise tax payment is due the 15th day of the fourth month after the close of your first taxable year. For calendar-year corporations incorporated in January, this means the first payment is due the following April 15th.

File your California corporate tax return (Form 100 for C-Corps, Form 100S for S-Corps) by the 15th day of the fourth month after your tax year ends. Extensions are available but don’t extend the time to pay—only the time to file the return.

Individual License Renewals

Your professional corporation’s legal status depends on the active licenses of its shareholders. If your license lapses, expires, is suspended, or is revoked, you can no longer practice through the corporation. In multi-shareholder corporations, if a shareholder’s license status changes in ways that affect eligibility, the ownership structure must be adjusted to maintain compliance.

Track all shareholder license renewal dates and ensure everyone maintains active, unrestricted licenses. For psychologists, licenses renew every two years. For LMFTs, LCSWs, and LPCCs, licenses also renew biennially. All require continuing education for renewal.

Professional Liability Insurance

While California statutes don’t explicitly require professional corporations to maintain professional liability insurance (unlike medical corporations or law corporations which have specific insurance mandates), practical reality demands it. Professional liability insurance (also called malpractice insurance or errors and omissions coverage) protects both you personally and your corporation from the financial devastation of malpractice claims.

The corporate structure doesn’t shield you from personal liability for your own professional negligence. Corporations Code section 13403 makes clear that shareholders of professional corporations remain personally liable for their own negligent or wrongful acts. But insurance provides a fund to defend claims and pay settlements or judgments, protecting your personal assets and your practice’s financial stability.

Obtain coverage appropriate to your practice risks. Solo practitioners providing outpatient therapy typically need lower limits than group practices providing intensive services or working with high-risk populations. Discuss coverage levels with an insurance broker who specializes in mental health professional liability.

Board-Level Compliance and Discipline Risk

Your licensing board has jurisdiction not just over your individual license but over your professional corporation’s operations. Violations of corporate practice requirements—improper ownership structure, false or misleading corporate names, unlicensed practice, fee-splitting arrangements that violate professional conduct rules—can result in discipline of both the corporation and individual licensees.

Common discipline triggers include using corporate or fictitious business names that violate naming requirements, failing to disclose to clients that services are provided by a professional corporation, allowing unlicensed individuals to provide clinical services or supervise licensees, corporate ownership structures that violate the 51% core profession rule, and commingling funds or engaging in financial arrangements that constitute unprofessional conduct.

Maintain meticulous records demonstrating corporate compliance. Keep your stock ledger current showing shareholder license numbers and ownership percentages. Maintain copies of all corporate filings. Document that clients receive required disclosures about the corporate practice structure.

Patient Disclosure Requirements

All four professional corporation types have statutory requirements that you inform patients or clients that services are being provided by a professional corporation. This isn’t optional—it’s a mandatory disclosure that must occur before treatment begins.

For psychological corporations, section 2998 requires informing patients “prior to the rendering of professional services, that the psychotherapist-patient privilege under Section 1014 of the Evidence Code shall apply to all communications occurring in the course of the professional services being provided.” The statute also requires disclosure that the business is conducted by a psychological corporation.

For MFT corporations, section 4987.7 requires disclosure that the business is conducted by a marriage and family therapy corporation. For LCSW corporations, section 4998.2 imposes the same requirement. For LPCC corporations, section 4999.125 requires disclosure that services are provided by a professional clinical counselor corporation.

Implement these disclosures through multiple mechanisms. Include disclosure language in your intake paperwork and informed consent documents. Post signage in your waiting area identifying the practice as a professional corporation. Include the corporate designation on business cards, letterhead, and marketing materials.

The disclosure serves several purposes. It informs clients about the business structure providing their care. It clarifies that the psychotherapist-patient privilege applies to services provided through the corporation. It distinguishes your practice from sole proprietorships or unlicensed counseling services. And it demonstrates regulatory compliance if board investigators ever review your practice operations.

Professional Liability: What the Corporate Structure Does and Doesn’t Protect

Mental health professionals sometimes misunderstand what forming a professional corporation protects them from. The corporate structure does not shield you from personal liability for your own professional malpractice. Corporations Code section 13403 states explicitly that shareholders of professional corporations remain personally liable for any negligent or wrongful acts or omissions committed by them or by any person under their direct supervision and control while rendering professional services.

If you negligently diagnose a client, breach confidentiality, engage in a boundary violation, provide treatment outside your scope of competence, or otherwise commit malpractice, you’re personally liable for resulting damages. The fact that you practiced through a professional corporation rather than as a sole proprietor doesn’t change your personal exposure for your own errors.

What the professional corporation structure provides is liability separation between shareholders for each other’s independent malpractice. If your co-shareholder commits malpractice and you weren’t involved in that case, had no supervisory relationship over that professional, and had no knowledge of the error, you’re generally not personally liable—though the corporation itself can be sued.

The corporate structure also provides a liability buffer for ordinary business obligations. If your professional corporation signs an office lease and later can’t pay rent, the landlord’s remedy is against the corporation, not automatically against you personally (unless you’ve personally guaranteed the lease). If the corporation purchases equipment on credit and defaults, the creditor’s claim is against the corporate entity.

But these protections only hold if you maintain corporate formalities and avoid alter ego problems. Courts pierce the corporate veil when corporations are undercapitalized, when shareholders commingle personal and corporate funds, when corporate formalities aren’t observed, when the corporation is used to perpetrate fraud, or when the corporation is really just the shareholder’s alter ego rather than a separate entity.

Fictitious Business Names and Marketing Compliance

Many behavioral health professionals want to use a practice name that’s more marketing-friendly than their formal corporate name. “Bay Area Family Wellness Center” sounds more approachable than “Smith Marriage and Family Therapy Corporation.” California law permits fictitious business names (DBAs) for professional corporations, but with strict limitations.

Your fictitious business name must comply with all the same requirements as your registered corporate name. For psychological corporations, the DBA must include psychology-related terms from section 2902(c). For MFT corporations, the DBA must include family/marriage/child terms plus counseling/therapy terms. For LCSW corporations, the DBA must include “licensed clinical social worker.” For LPCC corporations, the DBA must include “licensed professional clinical counselor” or “professional clinical counselor.”

The fictitious business name cannot be false, misleading, or deceptive. Names that imply credentials you don’t hold, specializations you’re not certified in, or affiliations that don’t exist all violate this prohibition. “Smith Board-Certified Neuropsychology Center” is misleading if you’re not board-certified in neuropsychology. “University Counseling Center” is misleading if you have no university affiliation.

File your fictitious business name statement with the county clerk in the county where your principal place of business is located. The filing fee varies by county (typically $10-$50). You must publish the fictitious business name statement in a newspaper of general circulation in that county, then file an affidavit of publication. The entire process typically costs $50-$150 depending on county and publication fees.

Renew your fictitious business name statement every five years to maintain the registration. Missing renewal can result in loss of the fictitious name and potential discipline for practicing under an unregistered name.

Remember that using a fictitious business name doesn’t eliminate your obligation to disclose to clients that services are provided by a professional corporation. Your intake forms and informed consent documents should identify both the fictitious business name and the formal corporate name.

Common Formation Mistakes and How to Avoid Them

Choosing the Wrong Corporation Type. Forming a psychological corporation when you’re an LMFT, or vice versa, creates immediate compliance problems. Each profession must form the corporation type specific to their license. If you’re an LMFT, you form a marriage and family therapy corporation under sections 4987.5-4987.8, not a psychological corporation. Using the wrong Articles of Incorporation form or wrong purpose clause can result in rejection by the Secretary of State or discipline by your board.

Violating Naming Requirements. Each profession has specific statutory naming requirements. Generic names like “Smith Professional Services Corporation” don’t comply with any of the four professional corporation naming statutes. Review the specific requirements for your profession and ensure your chosen name contains all required elements. If you’re uncertain whether your name complies, consult with an attorney before filing.

Incorrect Ownership Percentages. The 51% core profession requirement isn’t optional. If you’re forming a multi-disciplinary practice, calculate ownership percentages carefully before issuing shares. Psychologists must own at least 51% of a psychological corporation. LMFTs must own at least 51% of an MFT corporation. The same applies for LCSW and LPCC corporations. Violating this rule can result in corporate dissolution orders and professional discipline.

Giving Equity to Non-Licensed Staff. You cannot offer stock options or equity grants to your office manager, billing specialist, or marketing consultant no matter how valuable their contributions. Only licensed professionals in enumerated healing arts professions may own shares in behavioral health professional corporations. Non-licensed individuals cannot hold any ownership interest except in the narrow circumstances of personal representatives of deceased shareholders, and only temporarily pending share transfer or redemption.

Commingling Personal and Corporate Funds. Opening a corporate bank account but treating it like your personal account destroys corporate liability protection. Every business expense must come from the corporate account. Every dollar of business income must be deposited to the corporate account. Pay yourself through formal payroll and documented distributions—never just withdraw cash when you need money.

Missing Annual Filings. The $25 annual Statement of Information seems minor, but missing it results in penalties and eventual suspension of corporate powers. Calendar the filing date, set multiple reminders, and don’t rely solely on receiving the Secretary of State’s renewal notice in the mail. A suspended corporation cannot legally conduct business, and reinstatement requires paying all back fees plus penalties.

Not Making Timely S-Election. You have 75 days from incorporation to file Form 2553 for S-Corporation status. Miss that deadline and you’re taxed as a C-Corporation for the entire year, facing double taxation on profits. File the S-election immediately after incorporation, get IRS confirmation, and keep the confirmation with your corporate records.

Failing to Disclose Corporate Status to Clients. All four professional corporation types have statutory requirements to inform clients that services are provided by a professional corporation. This disclosure must occur before treatment begins. Implement disclosure through intake paperwork, informed consent forms, and office signage. Missing this disclosure violates statute and creates discipline risk.

The Financial Commitment: Formation and Ongoing Costs

Understanding the full cost picture helps you budget appropriately and avoid surprises.

Formation and first-year costs for a California behavioral health professional corporation include Secretary of State filing fee for Articles of Incorporation ($100), initial Statement of Information ($25), first-year minimum franchise tax (exempt for newly incorporated corporations, but owe tax on net income at applicable rates), professional liability insurance (varies by coverage levels and practice type, typically $1,500-$5,000+ annually for solo practitioners), attorney fees for document review and formation assistance if engaging counsel (varies widely), corporate records book and supplies ($50-150 if purchasing a kit), and fictitious business name filing and publication if using a DBA (approximately $50-150 depending on county).

Your minimum direct filing costs are approximately $125 (SOS $100 + Statement of Information $25), not counting insurance which is prudent but not statutorily mandated for behavioral health corporations. Most practitioners should expect total first-year costs of $2,000-$6,000 depending on insurance premiums and whether they engage counsel for formation.

Ongoing annual costs include Statement of Information annual filing ($25), minimum franchise tax ($800 for corporations with taxable income in subsequent years), professional liability insurance (annual premiums), S-Corporation tax return preparation (typically $500-$2,000 depending on complexity), payroll processing if you have employees including yourself on payroll (varies by provider), continuing education for individual license renewals (varies by profession and courses selected), and individual license renewal fees for all shareholders.

Budget for approximately $2,500-$5,000 in annual compliance costs beyond your insurance premiums. For profitable practices, the tax savings from S-Corporation treatment typically exceed these compliance costs. The break-even point varies by individual circumstances, but generally behavioral health professionals generating more than $60,000-$80,000 in net income benefit from the corporate structure’s tax advantages enough to justify the administrative burden.

Frequently Asked Questions

Can I form a single professional corporation if I hold multiple licenses (for example, both psychologist and LMFT licenses)?

If you hold licenses in multiple professions, you must choose which profession your corporation will primarily practice under. You’ll form either a psychological corporation or an MFT corporation based on which license represents your primary practice identity. You cannot form a hybrid entity—California law establishes distinct corporation types for each profession. The corporation you form must comply with the naming requirements, ownership rules, and regulatory oversight specific to that profession. Your other license(s) allow you to provide services within those scopes through the corporation, but the corporate structure itself must fit one profession’s framework.

What happens if my co-shareholder loses their license or their license is suspended?

When a shareholder’s license is suspended, revoked, or becomes inactive, they can no longer practice through the professional corporation and they can no longer legally own shares. Your corporate bylaws should contain mandatory redemption provisions addressing these scenarios. The corporation or remaining shareholders must purchase the disqualified shareholder’s shares within specified timeframes at a valuation determined by the method established in your bylaws (book value, formula-based valuation, or third-party appraisal). The timing requirements are strict—you can’t allow an unlicensed person to continue holding shares indefinitely. Plan for these scenarios in advance through well-drafted bylaws and shareholder agreements.

Can my professional corporation employ unlicensed staff or interns?

Yes, your corporation can employ unlicensed administrative staff for clerical, billing, scheduling, and other non-clinical functions. You can also employ pre-licensed interns and trainees (associates working toward LMFT, LCSW, or LPCC licensure) who provide clinical services under appropriate supervision. What you cannot do is employ unlicensed individuals to provide unsupervised clinical services, or allow unlicensed individuals to own shares or hold director positions. The key distinction is between employment (permissible for non-clinical roles and supervised clinical training) and ownership/governance (restricted to licensed professionals).

If I’m forming a multi-disciplinary practice with both MFT and LCSW services, which type of corporation should I form?

You must choose which profession will be the core profession constituting at least 51% ownership. If LMFTs will own the majority (51%+), form a marriage and family therapy corporation under sections 4987.5-4987.8. If LCSWs will own the majority, form an LCSW corporation under sections 4998-4998.6. The naming requirements, board oversight, and corporate purpose will follow the core profession. The minority shareholders can practice within their own professional scopes, but the corporation’s structure must align with the majority profession. Alternatively, some multi-disciplinary practices form separate professional corporations for each profession with shared administrative services through a management services organization.

Do I need separate professional liability insurance for myself and the corporation?

Professional liability insurance policies for mental health professionals typically cover both the individual practitioner and their professional corporation under a single policy. When obtaining coverage, specify that you’re practicing through a professional corporation and ensure both you individually and the corporation are named insureds. The policy should cover professional services rendered by the corporation and its licensed employees. If you have multiple shareholders, discuss with your insurance broker whether you need separate policies for each professional or whether a single group policy covering all shareholders is more appropriate and cost-effective.

Can I convert my existing sole proprietorship or group partnership into a professional corporation?

There’s no formal statutory conversion process from sole proprietorship or partnership into a professional corporation. Instead, you form a new professional corporation, obtain your corporate registration, then transition your practice to operate through the corporation. Transfer client relationships by notifying clients of the entity change and having them sign new engagement agreements with the corporation. Transfer business assets (furniture, equipment, leasehold interests) from your name to the corporate name. Close your sole proprietorship bank accounts and establish corporate accounts. From clients’ perspective, you’re still their therapist—you’re just practicing through a different entity structure. From a legal perspective, the corporation is a new entity taking over your established practice.

Can my professional corporation own the building where I practice?

Professional corporations formed to provide clinical behavioral health services are limited to rendering professional services in their licensed field. Sections 2995, 4987.5, 4998, and 4999.123 all specify that these corporations exist to provide professional services, not to engage in real estate investment or other non-professional business activities. If you want to own the building where you practice, purchase it personally or through a separate investment entity, then lease space to your professional corporation at fair market rates. Some practitioners establish separate entities for real estate ownership while practicing through their professional corporation. Consult with both a business attorney and tax advisor before implementing multi-entity structures to ensure you’re not creating complications with corporate practice rules or inadvertent tax issues.

Getting Started with Your Professional Corporation

If you’re ready to form your California behavioral health professional corporation, begin by verifying your license status with your board (Board of Psychology for psychologists, Board of Behavioral Sciences for LMFTs, LCSWs, and LPCCs), determining which corporation type you need based on your core profession, choosing a corporate name that complies with your profession’s specific naming requirements, deciding whether you’ll have co-shareholders and verifying their license status and types, and consulting with a tax advisor about S-Corporation election strategy and compensation planning.

Consider whether you need attorney assistance for formation. The mechanics aren’t insurmountable for a detail-oriented professional who researches the requirements carefully, but mistakes in corporate formation create compliance problems that are costly to fix later. An attorney experienced with behavioral health practice structures can ensure your articles and bylaws contain required provisions, that your shareholder agreements address mandatory redemption scenarios, and that you’ve satisfied all eligibility requirements.

For corporate governance documents including bylaws and organizational resolutions, my Corporate Bylaws Generator can help you create compliant documents. If you’re bringing in partners or co-founders, review my Co-founder Agreement Generator and Founders Agreement Generator to formalize your business relationships.

Your professional corporation represents a significant commitment. Take the time to do it right from the beginning. The compliance obligations require discipline, but the tax advantages, liability protection, and professional structure make it worthwhile for many California behavioral health professionals building sustainable practices.

If you need legal assistance with your California professional corporation formation, want a professional review of your proposed structure, or have questions about your specific situation, schedule a consultation to discuss your practice needs.

Official Resources and Primary Sources

Board of Psychology
Website: https://www.psychology.ca.gov
Laws and regulations: Psychologist licensing and psychological corporation provisions
Business and Professions Code §§2995-2999

Board of Behavioral Sciences
Website: https://www.bbs.ca.gov
Laws and regulations: LMFT, LCSW, and LPCC licensing and corporation provisions
MFT Corporations: Business and Professions Code §§4987.5-4987.8
LCSW Corporations: Business and Professions Code §§4998-4998.6
LPCC Corporations: Business and Professions Code §§4999.123-4999.129

California Secretary of State
BizFile Online (business search and filings): https://bizfileonline.sos.ca.gov
Forms and fees: https://www.sos.ca.gov/business-programs/business-entities/forms
Current processing times: https://www.sos.ca.gov/business-programs/business-entities/processing-times

California Statutes
Corporations Code §§13400-13410 (Moscone-Knox Professional Corporation Act): https://leginfo.legislature.ca.gov
Business and Professions Code (profession-specific corporation provisions): Same source

California Franchise Tax Board
Corporate tax information: https://www.ftb.ca.gov/file/business/types/corporations/index.html

Internal Revenue Service
EIN application: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
Form 2553 (S-Corporation election): Available at IRS.gov

This guide provides general legal information about forming California professional corporations for behavioral health professionals and is current as of publication date. Laws, regulations, board requirements, and fees change periodically. This information should not be construed as legal or tax advice for your specific situation. Consult with a qualified attorney and tax professional regarding your particular circumstances before making formation decisions.