Structuring and setting up your business
Whether you are planning to start a private practice or are already established, it is critical to obtain the right advice about how to best structure your business to suit your needs.
The right structure will not only consider what your business needs now, but what it may need in the future to allow you to realise your long term objectives.
Getting your structure right when you set up a business is very important as it can often be difficult and costly to change structures once your business has commenced. However, even if you are already established, there may be reasons to consider changing your business structure, particularly as your business grows.
There a number options available for running your business, and it’s not a case of “one size fits all”. In this first in a series of articles, we will explore the various business structures available to you.
An alternative to operating your own private practice as a sole trader is to work for other medical practitioners as an employee.
Working as an employee provides you the opportunity to work in private practice without establishing your own business, and provides for greater security with regard to income and responsibilities. The benefits of working as an employee include:
- Receive set salary on a regular and consistent basis.
- Entitlement to paid sick leave annual leave, and any other leave available to you under the National Employment Standards (NES) which set out the national minimum employment entitlements that must be provided to all employees.
- Employer provides workers compensation and other insurances.
- Provision of fair conditions as required by the Fair Work Act 2009.
- Your salary is subject to Pay As You Go (PAYG) Withholding tax, based on your marginal tax rates. Your employer will make the payments of tax to the Australian Taxation Office (ATO) during the year, which is deducted from your gross salary each pay period.
- Your employer must make payments of your Superannuation Guarantee. This is generally calculated at 9.5% of your gross ordinary time salary/earnings.
- Ease of meeting individual taxation requirements.
- Personal Service Income (PSI) rules do not apply if you are an employee receiving only salaries and wages.
- You are not personally exposed to the debt and losses of the employer and private assets are not at risk.
- You are under instruction as to what your job entails and who you should report to.
- You may also receive allowances in addition to your salary for laundry or uniforms.
However, the added security and reduced responsibilities of working as an employee are at the sacrifice of the opportunities available to sole traders – freedom, flexibility, control, and entitlement to potential profits of a successful business.
Stepping away from an employee relationship
Once you decide to step away from a common employee relationship there are many different things to consider. Many of these relate to the day to day operations of a business and will most likely be present regardless of what structuring vehicles you choose to use. Others will be tax and compliance focused and can vary from one structure to another.
Considerations for starting your own business include:
- You can have full control and management of your business.
- You will be entitled to the profits of the business and any increase from additional hard work on your behalf will be directly attributed.
- Debts and losses are not shared with others.
- You have full responsibility for the running of the business including clients, advertising and marketing, professional development, financial transactions, maintaining business records, taxation and superannuation, and staffing.
- No or less collegial support in management of workload.
- Responsibilities regarding the letting and subletting of room/s.
- You will need to put aside money to pay your tax at the end of the financial year – generally the ATO will require you to pay quarterly PAYG instalments during the year.
- If your annual turnover is $75,000 or more, you will need to register your business for Goods and Services Tax (GST).
- You are responsible for payment of your own superannuation and you may be able to claim a tax deduction for personal contributions you make to your superannuation.
- Potential loss of income in the case of injury or illness.
After considering the above you then need to consider the best structuring vehicle in which to run your business. Following are the options available to you.
As a sole trader, you carry on your business under your own name as an individual rather than that of a company, trust or partnership.
Such a structure can function in various ways, such as your private practice operating out of your own room or rooms, working out of your own rooms and subletting to others, or subletting rooms from others.
- Simplest and cheapest business structure.
- Fewer tax compliance obligations as business income and expenses are reported through your individual annual tax return- no need to prepare a separate set of management financial statements and income tax returns.
- You are entitled to full profits of the business and withdrawing the funds is simple.
Challenges and considerations
- You are legally responsible for all aspects of the business and have full exposure to loss of private assets such as your home.
- You may experience restricted access to some work in circumstances where a company business structure is required.
- There is limited opportunity for tax planning.
- Your income is taxed at individual marginal rates which in some circumstances can be significantly higher compared to other structuring options.
- You will need to apply for an Australian Business Number (ABN) and use it for your business dealings and transactions.
- Only suitable to individual practitioners.
A Company is a separate legal entity and as such a business run through a company will have a degree of separation from the individual personally at a structuring level.
Companies can be a useful vehicle but for health professionals earning consulting income only they have their limitations, as discussed further below.
- It is a structure based on shareholdings which will make admitting future colleagues into the business easy to quantify and administer.
- Offers an additional layer of protection for personal assets, but due to nature of medical liabilities a company won’t limit all risks.
- You may be eligible for small business tax concessions.
- Access to set tax rates which can be significantly more favourable than individual marginal tax rates in some situations.
Challenges and other considerations
- There are director duties imposed by the Australian Securities and Investment Commission (ASIC) to all directors and if these are breached it can limit or even remove the asset protection offered by companies.
- Profits earned by the company need to be paid out via a dividend to the owner. If the company “loans” amounts out to the owner it can cause tax complications.
- Profits can only be distributed to shareholders and in line with the shareholding proportions.
- If the income earned is solely from the efforts of the individual health professional then it may need to be passed out to them personally due to the personal services income (PSI) ruling which may lead to taxation treatment similar to that of a sole trader.
- Tax planning can be limited as the company is forced to pay tax at set rate and funds distributed in line with ownership.
- The company will need to apply for its own ABN and tax file number (TFN) and use it for its business dealings and transactions.
- If you own your practice building, the land tax is greater than that if held individually or via a trust. However for risk management it is advised to hold your practice property in a different entity to your active business.
- There will be greater compliance obligations with the need for annual management financial statements and income tax returns to be prepared for the company.
- Additional ASIC fee each year will be payable to hold the company (in 2018 this annual ASIC review fee was $263).
Trusts are a very popular vehicle for businesses as they offer similar protection for personal assets to that of a company, but with added flexibility which can be desirable at tax planning time.
- Protection of personal assets from business risk with the trust being considered separate from the health professional/s involved.
- The trust can have various beneficiaries (people or entities who receive income from the trust) which allows greater tax planning opportunities.
- You may be eligible for small business tax concessions.
- Potential to spread income across multiple individuals and entities which can potentially take advantage of Australia’s tiered tax system.
Challenges and other considerations
- You must ensure the trust follows the rules set out in the trust deed- note newer deeds are a lot more flexible and can ensure the vehicle is suitable for the business requirement.
- Profits can only be distributed to beneficiaries of the trust. If the income earned is solely from the efforts of the individual health professional then it may need to be passed out to them personally due to the PSI ruling which may lead to taxation treatment similar to that of a sole trader.
- It can be hard to admit new partners to a discretionary trust structure due to its discretionary beneficiary entitlements – instead, a separate structure would often be used.
- The trust will need to apply for its own ABN and TFN and use it for its business dealings and transactions.
- If you own your practice building, the land tax is greater than that held individually, although as noted above it would be recommended to hold this separately to the business vehicle for risk management.
- There will be greater compliance obligations with annual management financial statements and income tax returns being required to be prepared for the trust.
A unit trust operates like a discretionary trust in terms of a trustee holding assets on behalf of the trust, however rather than sharing profits with beneficiaries on a discretionary basis, the profits are distributed via unit holdings (similar to how shareholdings work in a company).
For some health practitioners who want to potentially expand their business in the future by adding new members, but don’t want a company, this may be a preferred option.
A partnership is a group of people or entities who carry on a business and distribute income or losses between themselves.
It should be noted that a partnership can be made up of any of the above mentioned structures and once the income or losses transfer to the relevant partners it will be treated according to the chosen partner vehicle (i.e. individual, trust or company)
In the next edition of the ADE, the accounting and tax team at LDB Group will explore further considerations with structuring your business including consideration of PSI and service entity arrangements.