When establishing a practice, choosing an appropriate structure for your business is perhaps one of the most important decisions you will make. Your structure is the legal entity through which you will interact with the business world and therefore sets the tax, legal and commercial parameters for your business.
In addition, for established businesses, no structure is a “set and forget” decision. Understanding the circumstances where you would review your ownership structure is also important to maximise your business for the future.
So how do you decide on a structure? And once in place, how do you know if it should be reviewed? The answer is, it depends. All of your personal, business and future circumstances are important when determining the most appropriate structure for you. No two businesses are identical and most importantly, no two business owners are identical. As each structure has its own advantages and disadvantages, your advisor’s recommendations should depend upon your individual circumstances. In essence, the questions to ask and the information to discuss, are just as important as the answers.
When considering where to begin, the questions to ask can be broken into three main areas:
- Questions about your business
- Questions about you and your circumstances
- Questions about the structure and how it works
- Questions about your business
Every business owner will have their own plan for their business. Some want to keep it small to provide extra private practice income to supplement their public work. For others they want to grow a large practice, with many doctors and continue to hold it beyond retirement, or look to sell at some stage. Understanding your plan, both current and future is perhaps the most critical issue when determining an appropriate structure. For example, some structures are not easily suited to bringing in business partners in the future and therefore a restructure may be required to achieve this, with associated tax, legal and commercial ramifications. Whilst plans can change, discussing your vision for your business will help advisors to determine what structure is best suited to those plans and how much flexibility is required.
Where you are looking to establish a business, some of the questions to discuss with your advisors include:
- Why are you going into business?
- What is your plan for your business?
- How are you going to fund the start up of your business?
- Do you plan to have business partners – now or in the future?
- Do you plan to build a business to keep, or build a business to sell?
Some prospective owners go to see their advisors to discuss their business ownership structure, but do not yet know the answers to these questions. Whilst you may not have all the plans laid out, it is important to know what you are trying to achieve in establishing your business. As advisors, our role is to help you achieve your goals. If these are not clear before you see your advisor, you risk establishing a structure that does not suit your business or plans. A better outcome is often achieved if you take some extra time to get clarity about your goals, so that you can discuss that with your advisor before establishing your structure, rather than expending time and costs on establishing a structure, only to have to change it later because it is not suitable.
For practices that are established, the question is often raised – “should I consider a restructure”? Ideally, when structuring, we start with the end in mind. This is because restructuring the ownership of your business can be an expensive and time consuming process. It is not only the tax implications (capital gains tax, stamp duty etc), but also the commercial implications. If you change your structure, you often have to consider also changing your legal arrangements, supplier agreements, employment contracts, banking details (including Medicare). It is not something that is done easily or quickly. So why would you consider a restructure? The most common reason is because either the structure that was set up initially did not consider the issues above and is not suitable to the business plans, or, the plans have changed and the structure that was established is no longer suitable.
If you are concerned about whether this is the case for you, some of the questions to discuss with your advisor would include:
- My business plan has changed – do you think my structure is still suitable and why/why not?
- If not, do I have to restructure to achieve my goals – can it be done another way?
- Why is the suggested restructure better than what I have now?
- Are there any reasons why I would consider a restructure?
As an owner, your business structure will determine a raft of items which will have implications for you personally. Issues such as understanding how profits are paid to you, how tax will apply as well as any legal and commercial obligations will determine how easy it is manage and work with your practice ownership structure.
In other words, it is you and your family that will need to work within a business structure, so it is important for your advisor to understand any relevant personal circumstances before giving advice. Some of the common items to discuss include:
- What is your family structure – eg: are you providing for family members such as children?
- Do you have any asset protection concerns?
- Do you have family members who will be involved in the business?
- Who will make the decisions regarding the day to day operations and also the strategic aspects of the business?
- Do you have any other family concerns that are relevant, for example: divorce, step-children?
- What are the practical implications for managing the structure – who is authorised to sign documents and access the bank account?
This is perhaps the broadest area to discuss because it can include taxation issues, legal issues, banking, employment and other commercial issues. It is rare for one advisor to be able to answer all of these questions, which is why it is important to have a team of advisors, who regularly communicate about your affairs, so that you can get advice on any issues that are relevant in your decision.
For example, as accountants and business advisors, we will advise you on the tax and business issues for your structure. We do not advise on the legal matters and will often work with your lawyer who will address these areas.
From a taxation perspective, understanding how tax applies to a structure and any profits you receive will certainly influence the choice of structure. It is also critical for you to understand how the various structures practically work from a business perspective to assist with budgeting, record keeping and cashflow management of your business.
Some of the questions to ask regarding the tax aspects of your business when establishing a structure include:
- How do the tax rules apply to this structure?
- Are there any proposed tax changes that might affect this structure?
- What happens from a tax perspective if I want to sell my business?
- What are my broader tax obligations, for example GST and employer obligations?
- Who else should be involved in assisting me in understanding my obligations with this structure?
- From a tax perspective, how do the different structures work (eg: a company vs a trust)?
- Why are you recommending one structure as opposed to another?
- What are business benefits of one structure as opposed to another?
When an established business is considering a restructure, it is critical that your advisors work together, within their areas of expertise, to address the various issues, which include:
- What are the tax issues or costs associated with restructuring?
- If a restructure is recommended for business purposes, are there any differences in how tax will apply to the new structure?
- If I change my structure, what are the implications for my business from a legal and commercial viewpoint (for example; banking arrangements, employer arrangements, practice management and Medicare/health fund arrangements)?
- Is there anything else I should think about?
When considering the ownership of your business (either new or existing), one of the most common questions we hear from clients is “my friend has a business structure that is a …. why can’t I just do the same?” I think of this as a great place to start, but not finish. It is seeking to understand whether a structuring recommendation is right for you. A question such as this can be the start of many more and will give you every chance to flush out the issues that are most relevant for your decision. The questions are just as important as the answers.
Disclaimer: The information contained herein is of a general nature and is not personal advice as it does not consider or address the circumstances of any particular individual or entity.