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Business Structure Options – Why the right structure is so important

May 22, 2023

Business Structure Options – Why the right structure is so important

The move from being an employee dentist or associate to running your own dental practice is a big one.  Not only do you need to decide whether to purchase a practice or establish one from scratch, but it is important to consider which business structure to use.

The business structure options include, but are not limited to:

  1. Sole Trader
  2. Partnership/Associate Ship/Joint Venture
  3. Company
  4. Discretionary (family) Trust
  5. Unit Trust
  6. Hybrid Trust
  7. Service Trust in combination with any of the above business structures

It is not essential to remain in the same structure for the duration of the business’s life because you can always change to a different structure at a latter date.  The change of business structure however, can be costly in terms of both time and taxes.  Subsequent changes to the business’s structure are usually done primarily for tax benefits and if this is the case then it is likely to be scrutinized by the Australian Tax Office.

There are two main reasons for someone to go into business and these are:

  1. To earn a living
  2. To develop and sell the business.

With these two points in mind, the main considerations in choice of business structure are:

  1. Flexibility
  2. Protection of both assets and earning capacity
  3. Tax effectiveness

Flexibility means the ability of the business structure to adapt to changes over time.  Over the life of the dental practice, the business is likely to see many changes including changes to the dentist and their family’s situations, changes to taxation laws, changes to health and professional regulations and the introduction or exit of business partners. The business structure needs to be able to cope with these changes and not create barriers to change, additional taxes or financial complexities.

Protection of business assets as well as assets owned by the dentist personally is often the reason why dentists opt for an incorporated entity or trust when setting up their practice.  While this is very important it should be remembered that adequate and appropriate insurances will achieve the same result.  Having business and personal assets held in the name of a spouse, who is not involved in the business is a common practice which often ignores the implications of divorce/separation and reduces the ability of the dental practitioner to involve the spouse in the income earning activities of the business.

Tax effectiveness is usually the issue which practitioners put foremost in their mind when considering which business structure to use. (don’t we all!).  Quite often the immediate and short-term tax benefits of a business structure (such as a company with a maximum tax rate of 25%) are given more weight than either the long term benefits of capital gains tax exemptions/reductions or the flexibility of allocating business income to various family members who are on lower marginal tax rates (which would be the case with a discretionary family trust).

Professional advice should always be sought….

TADA Services deals with both simple and complex tax matters for dentists on a daily basis. We specialise in advising and explaining to dentists the risks and benefits associated with conducting their business under various different tax structures. If you have difficulty understanding the implications of the above structures for your business or would like a confidential discussion on any tax issues which are concerning you, please call Albert Gigl on 0414 928 800.  There is no charge for your first consultation.