The Different Firm Structures
There are many options available now for structuring your professional practice. These include:
- Sole practitioner
- Partnership of individuals
- Partnership of discretionary trusts
- Service entities
There are advantages and disadvantages for each structure, and the relevant choice, as always, is dependent on each principals’ and practice’s personal situation.
Being a sole practitioner has its appeal. You’re the only boss and the start-up costs are low. Establishing and operating your business is simple, you have maximum privacy and you keep all the profits. This is a great starting structure as it’s easy to change your structure later if circumstances change and wind up is easily should you change your mind.
What you need to be aware is that there are some dire disadvantages for being a sole practitioner. You have unlimited liability for debts as there’s no legal distinction between private and business assets. Your capacity to raise capital is limited, while you’re taxed as a single person. It can also be it can be hard to take holidays and retain high-calibre employees
In a partnership, you have more people to lean on for decision making, access to more capital and greater lending capacity. There is opportunity for income splitting according to performance and you are likely to attract a higher calibre of employees over being a sole practitioner.
Your exposure to risk is much greater than being a sole practitioner, the liability of the partners for the debts of the business is unlimited with each partner ‘jointly and severally’ liable for the partnership’s debts.
There are higher risk of disagreements and friction among partners while each partner is an agent of the partnership and is liable for actions by other partners.
This is also another low-cost structure however one structure with the greatest future selling complications if partners join or leave, requiring value for all the partnership assets
A service entity is a separate legal structure to provide asset protection by separating the running of the practice. Generally, it will employ all the staff, negotiate lease arrangements and sub-lease arrangements, purchase and provide equipment and incur all the expenses in the day to day running of the practice.
The disadvantage is that you will also need to run more than one structure corresponding with service entity. Service entities practical use, now that most incorporation restrictions have been removed, is to share resources and lease arrangements between different parties.
There are many advantages of incorporation, with the main ones being an ease of succession, asset protection, taxation and cash flow management.
Companies are also limited in liability and have greater access to leading capabilities provided the business is profitable and cash flow positive.
A company can retain business profits and be taxed at 30% (lower for SBEs), the company tax rate and can be paid out in future years to control the businesses cash flow and taxation consequences.
There are more associated costs in running your practice in a corporate structure than compared to a sole practitioner or partnership structure.
If you’re considering setting up and Incorporated Practice, make sure you seek advice to address all the issues that will impact on your decision. Also be mindful of the significant advantages that incorporation provides and take a balanced view.