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January 22nd, 2019
Starting your own medical practice is an exciting but nerve-wracking time. You want to do things your way and therefore your business structure carries a lot of weight.
Used properly, the benefits of a good business structure are substantial. Your structure will govern business operations, streamline operations to ensure effective and efficient practice, and it will help you to make important business decisions. Your chosen structure can:
Yet surprisingly, medical practitioners don’t often put much emphasis on the right business plan. Instead they opt for a ‘cookie cutter approach’, replicating the structure of a colleague. This can lead to problems down the track and it won’t give you the competitive edge you’re looking for.
The structure you operate your medical practice through will provide you with both benefits and limitations. To determine the correct structure for your business, you need to consider the pros and cons of each available structure.
There are four main business structures in Australia:
A sole trader is a doctor conducting business as an individual. Whether it’s locum work, full-time contracting or running a practice, you are considered a sole trader if there are no other entities involved.
A sole trader is the simplest and least expensive business structure in terms of set up costs, and sole traders face very few legal and tax formalities. The rules regarding keeping records, auditing and filing and generally more relaxed, too.
A partnership involves two or more people (up to 20) controlling or managing the business. They are governed by a Partnership Act, but like the sole trader structure, a partnership structure is generally simple to set up. A big advantage compared to sole trader is that your capital is grown by pooling resources or funds together.
In the medical profession, partnership is an old-fashioned way doctors set up practice together. The income and the expenses are split equally between the parties and the parties then report their income on their own right. There are disadvantages to this structure, however, as all partners are liable for mistakes. If one doctor signs a disastrous contract or makes a bad business decision, you all face the consequences.
A company is an incorporated entity which under law is considered to be an individual in its own right – that is, the company itself is responsible for its actions, its taxation obligation, its civic obligation and its financial reporting obligation.
A company acts as a vehicle to conduct business, and you, the medical professional, become an agent of the company and the decision maker for the purpose of creating shareholder wealth. In most cases the agent and the shareholder are one and the same, so the company acts as the intermediary for your personal medical expertise.
The advantages to registering a company is that you can limit your personal liability. This gives you peace of mind knowing your personal assets are safe from creditors if your business were to fall into trouble. The main disadvantages to registering a company is that it’s the most complex structure. At times there can be high set up and administrative costs and more onerous legal and tax formalities than other business structures.
A trust is an entity of which a medical business can practice through but unlike a company, it’s not a separate legal entity. A trust has the sole purpose of organising and accumulating wealth for the benefactors of the trust and it uses the trust deed to set down the rules on how the wealth in managed.
Your practice income is never held in the trust, instead it is distributed out every year to the beneficiaries – the true recipients of the wealth creation and the entity that is taxed. The trust can provide many wealth creation strategies for your business if set up correctly, offering the lowest marginal tax rates to minimise the aggregate tax beneficiaries pay.
The disadvantages to running your business through a trust include the expense and complexity of set up and the fact that trustees can be personally liable for trust’s debts.
When looking at structuring your medical practice, it’s important that you receive tailored advice to meet your specific circumstances. A common misconception is that business structures should be set in stone, when in reality, there is every chance you will need to re-evaluate how your practice is governed as it evolves over time. As an example, a new practitioner will likely have limited cash flow and therefore, little priority for protecting assets whereas an established practitioner will likely have long term investment goals which have shaped their business decisions.
The best practice approach is to seek the advice of a professional accountant who understands the practice structures and can help you make smart financial and business decisions.
There are ten main factors to consider when choosing a business structure:
MEDIQ Financial offers a comprehensive service that’s specifically designed for medical professionals. We can walk alongside you as you manage:
Our professional team is highly qualified and offer specialist knowledge of the medical industry. We’ll work collaboratively with you to offer a complete financial compliance and wealth creation service that’s tailored to your needs.
Get your free consultation and receive advice you can trust. Let our specialist knowledge be the catalyst to your strong future.