For self-employed therapists, “liability” can mean either:
- Financial liability or debt
- Legal liability or vulnerability to lawsuits
They both sound intimidating. But liability isn’t such a scary word once you learn how to protect yourself and your practice.
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Financial liability vs. professional liability
Because liability is such a broad concept affecting many areas of private practice, it helps to break it down into two types: financial and professional liability.
Financial liability includes every type of debt your practice owes. Depending on how your practice is structured, you may be personally liable for debts, or only your practice (as a business entity) may be liable.
Professional liability includes your vulnerability to being sued (whether by clients—for malpractice—or by any other individual or entity) due to damages you may (or may not) have caused. It also includes the potential of having your license to practice suspended or revoked if someone brings complaints against you to your licensing board.
These categories overlap. For instance, the cost of defending yourself against a malpractice lawsuit—or paying premiums for liability insurance to protect yourself—may create financial liability.
Another example: If you default on your debts, your lenders may sue you for the amount you owe, bringing legal liability into play.
Financial liability for therapists
Any debt your practice owes to another person or entity is a financial liability.
Examples include:
- Rent
- Credit card debt
- A business loan
- A line of credit
- Payments owed to contractors
Tax liability, while it is treated differently for accounting purposes, may also be considered a form of financial liability for your practice.
The simplest way to avoid financial liability is to never incur any debts. For most therapy practices—and for most businesses—this is impossible.
The next best approach is to register your therapy practice as a limited liability company (LLC).
How an LLC protects you from personal financial liability
Some states require therapy practices to register as professional LLCs (PLLCs). In this section, PLLC and LLC are used interchangeably.
You convert your business from a sole proprietorship to an LLC by registering with your state. For federal tax purposes, you then elect for your LLC to be treated as either a disregarded entity (filing taxes as a sole proprietor), a partnership, or an S corporation.
Sole proprietorships are legally identical to their owners. When you operate as a sole proprietor, you and your business are the same entity in the eyes of the courts and the tax authorities.
LLCs, on the other hand, are separate legal entities. Your LLC can incur debts, and you can incur debts, and they remain separate debts.
So, if your LLC defaults on a debt, only its own assets are on the line. In the event a lender sues your LLC or places a lien on its earnings, they have access only to what your LLC owns or earns. Also, if your LLC files for bankruptcy, only its own assets—not your personal assets—may be liquidated.
Your therapy practice’s assets may include:
- Any working capital (cash) held in your business checking account
- Real estate (for instance, if you own your office)
- Computers, office furniture, books, therapeutic tools, etc.
How to guarantee you’re protected by your LLC
This clear line of division between your business assets and your personal assets is the ideal, not the rule. In fact, what LLCs really offer is conditional protection: You’re personally protected only so long as your business practices meet certain conditions.
A number of factors may allow lenders to go beyond the LLC’s assets and target your personal assets. But by following these best practices, you make sure your LLC protects you personally:
Maintain the corporate veil
The term “corporate veil” refers to the barrier between your personal assets and the assets of your business.
In order to keep the corporate veil in place, you need to keep your personal financial activities and your business’s financial activities completely separated.
If you don’t, and a lender takes you to court, the court may deem that the corporate veil between your person and your LLC has been pierced. In that event, the financial protection offered by an LLC is void.
You can maintain the corporate veil by:
- Using a business checking account. This helps to prevent your personal and business banking activities from becoming intermingled.
- Never using business funds for personal use, and vice versa. Even if you have a business checking account, you can pierce the corporate veil by using its funds for personal purchases—or by using your personal funds to make business purchases.
- Keeping separate personal and business credit cards. The same principle that applies to personal and business bank accounts also applies to personal and business credit cards.
- Accurate bookkeeping and financial records. An accurate set of books and financial records—provided they’re fully in sync with your banking activities—helps to build the case that your business and your person are separate entities.
Many business owners run into trouble when they unknowingly pierce the corporate veil and their business later ends up being pursued by creditors. Good financial hygiene is essential for maintaining the corporate veil.
Avoid personal guarantees
If your practice can’t qualify for credit—whether a loan, a business credit card, or some other form—then a creditor may ask you to provide a personal guarantee.
In effect, a personal guarantee says that, in the event your business can’t pay its debts, you will do so personally. That means your personal assets are on the line if a creditor sues you or if your business files for bankruptcy.
While a personal guarantee does not pierce the corporate veil, it does override the protections offered by an LLC.
How to avoid making personal guarantees
New therapy practices may struggle to secure a loan or qualify for a credit card because:
- They have a poor credit rating; and
- They can’t prove the profitability of their business.
To counteract these problems, you can:
- Slowly build credit over time. Start with a business credit card with a low limit, use it for business purchases, and keep up with payments. Paying office rent on time also helps to build credit.
- Maintain financial records. Financial reports—backed up by bank statements and completed tax returns—help to prove the ongoing profitability of your practice. They demonstrate that you have the revenue stream (and working capital) to cover payments to creditors.
When your practice is just getting started, you may find it impossible to secure credit without providing a personal guarantee. In that case, do your best to limit your liability by taking out a smaller loan or applying for a credit card with a lower limit. Treat these personally guaranteed liabilities as a stopgap measure until your business can qualify for credit on its own.
Limit personal investment in your practice
While it doesn’t technically offer you more personal liability protection, limiting your own investment in your practice can limit the impact of its assets being seized.
What that means in practical terms is keeping your working capital—the cash on hand your business uses to cover expenses—to a minimum.
By holding only as much money in your banking account as you need to pay for expenses and provide a cushion in times of low cash flow, you keep more of it in your hands as a personal asset (protected by your LLC status) and less of it in your practice’s hands (vulnerable to creditors).
Finding the right balance can be tricky. It depends on the financial needs of your practice, your personal financial needs, and the likelihood that creditors will come after your assets in the near future. While minimizing personal investment in your business is a good principle to follow overall, consult with an accountant to determine the best strategy.
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Professional liability for therapists
Professional liability can be divided into two categories:
- Your vulnerability to being sued for malpractice or having complaints against you filed with your licensing board; and
- Vulnerability to every other kind of lawsuit
How to protect yourself from being sued for malpractice
First, the bad news: No matter how strictly you adhere to your code of ethics, any client may press charges against you for malpractice. Even if you win the case, the cost of defending yourself in court can be prohibitive.
Now, the good news: If you’re currently practicing as a therapist, you already have professional liability insurance. That protects you against the cost of being sued for malpractice regardless of which party wins the case.
It also protects you against the cost of defending your license if someone complains to your licensing board. See the next section for details.
In all likelihood, either your state, your licensing board, or both require you to have professional liability insurance before you can legally practice as a therapist.
For more on this topic, check out Do Therapists Need Professional Liability Insurance?
Insurance covers both the cost of defending yourself in court and any funds you must pay if the suing party wins their case against you.
But even if you aren’t sued for practice, you may be vulnerable to costly legal fees for professional reasons.
How to protect yourself from formal complaints
Any individual—a client, a colleague, an employee, or someone in your personal life—may file a complaint against you with your licensing board.
If the board sides with the complainant, you may be at risk of having your license suspended or revoked.
According to The Counselor Liability Claim Report by HPSO, 63.7% of claims are dismissed by the board. But even if a claim is dismissed, you can rack up legal fees defending yourself.
Your professional liability insurance should cover the cost of mounting a defense, but it can’t guarantee you’ll win every case. Your best defense against this vulnerability—even if it doesn’t 100% guarantee a complaint will never be brought against you—is to adhere to a strict code of conduct.
Other types of legal liability for therapists
Clients, contractors, colleagues, or other individuals may sue you for other damages besides malpractice.
That includes:
- Workplace injuries
- Copyright infringement
- Breaches of contract
- Failure to protect client data
- Customer discrimination
- Misclassification of employees as contractors
- Property damage
- Libel or slander
Also, if you operate your practice out of real estate you own—whether your home office or a commercial space—then damages to property can create liability.
In this case, the liability is financial (the cost of repairs) rather than legal, but—like legal liability—you may be protected from it by insurance.
Insurance for therapists
Besides professional liability insurance, your practice also benefits from having:
- General liability insurance, which protects you from being sued in the case of the damages listed above
- Commercial property or home-based business insurance, which protects your property in the event of damages
- Commercial renters insurance, which covers you in the case of damages to rental property for which your business may be liable
All of these types of insurance, plus professional liability coverage, are typically included in a business owner’s policy. This is an insurance package meant to cover the needs of most businesses, although it may be customized to your particular situation.
For a deeper dive, see Do Therapists Need Professional Liability Insurance?
HIPAA violations
There’s another type of professional liability you should stay aware of when you’re practising therapy: The danger of violating HIPAA.
A HIPAA violation can result in civil or criminal penalties via the US Department of Health and Human Services’ Office for Civil Rights. In the case of criminal penalties, you may also be charged with violating state laws.
HIPAA compliance is a topic in its own right. For an introduction, two articles from the HIPAA Journal can serve as guides:
The best way to protect yourself is to make sure you’re fully educated by pursuing HIPAA training and education and by staying up to date with changes to HIPAA rules.
Key takeaways:
- Liability for therapists may be divided into two categories: Financial liability and professional liability.
- Financial liability includes business debts.
- Professional liability includes vulnerability to lawsuits for malpractice or other damages, and vulnerability to having complaints filed against you with your licensing board.
- Good financial practices and the benefits of the LLC business structure can help protect you against financial liability.
- The best protection against legal liability is a business owner’s policy that includes professional liability insurance.
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Confused about professional liability? Check out our article on whether therapists need professional liability insurance.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.
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