Hi there! My name is Ben Walker, and I'm the founder of an accounting firm called Inspire - Life Changing Accountants.
James Hill from Prescript Recruitment has asked me to share a little bit of knowledge around the different types of structures that, as a doctor, you might use to contract to a hospital or a surgery or a practice, and a little bit on the pros and cons of each one.
As a doctor, there is a choice (or any business in Australia really) of which business structures you can use and there are all sorts of things to consider when you're making a decision.
There are things around tax implications for each structure, risk and insurance perspective (which is actually quite a big one), and even asset protection as you build your family's wealth.
We don't want the risk of running your business (or contracting) to expose your family home as an example - so there are lots to consider.
The three most popular and main business structure options are:
Sole Trader - you've got an ABN in your own name and that's trading as yourself.
Trading as a company - which is the next most common one. A company is a separate legal entity that you do set up and you run it through a company. You can call it (within reason) whatever you'd like to, but that's yours and you contract to other people through that.
The third option is a Trust - there are pros and cons for that, but the main benefit usually for that is to stream income with other family members that the business owner earns. But I will come back on that because as a doctor, that's a little bit tricky to do, and I'll share why.
Sole Trader vs Company
So let's look at sole trader versus a company.
The big one here is actually all around risk, the insurance side of things and asset protection. So as a sole trader, you're literally contracting to your customer (or your practice or your hospital) in your own name. So if something goes wrong and you have a dispute, they're going to be suing you personally, and any assets that you own are up for grabs in the event of an outcome that doesn't go in your favour.
But let's say you've got a company as an example.
A company is seen as a separate legal entity, so the contract is actually between the company and your customer. If a dispute arises there, in the first instance, they will actually be suing your company and you've got some form of protection there. It doesn't always 100% protect you, but it's definitely not suing you personally in the first instance, which is good.
Also as a hospital or a practice owner, what they're often looking for in terms of their locums or their doctors that work for them on a contract basis (so not an employee, but on a contract basis) is they want to reduce their risk as much as possible. There are a few risks they might consider, but the key ones in terms of business structures are; what business structure is that doctor using?
I know it might sound strange, but if you're in a company structure, it could be seen to reduce the risk for the business because that reduces the view that they might need to be paying super on top of your wage. Or if you've set up a company, you might actually be contracting to multiple hospitals or surgeries or practices (depending on what you're doing) and the risk is that you're less likely to be seen as an employee of your customer, which as an employee, you carry a lot more risk to them versus a contractor.
So what they're trying to reduce in most cases is their risk of being up for super, all the rights as an employee, and that sort of thing. So it's to genuinely see the contract relationship as their company and your company - not as two people contracting or being employed. So that's the big one there.
Personal Services Income
In terms of the tax side of things - there's not a huge difference from a tax perspective being a sole trader versus a company. The reason that that's the case is because as a doctor, you're getting paid for your personal exertion. The way that the tax law is written, is if you're personally exerting to earn your income (regardless of your business structure) pretty much all of that income needs to end up in your name. This is a bit of an unfortunate thing for doctors where you might be on a very large income level, and unfortunately (depending on your circumstances) in some cases when you're contracting or locuming, we can't go and then split that income with your spouse or your kids.
I mentioned earlier, a trust is a great way of splitting income, but these are the rules with doctors: With personal exertion, we can't go and then say, "Oh, well, the trust earned $200,000, I'm going to split $100,000 with my spouse and $100,000 with me." We can't do that because of that personal exertion rule, so we get a bit stuck there.
But tax is not a huge factor when you're considering your structure (If you are caught under those personal exertion rules) it does come down to the risk.
What’s most attractive to your customer?
The other benefit, as well, of incorporating or becoming a company for your contracting, is that you will be more attractive to people looking to bring you on board. No doubt that that will be the case, because they'll see you as a lower risk if you've got all that set up and you're familiar with running your own company - it's a very simple process of almost just providing an invoice, really. So that's a big benefit. When you're looking at getting your next role, if you're as attractive as possible to that potential contractor, then that'll go in your favour versus if you are a sole trader.
At the end of the day, it is your option, but again, a strong recommendation for a Pty Ltd company. The other thing to keep in mind is to make sure you have a really good insurance advisor to have a look at your public liability insurance, your professional indemnity, and make sure it incorporates your company.
However you're set-up, whether it's a sole trader, company, or trust - make sure you've got an advisor who really understands their stuff around that, because that is paramount to have sorted, as well.
So there's a view on the different structures you could have as a doctor, and that's more in that contractor relationship - not an employee. I hope this has helped!
About Ben Walker
Author, Award-Winning Chartered Accountant & Founder of Inspire - Life Changing Accountants.
★ Started Inspire at 23
★ Award-Winning Chartered Accountant
★ Co-Authored 'Cashed Up'
★ Helped save clients over $10M in tax (and counting)
★ Given 10M days of impact to families in need
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