Changing Your Medical Practice’s Legal Structure – Is It Time?
Running your own medical practice is an exciting yet challenging venture. Practitioners who have their own practice must navigate various administrative and legal complexities, one of them being their medical practice structure.
As medical legal advisors, we’ve seen how the right structure can help practitioners avoid legal headaches, and how the wrong structure can create them. We have also helped medical practices grow, utilising legal structures that allow for this.
If you’re wondering whether the legal entity of your medical practice is the best one for your circumstances now, and to position yourself for future growth, this article will help to simplify the common medical practice entities in Australia, to help you know when it might be time to change yours.
Different Types of Medical Practice Structures
Sole Trader
Sole traders are self-employed medical practitioners who typically run their own practice. This entity is often seen in doctors who are just starting their business, independent practitioners, and locum doctors. If you’re a sole trader, you’ll typically be running your practice yourself with an Australian Business Number (ABN).
An example of this could look like: Dr. Jane Good Doctor (ABN).
Running as a sole trader has many benefits. It’s simple and cheap to set up and you’ll have full autonomy over your practice decisions without needing approval from other partners (i.e. trading location, applying for permits and licenses). Additionally, you can also claim certain business expenses as a personal tax deduction.
However, there are also drawbacks to being a sole trader. You’ll be personally liable for your business decisions, and scaling your business may be an issue. Your personal assets can also be at risk if your business is subjected to any liabilities (sometimes beyond your control). For example, if you were to get a medical negligence claim against you and your practice, your claim could be more than the insurance will pay out. Many medical practitioners move to a different entity to expand their business, because being a sole trader is not a recommended structure for growth.
Partnership
A partnership for medical practices can be structured in a couple of ways. It could be with you and your business partners personally, or it could be people with another entity, which could be a company in partnership with other companies. It’s important to know that a partnership isn’t a separate legal entity, and you’ll be sharing your business profits, expenses and risks with your partners. If you are in partnership in your own individual names, your income will then be reported as personal income and will be taxed at your marginal rate, even if it’s not income that is the subject of personal services income tax.
We typically see this type of medical practice trading entity when two doctors work side by side, such as ‘Jane and John Medical’. While partnerships give you autonomy with a trusted person, there are legal risks to this structure.
As a partner, you are legally responsible for all of yours and your partner’s liability, including for example if your partner is responsible for an insurance claim, or has done something wrong with Medicare billing, then you could be equally liable to pay that debt. Like a sole trader, this puts your personal assets at risk for issues that are beyond your control.
Company
Companies are separate legal entities from an individual. A company typically has its own name, can own properties, and can also enter into contracts with external parties - among other things.
If your medical practice is registered as a company, your practice typically earns income either from patients or from providing services to independent practitioners and pays business expenses (like employing admin staff/ nurses/ rent etc). Any remaining profit is then distributed to the doctors or owners. A company entity’s name would typically be something like ‘Your Medical Practice Pty Ltd’.
Structuring your medical practice as a company is a good structure from a legal and risk perspective. Especially if you’re planning to scale your practice and get more patients. As a company, you can better establish your practice for long-term growth, get tax benefits, and run your company with other medical practitioners – even if you choose not to be a doctor in that practice in the future.
Think of setting up your medical practice as a company like creating a new person in your family. While it may be more costly to set up (and pay the annual compliance costs for) than a partnership or as a sole trader, you absorb less risk should anything go wrong.
Trust
A popular structure we see among medical practitioners is the trust structure. This provides an additional layer of protection. In this structure, a trustee (either an individual or a company) operates the business and distributes the profits to its beneficiaries. Broadly however, we ordinarily suggest having a company as trustee rather than an individual or individuals personally. For example, it could be ‘Your Medical Practice Pty Ltd as trustee for Medical Trust’.
You can set up a trust through a formal trust deed, a legal document that outlines how the trust will operate.
There are two different types of trust we typically see for medical practices:
Unit trust: The trust is divided into units, and profit distribution is determined by how many units a beneficiary holds.
Hybrid trust: This is a mix between a unit trust and a discretionary trust (where the trustee makes decisions about profit distribution to beneficiaries). It can give the parties more flexibility.
It’s important to note that trusts are not separate legal entities. If you are a trustee personally, you are legally responsible for the management of the trust and legally liable for its debts.
If you have a medical practice company, setting it up as a trustee gives you an added layer of protection from risk. It also better facilitates the company's succession.
What about if I have multiple medical practices?
Here is the true but typical ‘lawyer answer’: It depends. We have clients who put their different medical practices as different entities, for example because they are in different states and therefore different tax laws apply or because they want to have different parties become owners in due course. There are risk, reporting and staffing implications to be mindful of when considering this strategy.
It is worth having a discussion with your accountant about this topic. If your multiple practices are currently structured through the one entity, there are likely going to be costs and potential tax implications, to move to three separate legal entities. Proper tailored structuring advice would be appropriate if this is the stage you are at.
How to Identify When Your Medical Practice Structure Needs Reviewing
Changing your medical practice structure is an issue that’s determined by a practitioner and practice’s unique circumstances. You know how you tell people not to use Dr. Google, here is a legal example of that – you could go through Google and online searches of structures, but what is important is tailored assistance and working with somebody who is going to look at your whole situation. If that person has experience in the health and medical sector that would be extremely beneficial. Generally, we see practitioners change their trading entity as the business (and risk) grows.
Here are some common scenarios that can help you identify when it's time to change your medical practice structure.
Your existing structure is getting too complex, expensive, and confusing to administer, and you’re looking to simplify your trading entity.
You’re planning to sell your practice, retire, or begin succession planning. It’s important not to leave this to the last minute, and plan at least 8-10 years early for succession.
You have intangible assets (i.e. software, trademarks and licences) that need to be protected but are currently at risk in your existing business structure.
Your existing medical business structure is not suitable to admit another owner, and you would like to do that.
If you’re making lots of profit and your business income is taxed at the highest rates, and you want to review the efficiency of your tax structure.
You’d like to access concessions, losses and low-income benefits, along with tax rebates using a different business structure.
You’d like to reduce your personal liability and secure your assets.
You’ve had the same business structure for decades, and it hasn’t been reviewed.
Changing Your Medical Practice Trading Entity: Final Thoughts
Changing your medical practice structure may be easier, and produce more benefits, than you think. If you believe your existing structure is putting your business at risk, minimising profitability, hindering your succession planning, or is simply outdated, there’s no better time to assess whether you should change your structure than now. The right legal advisor will be able to offer sound advice that’s suitable at every stage of your medical practice journey.
Depending on your structure, having a comprehensive and sound Agreement (e.g. Unitholder, Equityholder or Shareholder’s Agreement) in place is also important for your risk management. It is like having an insurance policy to secure the future of your practice.
Our team has extensive experience in providing advice and insights into best practices for medical practices. To discuss the various ways we can help, contact our team here, and we will put you in touch with the best professional for your needs.