The art and science of practice structuring

When choosing the most appropriate legal structure (sole trader, partnership, discretionary trust, unit trust or company) for a new practice, there are numerous issues to consider.

The difficulty is that there is no single formula or method that will determine the best structure for your practice. In every case, the practice will have different facts and circumstances that need to be taken into consideration and may affect the choice of structure.

Further, practice owners will have needs, goals, and outcomes that they will want to maximise over the lifetime of the business. Many of the desired goals and outcomes may be mutually exclusive. Therefore, some form of compromise will likely be necessary. For example, some structures may provide a good capital gains tax (‘CGT’) result but are a poor way to minimise income tax or may not be optimal from an asset protection perspective.

It is also worth noting that the structure established today may not be appropriate for what happens tomorrow. The right structure will take into account the future needs of the practice and will be able to grow with the practice owners and afford a considered exit strategy.

While the legal concepts of structuring are generally well understood (the science), it is combining these concepts with the day-to-day practical matters that is most difficult (the art). The appropriate structure will take into consideration several issues including (but not limited to) the following:

access to the CGT 50% discount;
access to the small business CGT concessions;
flexibility to distribute income and capital;
marginal tax rates of participants;
ability to recoup losses;
access to research and development (“R&D”) concessions;
asset protection;
potential employee participation;
future funding requirements;
compliance costs; and
exiting and succession planning
estate planning

Below, we have put together a high-level summary of the how the objectives above work with the legal structures available and is a useful guide for practice start-up structuring.

Issue	Sole Trader	Partnership	Discretionary Trust	Unit Trust	Company
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 unit-holders. 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 complex tests	Yes – subject to complex tests	Yes – subject to complex tests
Access to R&D concessions	No	No	No	No	Yes
Asset protection	Poor – sole trader personal assets at risk	Poor – partners are joint and severally liable for debts of the partnership	Good – increased with use of a corporate trustee	Good	Good – corporate veil provides limited liability for shareholders
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 is in place	Can be achieved through the sale of shares

If you are thinking of starting a practice, the team at Cutcher & Neale can help you understand the pros and cons of different business structures, provide professional advice on the tax implications of each and what structure will suit your needs now and into the future.

The art and science of practice structuring

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