INSIGHTS: Choosing the right business structure

Whether you are entering into an existing professional health practice or other business, intending to set up a new structure or restructuring an existing practice or other business there are a range of legal structures that may apply in your circumstances.

Different legal risks and liabilities associated with each business structure may apply:

Sole Trader

• Appropriate for sole owners who intend to control and manage the business on their own
• Simple and may be relatively cost efficient
• A sole owner can retain all profits but has unlimited legal liability for all debts and liabilities of the business
• Personal assets may be used to pay off debts of the business
• Sole traders should consider and assess asset protection strategies

Partnership

• Appropriate if there are two or more partners who wish to jointly hold ownership of the business
• A written partnership agreement should address how profits are to be distributed, the share or proportion of ownership of each partner, dispute resolution and transfer of ownership if  one partner exits
• Upon the exit of a partner, the partnership structure may need to change or even be dissolved depending on the terms of the partnership agreement
• Each partner is personally liable for their own acts and may be personally liable for the acts of other partners

Associateship

• Appropriate for a group of health practitioners wishing to carry on separate practices as associates while splitting the business expenses
• Associates will share the costs of running a practice however do not share any income, profits or losses which each associate may individually generate
• Unlike a partnership, each associate is not personally liable for acts of another associate

Proprietary Company

• Appropriate for setting up a practice with a separate legal entity responsible for liabilities of the business that is separate to its owners or shareholders
• Must comply with the Corporations Act including governance and reporting requirements which may lead to higher compliance costs
• A company must have at least one director and one shareholder (who can be the director) and up to 50 shareholders
• Liability of owners/shareholders is limited to share capital subscribed
• A company structure can provide asset protection not otherwise available under a partnership
• The company structure continues if a practitioner/shareholder leaves or joins the practice
• Profits can be distributed by way of dividends to owners/shareholders
• A company structure may be more attractive to prospective purchasers

Trust

• Appropriate where a person or a company wishes to carry on the business and hold assets acting as trustee for the benefit of the beneficiaries
• A trust can be structured as a service entity to employ administrative staff, purchase equipment and lease premises
• All income is accumulated in the trust and the trustee has the power and discretion to distribute the income to the beneficiaries
• Ownership of the business by a trustee may provide an asset protection strategy
• A trust structure may be complex and the establishment and ongoing management of a trust may be expensive

Checklist of factors to consider for each structure:

• Set up costs and ongoing regulatory costs
• Retirement and exit strategies
• Corporate structure and associated risks and liabilities
• Regulatory and reporting requirements
• Management control, participation and ownership
• Asset protection

We can help

Our corporate advisory and commercial team can advise you on a business structure for your business and prepare necessary documentation including:

• Business Sale and Purchase agreements
• Dividend and distribution policies
• Associateship, Partnership and Shareholder agreements
• Company Constitution
• Protection of patient and business data ownership
• Funding and loan agreements
• Compliance and regulatory consideration such as employment, data security and privacy
• Employment contracts
• Board governance issues

If you would like more information about business structures please contact Principals Mark Fitzgerald (Melbourne) or Georgina Odell (Sydney).

Disclaimer: This information is current as of February 2017. This article does not constitute legal advice and does not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of this article.