Starting your own medical or health business is an exciting yet nerve-wracking time.
Choosing the most appropriate business structure (sole trader, partnership, discretionary trust, unit trust or company) is one of the first steps in that journey.
The right structure for your business will take into consideration:
- control
- tax, access to research and development (“R&D”) concessions, access to the CGT 50% discount, access to the small business CGT concessions
- flexibility or not to distribute income and capital
- limitation of liability
- compliance costs and complexity of the legal structure
- future plans for the business
- ongoing administration
- continuity of existence
- asset protection and risk
- industry regulations
- ability to recoup losses
- potential employee participation in the structure
- future funding requirements
- exit strategy and business succession planning
- the business owners’ estate planning
In Australia, the core business ownership and operating structures are:
Sole trader
A sole trader is where the business owner conducts the business as an individual, in their personal capacity. 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 are also generally more relaxed.
Partnership
A partnership involves two or more people (or up to 20 entities) controlling or managing the business. Partnerships are governed by the Partnership Act 1958 (Vic) and like the sole trader structure, a partnership structure is generally simple to set up.
An advantage compared to the sole trader structure is that business capital is grown by pooling resources or funds together.
The income and the expenses are split equally between the partners and the partners then report their income in their own right.
The disadvantages to this structure include liability - partners are liable for mistakes. For example, if one partner signs a disastrous contract or makes a bad business decision, all partners could face liability as a result.
Company
A company is an incorporated entity which is considered an individual in its own right – meaning the company is responsible for its actions, taxation obligations and financial reporting obligations.
A company acts as a vehicle to conduct the business, the owners essentially become agents of the company (if they are directors) and the decision makers for the purpose of creating shareholder wealth.
The advantages to registering a company is that owners can limit their personal liability. This gives the owners peace of mind knowing their personal assets are safe from creditors if the business were to fall into trouble.
A disadvantage to registering a company is that it is a more complex structure. At times there can be high set up and administrative costs and more onerous legal and tax formalities than with other business structures.
Trust
A trust, unlike a company, is not a separate legal entity.
The business’ income isn’t usually held in the trust, instead it is distributed out every year to the beneficiaries – the true recipients of the business’ wealth creation and the parties that are taxed.
Disadvantages to running your business through a trust includes the expense and complexity of set up and the fact that trustees can be personally liable for a trust’s debts.
The following table summarises the main business ownership structures and what they offer:
| Access to the CGT 50% discount | Yes | Yes | Yes | Yes | No |
| Small Business CGT concessions | Yes | Yes | Yes - subject to the significant individual test in some circumstances | Yes - subject to the significant individual test in some circumstances | Yes - subject to the significant individual test in some circumstances |
| Flexibility to distribute income and capital | None | Some depending on partnership agreement | Good | Limited but will depend on the classes of units on issue | Limited but will depend on the classes of shares on issue |
| Tax rate | Marginal tax rate of the individual | Tax rate of the partners | Tax rate of the beneficiaries. Trustee may also be taxed in some circumstances | Tax rate of the unitholders. Trustee may also be taxed in some circumstances | 25% or 30% depending on if the company is a Base Rate Entity |
| Ability to recoup losses | Yes - straightforward | Yes - losses will be available to the partners | Yes - subject to certain tests | Yes - subject to acertain tests | Yes - subject to certain tests |
| Access to R&D concessions | No | No | No | No | Yes |
| Asset protection | Poor - sole trader personal assets at risk | Poor - partners are jointly and severally liable for debts of the partnership | Good - increased with use of a corporate trustee | Good - increased with use of a corporate trustee | Good - corporate |
| Potential employee participation | Difficult | Difficult | Difficult | Yes | Yes |
| Future funding requirements | Can only be achieved with debt or partial sale | Can only be achieved with debt or partial sale | Can only be achieved with debt | Yes can be achieved using debt or the issue of units | Yes can be achieved using debt or the issue of shares |
| Compliance costs | Low | Low | Medium-high | Medium-high | Medium-high |
| Exiting and succession planning | Requires sale of business assets | Requires sale of partnership assets | Requires the sale of business assets unless family succession | Can be achieved through the sale of units - may be complicated if there is a Family Trust Election in place | Can be achieved through the sale of shares |
When looking at structuring your business correctly, 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 business is governed as it evolves over time.
Here at Burke Lawyers, our commercial lawyers have experience and expertise in advising clients owning and operating businesses in the medical, health and life sciences industries. Contact us today on +61 3 9822 8588 or email HERE to find out how we can assist you.
