Factors to consider include set-up of the medical practice and ongoing costs associated with running the practice such as doctor wages and nursing costs, tax implications, asset protection and legal requirements. The four main structures are:
The owner is a sole proprietor who controls and manages the business. This structure is only appropriate if you are working as a locum doctor working part time. However, you need to consult your accountant or advisor to ensure that you have sufficient asset protection strategies are in place before you setup your structure.
- Simple and inexpensive to set up with minimal record-keeping requirements for legal and tax purposes
- The owner retains all the profits and is responsible for all debts and liabilities
- The owner has unlimited legal liability for all expenses and debts, which means that personal assets can be used to pay for business debts
- A sole trader pays tax as part of their personal income tax return at their marginal income tax rate – as the business earnings increase, so does the owner’s tax rate
- The business can easily cease or be sold.
A partnership consists of two or more people (up to 20) who hold joint ownership of a business. Partnerships are an effective way of combining expertise, knowledge, resources and additional finances to run a successful business.
- Partnerships are easy and fairly inexpensive to establish – a written partnership agreement is not mandatory but is strongly recommended
- Profits of the business are distributed to the partners who then pay income tax at their marginal tax rate according to their personal circumstances
- Partners don’t have to hold equal shares in the business, however, each partner is jointly and individually liable for all financial obligations of the business and there is unlimited legal liability for all partners
- Disputes between partners occasionally arise which may hinder operation of the business
- Transfer of ownership from one partner to another person can be complex. If a partner leaves, retires or dies, the partnership usually has to be dissolved.
Pty Ltd Company
A proprietary limited company is mostly used by locum doctors and even medical practices a separate legal entity with its own income tax liability. It is incorporated under the Corporations Law and is regulated by the Australian Securities & Investments Commission (ASIC). A proprietary limited company must have at least one director and one shareholder (who can be the same person) and can have up to 50 non-employee shareholders. Liability of the shareholders is limited to the share capital they have subscribed and any debts which they may have personally guaranteed, so the personal assets of shareholders cannot be seized to pay company debts. Company directors may still be liable for any debts, liabilities and legal actions held against their company. This type of structure would be useful for a small business which needs restricted liability with flexibility and tax advantages.
- Set-up and ongoing costs of a company are higher than those of a sole trader and partnership
- The process of establishing a company is complex and there are stringent tax reporting, administration and record-keeping requirements
- A company pays income tax on its taxable income for the year at a fixed rated (currently 30%)
- Transfer of company ownership can be relatively easy; the company doesn’t have to be wound up in the event of the death, disability or retirement of any of the key people in the business
A trust is an arrangement where one party, the trustee (either a person or a company), carries on business and holds assets for the benefit of the other parties, the beneficiaries. The most common form of trust is a discretionary trust, also known as a family trust. If you are operating the medical practice in a partnership situation, a fixed unit trust structure may be used to determine the fixed partnership entitlement for each partner doctor. All income of the practice goes into the trust and the trustee has the power to decide how to distribute the income to the beneficiaries. The rules by which the trust is managed are contained in a trust deed.
- A trust is a complex structure which has to comply with specific regulations, so establishing a trust needs to be done by a solicitor or accountant – this can be expensive
- Ownership of the business by a corporate trustee provides asset protection and limits liability in relation to the business
- Beneficiaries of a trust pay tax on income they receive from a trust at their own marginal rates, therefore, income distributed to children under 18 may be taxed at higher rates than adults
- Beneficiaries of a trust are generally not liable for the debts of the trust – assets of the trust may be controlled by the beneficiaries but they are not owned by them.
- You may be effected by the Personal Services Income regime.
The Associate Model
Associateship are a unique business structure for many doctors, where they allow doctors to carry on separate practices while splitting the business expenses.
Essentially, the doctors work independently and are relatively simple and inexpensive to setup, operate and exit. Accordingly, this structure overcomes some of the complexities in a partnership structure.
- The doctors run their practice under one umbrella or a business name.
- Each doctor operates under a separate legal entity for tax and legal purposes.
- A service type entity may be used to receive and distribute payments.
YOUR ACTION PLAN
- Make an appointment with your accountant and solicitor for advice on choosing the best structure for your business.
- Ask about:
- Establishments costs
- Maintenance costs
- Record-keeping and reporting requirements
- Tax implications
- Asset protection
- Selling, leaving or transferring ownership of the business
General advice disclaimer
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.