Pharmacists’ body corporates have grown in popularity since restrictions around their uses were removed many years ago. In this article, we explore how they are used in different structuring arrangements, and their pros and cons.
What is a pharmacists’ body corporate?
A pharmacists’ body corporate is a company, limited by shares, subject to and governed in New South Wales by Schedule 5F of the Health Practitioner Regulation National Law (National Law) and Pharmacy Council of New South Wales requirements.
What structuring arrangements can pharmacists’ body corporates have?
Pharmacists’ body corporates can use one of the following structuring arrangements:
A company limited by shares
In this scenario, the pharmacy business is structured as a company. That is, a Pty Ltd company limited by shares, operating and trading through a company structure, with one or more shareholders.
In most jurisdictions, there is a requirement for the shareholders in the pharmacy company to be “natural persons”. This would typically mean that the shareholders would need to be individuals who satisfy Schedule 5F of the National Law regarding financial interests and ownership in the company.
Like other types of companies, pharmacists’ body corporates have the benefit of limited liability for the shareholders (who are the owners) of the company, and a legal personality all of their own. Having a separate legal personality means that companies can enter into contracts in their own names (including lease agreements and employment contracts), and they can sue and be sued in their own name.
The concept of a “company” was invented to encourage entrepreneurial activities in society, with less fear of personal liability for the business people involved.
This separate legal personality distances the day to day liabilities of the company (and the pharmacy business operated by it) from the individual pharmacists who own the company, and therefore the pharmacist’s personal assets such as their home, personal bank accounts and personal investments are distanced from the liabilities and creditors of the pharmacy business.
It should be noted that creditors, financiers and suppliers sometimes take personal guarantees or security interests from the individual pharmacists who own the company, in order to have a right of recourse against the pharmacist’s personal assets, as well as the business and assets of the company.
Pharmacists are advised to look out for documentation from landlords, financiers or suppliers which may contain personal guarantees and seek advice before signing them.
Companies can have just one shareholder and director, or multiple shareholders and directors. If there is more than one shareholder, it is strongly recommended that a shareholders’ agreement is negotiated and signed to govern the operation of the company. Shareholders agreements can stipulate many things including:
- how often the directors are to meet and by what means (face to face or electronic),
- how often profits are to be paid to shareholders as dividends,
- what process is to be followed if a shareholder wishes the retire from the business, and
- what should happen should a shareholder default in some way (for example, by losing registration as a pharmacist).
A partnership of body corporates
In the second scenario, the pharmacy business operates in a partnership structure, where at least two partners are pharmacists’ body corporates.
In New South Wales, partnerships are governed by the Partnership Act 1892 which typically means that each company partner would be jointly and severally liable for the debts of the partnership.
Once again, it is recommended that a partnership agreement be negotiated and signed to govern the operation of the business and the partnership, and to provide pre-agreed processes if certain events occur, such as retirement, death or total and permanent disablement of a co-owner.
A rule of thumb commonly used around whether to structure the business through a company or a partnership of body corporates, lies in the composition and funding of the business owners. Where funding needs to be obtained separately (and to allow for incoming and outgoing partners), a partnership arrangement would typically be required, to better facilitate income and outgoing parties.
The pros of pharmacists’ body corporates
One of the key advantages in both scenarios, and why the use of pharmacists’ body corporates has grown, is being able to control profit and tax outcomes. Most commonly, the fixed small business company tax rate of 25% applies.
The pharmacists’ body corporate structure potentially avoids individual pharmacists being taxed personally on pharmacy profits. It also avoids the need to fund pharmacy debt from post-tax environments, which often incurs the highest marginal tax rate.
The company (as opposed to partnership) structure has the additional advantage that all initial pharmacy profit is taxed at the business level, prior to distributions being made available to respective partners. This can make it easier for all parties to understand and manage tax outcomes and can allow for better retention of funds in the trading entity if required for reinvestment (such as a refit, for example).
The cons of pharmacists’ body corporates
Possible drawbacks include initial upfront costs and expertise required to set up a compliant pharmacists’ body corporate.
For exit and capital gains, companies (unlike individuals) are not eligible to receive a 50% general discount for holding an asset greater than 12 months.
In addition, while small business Capital Gains Tax Discounts can still be accessed via a company limited by shares structure, there are added complications in extracting the net capital proceeds. These can unwind and offset some of the initial tax concessions.
There are also more stringent restrictions on the governance documents and ownership options for a pharmacist’s company, than for a generic Pty Ltd company.
Conclusion
When structuring a pharmacy or pharmacy interest, it’s important to consider the legal, tax and practical issues of each structuring option, and to seek proper legal and tax advice.
This article was written by Principal Georgina Odell of Meridian Lawyers and Director Stuart Brandman of 542 Partners.
Interested in attending Pharmacy Connect 2024?
Georgina and Stuart will be presenting their session: Starting & Finishing Strong – structuring your pharmacy business for financial, tax and legal success in Sydney on Friday 6 September 2024. Click here to learn more.
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