Business structuring for medical practitioners

Poor business structuring is the biggest cost in business.

There are a plethora of reasons to consider the impact that structure can have on your medical business. The key reasons include:

Optimising your tax position

As tax law becomes more complex, the need to consider the impact of business structuring becomes more important. A poor choice of business structure will ultimately result in you paying significantly greater tax than you otherwise should, thus reducing the buying power of your income.

The choice for business structure, while an important decision, is not always an easy decision and can be fraught with danger when acting upon the wrong advice. In making such a decision, we consider the following to be some key points involved in the choice of tax structure advice:

• Distribution of income to low rate taxpayers (30% for companies, 15% for superannuation funds and up to 46.5% for individuals);
• Accessing capital gains tax discounts and the Small Business Concessions upon exiting your business;
• Accessing valuable superannuation deductions to plan for your retirement;
• The impact of Personal Services Income legislation; and
• Litigation from the Australian Taxation Office (ATO) in respect of tax avoidance and evasion.

A common business structure for a medical practitioner is identified in the following diagram:

Example

During the 2010 financial year, John (45) operated his medical practice which generated net income of $300,000 per year after business and superannuation deduction. John’s wife, Elizabeth (44), is unemployed as she maintains the family home and plays the major role in raising their two children who are both under the age of 18 years.

John has previously received some wayward advice that the sole trader structure would achieve optimal tax results. The business profits are assessable to John personally and taxed at his marginal rate, resulting in an annual personal tax liability of $114,350, roughly 38% of the net business income.

Now consider John operating under a structure such as that described above. Profits from the provision of support services to the medical practice (say $50,000) will be taxed with the service entity at corporate tax rates of 30%. The remaining profits ($250,000) will be distributed to John, Elizabeth, their two children and a corporate beneficiary in order to achieve the best possible tax position. This also provides Elizabeth with an opportunity to make a tax deductible superannuation contribution. The arrangement reduces the families overall tax liability to $73,500 annually, roughly 26% of the net business income.

Legal liability

Often businesses are exposed to risk through their various business dealings whether the risk be resultant of claims from creditors, staff or in the case of medical businesses, patients. Legal liability of businesses and business owners go hand in hand and the choice of business structure will ultimately determine the exposure of your business and personal assets. Consider the example provided above.

If John were to face a lawsuit from a patient in respect of the medical services he has provided through his sole trader business, the assets of his sole trader business are completely exposed to any liability John may incur as a result of the case. Further, the nature of a sole trader business is that John’s personal assets (e.g. home, car, holiday house) are also fully exposed to the liabilities incurred.

By means of including a company and/or trust in the mix of your business structure, PKF can assist you to manage your business risks to minimise their impacts upon your personal lifestyle choices.

Business growth and succession planning

Key to the business structure decision making process is giving consideration to your plans for the business. A simple structure such as a sole trader business may provide for adequate access to resources in the early years of your business. As your business grows however there will undoubtedly be a need to access resources beyond that which you can provide personally. Important resources will include:

• Entrance of new business partners and identifying strategies to ensure equitable financing by all partners;
• Debt funding from financial institutions and the most commercially viable means of achieving the desired level of funding; and
• Access to intellectual property and a greater range of professional medical skills.

Poor choices in business structuring will lead to a lack of available resources in your business and ultimately an underperforming business.

No doubt your exit plan will include an objective to achieve the highest possible price. We can assist you in developing a strategic structure that ensures business continuity to achieve that price and to retain the esteemed brand for your remaining business partners which you have collaborated to develop over the years.

Corporate governance and reporting requirements

The introduction of companies and trusts into your business environment raises important matters in respect of corporate governance, your role as a director and reporting requirements. These matters are largely governed by law such as the Corporations Act 2001 and breaches of these laws will result in serious ramifications for your business and your family who rely upon it as a source of income.

To learn more about financial solutions, see Medical Alliance.

(Source: Medical Alliance: October 2009)