Kristy Baxter and Angela Stavropoulos, Associate Directors and co-heads of the medical division at Pilot Partners Chartered Accountants explain the importance of choosing the right business structure for your medical practice.
Commencing a medical private practice is an exciting yet nervous time for many medicos. A tremendous amount of work is undertaken before a practice can start. Subsequently, many medicos do not place much importance on, or invest in time to plan the right business structure for their practice. Opting for a “cookie cutter” approach to structuring or simply copying the structure of a colleague, could lead to risks in the future. A medical practitioner lacking understanding or using an incorrect business structure could be exposed in terms of their asset and wealth protection.
As a medical professional you can mitigate risk through professional indemnity insurance which should cover you in most situations against patient claims. However, there are many other potential circumstances or life events that can arise unexpectedly to compromise your assets and wealth accumulation. As your business grows you are exposed to employee risk, leasing risk, creditor risk and other business risk. Risk is not only limited to business risk as you are also exposed to risk in your personal life from day to day activities, for example, a motor vehicle accident. Ensuring you have the correct business structure will help mitigate against these risks.
Comparing different structures
When used properly, the benefits of a business structure can be substantial. To determine the correct structure for your business you need to consider the pros and cons of each structure or a combination of them. Our structure comparison chart highlights the main differences between each structure and can be a useful tool in making an informed decision with the help of your accountant.
It is important to be aware that a medical practice is not taxed like most other businesses. As a doctor’s income is earned due to their personal exertion, all profit earned within their business must be attributed to their personal name and taxed at their marginal tax rates. Therefore, irrespective of the business structure that is selected, the net profit of the business will be taxed in the doctor’s personal income tax return at their marginal tax rate. With this in mind, tax minimisation should not be the main consideration when determining the correct business structure. Other factors previously discussed such as risk mitigation need to be considered when determining the most appropriate structure. A doctor can choose from a combination of several different business structures to operate their private practice within.
A doctor who operates as a sole trader records all private practice income and expenses within their tax return. Although this structure is considered by many as being the simplest to establish and administer, it offers no asset protection benefits. Any assets that the sole trader personally owns are exposed to business and personal risk.
A doctor who operates through a private company structure, will report the net profit of the business in their individual tax return in the form of a salary and wage. Although the company is required to lodge an annual income tax return, it will have no tax to pay given the net profit is reported in the individual doctor’s tax return. A company is a more expensive structure to initially set up and administer each year when compared to a sole trader. Despite these costs, a company structure provides greater asset protection. A doctor’s personal assets are largely protected from business and personal risk.
A doctor who operates through a discretionary trust will report the net profit of the business in their individual tax return in the form of a trust distribution. The trust is required to lodge an annual income tax return and it will not be required to pay any income tax as the trustee of the trust distributes the net profit to the doctor each year. This structure can be the most expensive to initially set up and administer each year. Despite this, a discretionary trust offers the highest level of asset protection to the previous structures discussed. It provides a protective layer between the business assets and the personal assets the doctor owns in their own right, thus separating the business and personal risk from the doctor.
The right structure is likely to be a combination of the structures previously discussed. There are also many other factors to consider such as the use of a self-managed superannuation fund for wealth creation or the purchase of business premises. Additionally, you may consider the use of a service entity for separation of business risk. When considering what business structure best suits the needs of a medical practitioner commencing private practice, it is recommended that you seek the advice of a professional accountant.
It is important to note the business structure that suits you as a newly qualified medical specialist, may not be appropriate for your entire career. A business structure needs to be continually reviewed to ensure the needs of the medical practitioner are being met. At the start of your medical career, there is minimal wealth to protect and your priorities can be greatly different to your priorities as an established medico once wealth has grown. Even though cash flow is tight when you commence private practice, this should not be the determining factor for your chosen business structure. It is always worth investing in your structure to ensure you are set up with your long term goals in mind.
Correct structuring is extremely important if you plan to expand your medical practice in the future. Consider the situation where a sole medical practitioner has decided to expand the practice and wishes to bring in a new medico “partner” to the business. Alternatively, consider when a sole medical practitioner makes the business decision to employ more staff to assist in running the business. These common situations, although may make business sense, can also bring with it many risks to your initial structure. If you did not set up with this scenario considered it is likely that your existing structure does not provide the protection you need. Discussions around structuring should always consider your end goals. Some doctors successfully grow a private practice that can be sold upon their retirement. These doctors have likely considered this end goal from the outset when choosing their structure. However, there are many more doctors who retire from their practice with no saleable asset. If a saleable asset is your goal upon retirement, this needs to be contemplated when setting up your business structure.
As your business and personal priorities evolve over time, your initial structure may no longer be appropriate. It is always possible to review your structure and modify it if required, however there may be costs involved. Transferring a business or an asset to a new entity can incur significant costs including stamp duty and capital gains tax. Therefore the best and most cost effective option will be to invest time and money into getting the correct structure upfront. Continual review when changes occur to your business or personal life will help ensure your structure remains appropriate for your needs. It is recommended to regularly seek the advice of a professional accountant on these matters.
Invest in the right business structure
It’s important to choose the right business structure for your medical practice now and into the future. When considering what business structure best suits your needs, it is recommended that you seek the advice of a professional accountant. If you want to explore your options, please contact us for an introduction to Kristy Baxter and Angela Stavropoulos.