A medical practitioner may assume that incorporating a practice is automatically the better option.
That is not always the case.
The decision depends on the practitioner’s profits, personal cash-flow requirements, growth plans, administrative capacity and whether the benefits justify the additional cost and compliance.
For a broader comparison of the two structures, read: Sole Proprietor vs Company in South Africa: Which Is Better for Your Business?
For medical practitioners, however, there is an additional consideration.
Where incorporation is appropriate, the practice cannot simply be placed into any company structure. The entity must also comply with the professional rules governing medical practices.
The Company Must Fit the Profession
South African company law provides for a personal liability company, identified by the suffix “Inc.”
This is the company form generally associated with professional practices, including medical practices.
It is not enough for the company to be legally registered with CIPC. Its ownership, name and manner of operation must also comply with the applicable professional requirements.
The practitioner should therefore consider the HPCSA rules before registering the entity, issuing shares or entering into agreements in the company’s name.
“Inc.” Does Not Mean No Personal Liability
The name can be misleading.
An incorporated practice remains a separate legal entity, but the directors may be jointly and severally liable with the company for debts and liabilities incurred during their periods of office.
Incorporation therefore does not create an impenetrable wall between the practitioner and every liability of the practice.
It also does not remove the practitioner’s personal responsibility for professional conduct.
The purpose of incorporation is therefore not simply to avoid liability. It is to create a more formal structure through which the practice can operate, employ staff, own assets, enter into contracts and manage its financial affairs.
What About a Trust?
Where safeguarding other assets is important, the practitioner may need to consider a broader structure.
Assets such as consulting rooms, investments or separate commercial businesses may, depending on the circumstances, be held outside the medical practice through separate companies or an appropriately structured trust.
A family trust cannot ordinarily own the incorporated medical practice itself because the trust is not an HPCSA-registered practitioner. The professional practice must remain owned and controlled by appropriately registered practitioners.
The trust may instead form part of the wider structure by holding shares in separate non-professional companies that own property, investments or unrelated commercial businesses.
A trust does not automatically protect assets or reduce tax. Its use must be supported by proper estate, risk and tax planning.
Structure First. Tax Second.
Practitioners are often introduced to incorporation as a way to reduce tax.
That discussion comes later.
Before comparing company tax, salary and dividends, the first question is whether incorporation suits the practice at all.
The second is whether the proposed company is the correct legal and professional structure.
The practitioner should then consider whether valuable assets and unrelated business interests belong inside the practice entity or should be separated through a broader ownership structure.
A tax-efficient structure is of little value if it is the wrong structure for the profession—or if it unnecessarily exposes the practitioner’s other assets to the risks of the practice.
This article provides general information only and does not constitute tax, legal, financial or professional advice. The appropriate structure depends on the practitioner’s specific circumstances, the applicable professional rules and current legislation. Professional advice should be obtained before implementing or changing any business, company or trust structure.
