“Maya Hernandez,” a Licensed Marriage and Family Therapist (LMFT) in Los Angeles, has practiced through a sole proprietorship for years. After her client base grew substantially, her CPA suggested forming a professional LMFT corporation.

The business entity would give her tax advantages and make it easier to hire employees in administrative roles, so Maya agreed it was the right move. But with year-end fast approaching, it quickly dawned on her that the timing of filing for incorporation is important.

When should she form the corporation? Should she incorporate in December or wait in January? Let’s walk through how we helped Maya determine best time to incorporate California LMFTs.

Why LMFTs Need a Professional Corporation — Not an LLC

California law strictly limits how you can structure your business if you are rendering professional services. As an LMFT, you cannot operate your clinical services through a limited liability company (LLC).

Under the California Corporations Code § 13400-13410, licensed mental health professionals with private practice can operate as:

• Sole proprietorship
• Professional corporation

Operating as an LLC when providing clinical and professional services will be in violation of the Moscone-Knox Professional Corporation Act.

Should You Incorporate Your California LMFT Practice Now?

Maya had been billing as a sole proprietor for years. In that time, her practice had grown significantly from referrals, contract work, and consulting. It came to a point where her CPA determined her net income could benefit from an S-Corp election.

Her growing practice also meant she needed administrative help in managing her clients. She also wanted a more solid foundation to:

• Supervise trainees and wanted clearer liability separation.
• Develop an online training program on couples therapy and systems work.
• Gain a professional structure for contracts with schools and community agencies.

It’s no longer a question of whether forming a California licensed marriage and family therapist corporation was the right move. It was only a question of when’s the best time to incorporate her California LMFT practice.

Does Timing Matter for LMFT Incorporation?

Choosing when to file your incorporation papers with the Secretary of State is more than just about your desired opening date. California has a unique rule only for corporations.

When you form your corporation determines whether you must file:

• A California short-year corporate return
• The $800 California minimum franchise tax
• A federal short-year return
• Additional compliance paperwork

Understanding year-end incorporation timing for California LMFTs helps you avoid unnecessary filings and choose the date that best supports your goals and financial strategies.

California 15-day Rule for Corporations Explained

California allows corporations to skip an entire year of tax filings if they qualify under the Franchise Tax Board’s 15-day rule. You may be exempt from filing for your first taxable year if you meet these two requirements:

1. Your corporation has 15 days or less in your first taxable year.
2. The corporation conducts absolutely no business activity in those 15 days.

For example, if you incorporate your practice on December 17 or later — and there’s no business activity — you can benefit from the following:

• No California return is required for that year
• No $800 minimum franchise tax is due for that year

You can also check the IRS Publication 538 for more guidance on Accounting Periods and Methods to decide on the best time to incorporate California LMFTs.

What Counts as ‘Business Activity’? What Can Corporations Do in Those 15 Days?

The date of filing isn’t the only requirement for California’s 15-day rule for corporations. You also need to make sure that regulators will not find any activity that would count as doing business

Business activity includes any action that shows the corporation has begun operating, including:

• Signing client contracts
• Billing or receiving payment
• Signing a lease in the corporation’s name
• Hiring staff
• Opening and using a bank account
• Providing services through the corporation
• Paying expenses corporately

Meanwhile, here are the activities you can do without breaking the 15-day rule:

• Filing Articles
• Obtaining an EIN
• Organizing corporate documents
• Preparing but not executing contracts
• Planning January operations

To be on the safe side, we advised Maya to focus on forming her California LMFT corporation. We made sure she understood that she must intentionally delay all operating steps until January 1 next year.

When Is Your California Return Be Due if You Form a Corporation in December and Remain Inactive?

From our example, if Maya forms her LMFT corporation on or after December 17, 2025 and conducts no business:

• California does not require a 2025 tax return
• Her first California return will be for 2026, due March 15, 2027 (if an S-Corp)

But she will still file a federal short-year return for December 2025.

Do Incorporated California LMFTs Need Pay the $800 Minimum Franchise Tax in the First Year?

No, the FTB exempts corporations from paying the $800 minimum franchise tax for their first taxable year.

You may also be exempt from paying the minimum franchise tax if:

• Your corporation did not conduct any business activity in the state throughout the tax year.
• Your first taxable year was only 15 days or fewer.

But even if you’re exempt from the minimum franchise tax, you’re still required to:

• File a 2024 California corporate return
• File a federal short-year return

This is why many professionals prefer forming after December 17 or waiting until January.

Does Forming Your Corporation in January Simplify Things?

Yes, it does. That’s why incorporating in January is common choice when forming a professional corporation.

Forming your California LMFT corporation in January provides:

• One federal return, not two
• One California return, not two
• No 15-day timing concerns
• No risk of accidental “business activity”
• Clean calendar-year bookkeeping

However, this also means you’re delaying your S-Corp benefits until January.

How Does S-Corp Election Timing Work at Year-End?

Maya can file Form 2553 to elect S-Corp status:

• Effective December 2025, or
• Effective January 1, 2026

However, most licensed therapists choose to file for S-Corp status on January 1 because it keeps payroll and compliance simpler.

Do You Still Need to File for the IRS Short-Year Tax Return?

Yes, because the IRS does not recognize the California short-year corporate tax rule or the state’s 15-day exemption.

According to IRC § 6012(a)(2), every corporation, including inactive ones, to file a federal return for any year in which the corporation legally existed.

If your corporation legally exists — even for 1 day — federal law requires:

• A federal short-year return (Form 1120 or Form 1120-S)
• Even with zero income, zero expenses, and zero activity

You can read more about federal rules on short-year tax filings from the IRS Instructions for Form 1120 (2024).

Comparing Your Options: The Best Formation Timing for LMFT Corporations

The best time to incorporate California LMFTs at year-end will depend on your financial goals. Maya had three options:

Option 1: Form Between December 17 to 31, 2025 — Most Popular for Tax Savings

Best if you want:

• No 2025 California corporate return
• No 2025 $800 minimum tax
• S-Corp status starting January 1

This requires strict inactivity until January 1 but offers a clean start to 2026.

Option 2: Wait Until January 1, 2026 — Most Popular for Simplicity

Ideal for LMFTs who want:

• No short-year federal return
• No 15-day rule compliance
• One clean calendar year of income and expenses

This is the most common choice that allows you to avoid complexities. But, again, you’re delaying potential S-Corp savings until next year.

Option 3: Form Early December 2025 — Only When Necessary

You can choose this route if:

• The corporation must sign contracts or leases before year-end.
• Operations must begin immediately.
• The LMFT is prepared to file short-year state and federal returns.

But this also means:

• You must file a 2025 state return.
• You must file a 2025 federal short-year return.
• You might owe the minimum tax depending on whether you qualify or not in FTB exemptions.

This is a less common choice, but sometimes necessary if there are corporate or business activities you cannot delay.

Real Client Example: How One LMFT Saved Time and Money Through Year-End Incorporation

After going through the state and federal rules and her options for her California LMFT professional corporation year-end formation, here’s what she decided to do:

• Form her corporation on December 18, 2024
• Stay completely inactive until January 1, 2025
• Make her S-Corp election effective January 1, 2025
• Open her bank account and sign new agreements in January 2025

Through this incorporation timing and strategy, she enjoyed the following benefits:

• No 2024 California return
• No 2024 minimum tax requirement
• One clean corporate year beginning January 1, 2025
• Full LMFT S-Corp tax strategy and benefits starting in 2025

FAQs: When to Incorporate My LMFT Practice in California

Can an LMFT practice be an LLC in California?

No. California does not allow licensed mental health professionals to operate their clinical services through an LLC. LMFTs may practice only as a sole proprietorship or a professional corporation under the Moscone-Knox Professional Corporation Act.

What is required to form a corporation in California?

The California LMFT corporation requirements include:

• Complying with LMFT corporation name requirements
• Filing Articles of Incorporation with the SOS
• Appointing officers and directors
• Adopting bylaws
• Issuing stocks to licensed professionals, according to CA Corp Code § 13401.5 (g)
• Obtaining an EIN
• Meeting tax-compliance requirements such as payroll setup if electing S-Corp status.

Should I incorporate my LMFT practice in December or January?

If you want maximum tax savings, forming December 17–31 and remaining inactive for the rest of the year allows you to skip filing the California return and $800 minimum tax. If simplicity is your priority, forming on January 1 avoids short-year federal filings and eliminates timing risks.

Do LMFTs pay the $800 franchise tax in the first year?

No. California exempts new corporations from paying the $800 minimum franchise tax in their first taxable year. If you qualify under the 15-day rule, you may also avoid the minimum tax entirely for that calendar year.

What counts as business activity for the California 15-day rule?

Business activity includes signing client contracts, billing, receiving payments, opening and using bank accounts, providing services, or signing leases. To qualify for the 15-day exemption, your corporation must stay fully inactive through December 31.

Form Your California LMFT Corporation with a Smart, Stress-Free Start to 2026

It’s true, there are a lot of state and federal rules you need to follow when forming a professional corporation toward the end of the year. But knowing your legal options provides you with potential tax exemptions and simpler filing requirements.

If you are like Maya and you’ve decided to incorporate now, our team can help you determine best time to incorporate California LMFTs based on your goals.

Our attorneys help LMFTs plan year-end timing, file correctly, and avoid unnecessary tax filings. Call Law Offices of Gale & Vallance today on (714) 634-4838 or answer our contact form to schedule a consultation.