Ryan Scott, Burke Lawyers
Business Structure: What are the options?
Sole trader: A sole trader (also known as a sole proprietorship) is the simplest and cheapest structure. The sole trader owns and operates the business in their own name, has complete control of the business’ activities and retains all profits. From a governance standpoint, there are fewer legal and regulatory requirements, and start-up costs are low.
Under a sole proprietorship, the owner is personally liable for all debts and third-party legal claims, as there is no legal separation between the owner and the business. For high-risk professions such as medicine, this exposes the owner’s personal assets to the business’ creditors.
Partnership: A partnership involves two or more partners carrying on a business together. In a partnership, profits and decision-making responsibilities are shared between the partners. This business structure also allows partners to share resources and skills. In a medical context, this means that two or more practitioners can combine their patient bases and capital to establish and accelerate the growth of a medical clinic.
The main disadvantage of a partnership is that each partner is jointly and severally liable for the partnership’s obligations. This means that each partner can be held personally responsible for any debts or legal claims against the partnership, or the actions of another partner.
Company: A company is a separate legal entity that can buy and sell assets, incur debts, and enter into contracts independently. Owners (shareholders) appoint directors to manage the day-to-day operations.
The key benefit of a company is that its shareholders’ liability is limited to the value that they have invested in the company via the purchase of shares in the company. Directors also cannot generally be held personally liable for the company’s debts, unless they have acted negligently or fraudulently, or where the company trades while insolvent, or where the company’s taxation, employee entitlements, employee superannuation guarantee, or workplace health and safety obligations are not complied with. Generally speaking, this means that except in these circumstances, personal assets of a company’s shareholders and directors cannot be realised to satisfy the company’s debts or legal claims.
However, companies are more complex and costly to set up and are more highly regulated. For example, companies must be registered with the Australian Securities Investment Commission (‘ASIC’), comply with reporting and record-keeping obligations, and pay annual fees.
The key benefit of a company is that its shareholders’ liability is limited to the value that they have invested in the company via the purchase of shares in the company.
Trust: A trust is a legal relationship between two parties:
(a) The trustee (often a company), whose primary role is to hold property or assets on behalf of another party, being:
(b) The trust’s beneficiaries, who are entitled to the income derived from the property or assets being held by the trustee, and the capital of the trust.
Trusts can be used to operate a business. In this scenario, the trustee manages the day-to-day operations of the business, and holds the business’ assets and income on behalf of the beneficiaries.
The main advantage of trusts is that they can offer stronger asset protection. As the beneficiaries do not legally own the trust’s assets (and often have no fixed entitlement in them), those assets will generally be protected from creditors in the event that one of the beneficiaries is declared bankrupt.
However, trusts are more costly and complex to set up and maintain, and place more administrative burden on all parties involved. The trustee must comply with the rules set out in the trust deed (which is prepared and executed when a trust is established), make an annual resolution on income distributions, and lodge a separate tax return for the trust.
Key Considerations When Choosing a Structure
Future Growth
If you plan to grow your business (for example, by admitting other practitioners, attracting investors, or setting up a multi-site practice) a trust or company is usually the most flexible structure. In a company, issuing or transferring shares allows smoother ownership changes. Meanwhile, unit trusts can accommodate new unit holders entering.
In comparison, a sole proprietorship cannot have co-owners and partnerships can be dissolved or otherwise become unwieldy as numbers grow.
Owner Contributions
It is important to consider how owners will contribute and choose a structure that accommodates those contributions fairly. For example, if one owner is providing most of the start-up capital while another is contributing labour and professional skill, the structure and written governing documents must reflect this.
Companies, partnerships, and certain trusts have the ability to accommodate unequal ownership shares.
Profit Sharing and Income Distribution
The method used to distribute profits depends on the chosen structure.
In a partnership, profits are distributed to the partners in accordance with the terms of the partnership agreement. In a company, profits belong to the company and directors are often paid a salary or director’s fees and dividends, if they are also a shareholder.
Depending on the type of trust, the trustee may have discretion to distribute income and capital based on each beneficiary’s interest in the trust or other metrics, such as the amount of income generated or the number of hours worked by practitioners. Due to the flexibility with profit distributions in some types of trusts, trusts are commonly used to operate medical or health-related businesses.
Regardless of your chosen structure, adequate professional indemnity and public liability insurance… is essential.
Asset Protection and Risk Management
Healthcare providers are exposed to a higher level of personal risk than many other professionals, due to the nature of the services they provide to patients.
Trusts often provide the benefit of asset protection, if structured correctly, as the business’ assets are legally owned by the trustee. However, this is dependent on the nature of the relationship between the controllers and the trust, and it being properly documented.
Companies provide some level of protection. However, directors can be held personally liable in certain circumstances.
Sole proprietorships and partnerships are rarely used to operate medical or health-related businesses, as the personal assets of the owners and partners are fully exposed to the business’ creditors and claimants.
Regardless of your chosen structure, adequate professional indemnity and public liability insurance for the business and key personnel is essential.
Tax Considerations
As choice of structure may have a significant impact on the amount of tax paid in the operation and future sale of the health business (including income tax, payroll tax and capital gains tax), great care and professionally qualified advice is required in establishing the most appropriate structure.
Ryan Scott is a lawyer in the Commercial, Business and Private Client Services Division at Burke Lawyers, a law firm based in Melbourne, Victoria. He works closely with medical and healthcare professionals and their businesses, helping them to achieve their business goals while effectively managing risk. Mr Scott’s core practice areas are contract law, commercial and business advisory, business transactions (mergers and acquisitions), corporate governance, dispute resolution, business succession planning and asset protection.
