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Starting a psychology practice is an exciting time. When doing so, it is important to consider your business structure. Your business structure is the foundation of your business and can reduce your exposure to risk and liability, allowing flexibility and enabling growth. To ensure you choose a structure that best suits your business’ needs, this article evaluates four business structures and their suitability for a psychology practice. 

Sole Trader

If you are starting a psychology practice on your own, you may choose to operate as a sole trader. This structure is relatively easy and cost-effective to set up. You will require an Australian Business Number (ABN) and register a business name.

Despite the relatively easy setup, this structure comes with risks. For example, if a patient (or any other party) sues you, you are personally liable and your personal assets are at risk. Professional indemnity insurance may cover a proportion of costs. However, depending on the terms of your insurance, you may also personally owe a significant amount.

This structure may also be appropriate for a group of sole traders contributing to shared resources. For example, each psychologist may have their own ABN but share the premises, bills and cost of support staff. However, as each sole trader is a separate business with separate clients, each sole trader is personally and entirely responsible for their individual business.

Partnership

If more than one psychologist works in the practice, you may choose to enter into a partnership. Similarly to a sole trader, setup is easy and cost-effective. You will require an ABN for the partnership and possibly a registered business name. It is also best practice to have a partnership agreement. The agreement governs the relationship between partners and sets out key terms, such as how to transfer your part of the business and a dispute resolution process.

However, setting up a partnership also comes with risks. For example, if someone sues you or you do not pay creditors, your personal assets are at risk. Additionally, partnerships involve joint liability. Therefore, you may be personally liable for debts incurred by any of the other partners. The amount owed is not split according to your percentage of ownership in the partnership, so you could be liable for the entire amount.

Company

Whether you are operating the practice on your own or with other practitioners, you may choose to operate as a company. When you incorporate a company, you are operating as a separate entity. Doing so involves a number of initial set up costs, including incorporation and registration costs (such as for your ABN, Tax File Number (TFN), Goods and Services Tax (GST) and Pay as You Go (PAYG)). A company also involves ongoing costs (e.g. ASIC requires $254 per year). 

Additionally, where there is more than one shareholder in a company, it is best practice to have a shareholders agreement that governs the relationship between shareholders in the same way as a partnership agreement. Unlike the other structures, your personal assets are typically not at risk in a company. Instead, only the assets of your psychology practice (assets that the company owns) are at risk. Further, this structure allows for growth as a new psychologist buys or is issued shares in the company.

Trust

You may also opt to operate as a trust. There are three key players in a trust:

  1. The beneficiaries, who are the people for whom the trust is set up. In this case, the beneficiaries could be the psychologists and their families;
  2. The trustee, who manages and allocates the assets in the trust within the framework set out in the trust deed; and
  3. The appointer, who can appoint and remove the trustee.

The trust may be a discretionary trust, where the trustee distributes assets discretionarily. Alternatively, it may be a unit trust, where unit-holder distributions are made proportionally to the units held.

Accountants typically recommend a trust structure for tax reasons. However, this business structure presents some limitations. For example, it does not really allow for growth. Family run or small businesses typically operate using a trust structure. Establishing a trust includes some initial set up costs that cover drafting the trust deed, settling and stamping the trust and registering the trust for an ABN. It is also typically difficult to make changes to trust deed.

Key Takeaways

When starting a psychology practice, the business structure you choose will have long-term impacts in terms of:

  1. your personal exposure to risk and liabilities;
  2. the flexibility to bring on additional or new owners of the practice; and
  3. growth.  

It is vital to make a well-informed decision when starting a psychology practice to ensure you can best serve your clients in the long run.

If you have any questions about business structuring or need assistance when starting a psychology practice, get in touch with LegalVision’s business lawyers on 1300 544 755.

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