Medical practice set up: Choosing the right business structure for your healthcare practice

Introduction:

Calling all healthcare heroes! Are you ready to take the leap into entrepreneurship and start your medical practice? It's an exciting journey, but before you dive in headfirst, let's talk about something crucial: choosing the right business structure.

Should you go solo or partner up? What about incorporating? Don't fret, we've got the prescription for success. In this article, we will break down the different business structures and help you find the perfect fit for your medical services.

Importance of choosing the correct business structure for own medical practice

Choosing the correct business structure for your practice is a critical decision that can have long-lasting consequences. The business structure you choose will impact your taxes, liability, and operational flexibility. Different business structures, such as sole proprietorships, partnerships, LLCs, and corporations, each offer unique advantages and disadvantages.

Factors such as ownership structure, management, and taxation should be considered carefully to ensure that you choose the structure that best aligns with your practice goals. Selecting the wrong business structure for health professionals could result in unexpected financial liabilities, legal issues, and hindered growth opportunities. As a word of caution, you need to seek professional advice before moving ahead with a particular structure.

Things to consider before structuring your medical practice

Here is a list of ten factors that you will need to be mindful of while selecting the business structure options of your medical practice,

• Level of control over the business operations and decision-making processes
• Protection against personal liability for business debts and legal issues
• Costs and complexity associated with the formation and legal structure of the business
• Flexibility to adapt to changing business needs and opportunities in the future
• Tax implications, including the type and amount of taxes owed by the business and its owners
• Ongoing administrative requirements and compliance obligations
• Continuity of the business's existence, including its ability to survive ownership changes or unforeseen events
• Protection of assets and mitigation of business risks
• Adherence to industry regulations and compliance requirements
• Availability of exit strategies for business owners, including potential sale or transfer of ownership.

Types of business structure for medical practices

Let's explore the common business structures available in Australia for medical practices.

Sole trader

Sole trader is the simplest and most cost-effective business structure for individual medical professionals, especially those working under contract at hospitals, solo practice or in private practices. In the sole trader structure, the business is not considered a separate entity from the owner, and the owner's personal and business assets are not distinguished.

Medical practitioners operating as a sole trader may choose to register a business name or operate under their name. While they can hire employees or contractors, they cannot employ themselves as the term "self-employed" does not apply in this context. Additionally, they may operate multiple businesses under one Australian Business Number (ABN).

Advantages

• No sharing of profits over business income
• Increased flexibility to adapt to changes
• More personal control over decision-making

Disadvantages

• No protection against personal assets or liability
• Limited access to funding
• Less growth potential

Tax considerations

• The profit you make from your medical practice is included in your personal tax return and is taxed at your individual tax rates.
• Drawings you make from your business account are not considered salary or wages and do not have separate tax consequences.
• As a sole trader, you do not have an obligation to pay Super Guarantee payments for yourself, but can still make personal super contributions.
• You still need to comply with super guarantee, work cover, and other employer obligations for any employees you may have.
• If your practice generates a loss, it may be quarantined and carried forward until it can be offset by future profits.
• Small business concessions such as simplified depreciation, immediate asset write-off, and capital gains concessions may be available to you if your practice qualifies as a small business.

Partnership

A partnership can be a popular business structure for health professionals who want to work together to run a practice. The partnership allows for the sharing of resources, such as equipment and staff, as well as the sharing of risks and profits. In a medical partnership, the partners may be individual medical practitioners, or they may include other entities such as companies or trusts.

It is important to note that a general partnership structure for medical practices is not considered a separate legal entity, and all assets of the partnership are owned by its partners. This means that each partner is personally responsible for any debts or obligations of the partnership. As such, it is crucial to have a clear written partnership agreement in place that outlines each partner's roles, responsibilities, and obligations, as well as how to distribute income and loss.

Advantages

• Shared resources and expertise
• Risks and liabilities are borne mutually
• Inexpensive to set up

Disadvantages

• Disagreements and conflicts can affect operational continuity
• Profits are shared
• Lack of individual control

Tax considerations

• Partnerships must lodge a tax return to declare business income and expenses, but they are not taxable entities in themselves. The partnership must have its own ABN and TFN.
• Each partner is liable to pay tax on their share of the partnership's net income, which is distributed according to their contribution to the business.
• Partners can claim their share of any losses against their other income, subject to Non-Commercial Losses provisions.
• When the assets of a partnership structure are sold, capital gains are assessed to the individual partners rather than the partnership itself. Partners may be able to apply CGT concessions to their share of partnership assets.
• If the partnership's turnover is below the relevant threshold (currently $5 million), individual partners may be eligible for the Small Business Tax Offset of up to $1,000.

Companies

A company structure is a legal entity that is owned by shareholders and operated by directors. It can make profits, enter into contracts and be held responsible for its own debts, separate from its shareholders and directors. Unlike other business structures, a company can own assets in its own name. In Australia, all companies must register with the Australian Securities and Investments Commission (ASIC) and obtain an Australian Company Number (ACN).

Advantages

• Access to greater capital raising opportunities
• Ability to issue shares to attract investors
• Continuity of existence

Disadvantages

• Higher set-up costs and ongoing compliance requirements
• Ownership and control may be diluted if shares are issued
• Greater administrative burden

Tax considerations

• When income is paid out to shareholders as dividends, they are not entitled to certain concessions that may have been applicable to the income made by the company.
• Companies are not eligible for the 50% General CGT Discount.
• Company losses cannot be passed on to shareholders and can only be applied to reduce taxable income of the company in future years, subject to certain tests being met.
• A company structure provides limited liability protection to its shareholders, meaning that their personal assets will generally not be at risk in case of the company is sued by creditors.
• Shareholders are liable for the company’s debts but only to the extent of any unpaid amount of their shares

Services entities/ trusts

A trust is a fiduciary arrangement between a trustee, who legally owns the trust property, and beneficiaries who benefit from the property. It is not considered a separate legal entity, and its activities are governed by the terms outlined in the Trust Deed. While trusts have traditionally been used for asset protection purposes, they have recently become a popular option for structuring family-run medical practices.

To achieve the desired outcome, trusts are often used in combination with other entities. In a trust structure, a trustee (which can be a person or a company) conducts business on behalf of the trust for the benefit of the beneficiaries. Different types of trusts can be used, but the most common ones for medical practices are discretionary trust, unit trust, and hybrid trust.

Advantages

• Allows for succession planning and the seamless transfer of ownership
• Provides greater flexibility in managing and distributing assets
• Greater asset protection and tax benefits

Disadvantages

• Expensive to establish and maintain
• Complex income tax implications
• Difficult to dissolve or terminate

Tax considerations

• Trusts are required to register for TFN and ABN if carrying on a business and for GST if the annual turnover exceeds certain thresholds, but they do not pay taxes themselves.
• Trust income may differ from its taxable income due to certain factors, which can create complexities in allocating the taxable income to beneficiaries on a proportional basis.
• Trust income retains its character when distributed to beneficiaries, which can pass certain tax benefit to beneficiaries, such as imputation credits, small business offsets, and capital gain discounts.
• Trusts are eligible for a 50% general CGT discount (subject to a minimum holding period) and other CGT concessions, which can be passed on to beneficiaries.
• Tax losses incurred in a trust cannot be passed on to beneficiaries but must remain in the trust, and they may be applied against future income if certain loss utilization tests are met.

Your action plan when structuring a separate legal entity

So have you decided on the type of business structure that you would be incorporating for your practice? As experts in business setup, we have created the below action plan for you to ensure that you set up your healthcare business without much ado.

• It is recommended to schedule appointments with a healthcare accountant to seek professional advice on choosing the best business structures for your needs.
• During the appointment, you can ask about the establishment and maintenance costs of different business structures, including any ongoing record-keeping and reporting requirements.
• You can also discuss the tax implications of different structures and any potential tax benefits or income tax drawbacks.
• Another important consideration is asset protection, including the level of protection offered by different structures and any risks associated with personal liability.
• Finally, it's important to ask about the process for selling, leaving, or transferring ownership of the business, and how different structures may affect these processes.

Wrapping up!

A medical practice is an ambitious endeavor and should always be done right. Finding the best organization structure that works with your needs, requirements, and goals is essential. With the right legal formality in place, you will spend much more time concentrating on treating patients than dealing with sorting out paperwork.

There are a few different paths to choose from when it comes to setting up a healthcare facility and selecting the most suitable route can be a challenge; whether it be creating a limited company, public company or even setting up as a sole trader. Consider all of your options carefully before making the big decision; ideally, speak with professional advisors who specialize in this area.

When you're ready, contact CleanSlate for healthcare setup services - our experienced legal professionals will provide expert advice on finding the perfect organization structure for your healthcare practice and help with your recordkeeping needs.