When becoming the proprietor of a pharmacy, it is important to consider the most appropriate and effective corporate structure. The two most common commercial structures for a pharmacy business are a sole proprietorship/partnership or a company. Selecting which structure is appropriate, requires an understanding of your objectives, the scale of venture, your individual risk tolerance, and the advantages and disadvantages inherent to each structure. We expand further on each structure below.
Sole Proprietorship and Partnerships
A sole proprietorship is where an individual owns an asset in their personal capacity, whereas a partnership occurs where two or more natural persons or companies join together to conduct a business venture. The core characteristics include:
Ownership: Each partner will hold assets proportional to their partnership share. In a sole proprietorship the assets will be held entirely by the individual.
Control: The partnership is controlled by its partners, subject to the terms of the partnership agreement.
Method to establish: Although a partnership can be set out in an oral agreement, this arrangement should be formed in writing to comprehensively establish the rights and obligations of each partner and ensure each partner is appropriately protected moving forward in the event of unforeseen disputes.
Members: A partnership is generally limited to 20 members, unless subject to a statutory exception.
Method to end: A partnership can be dissolved by agreement, a court order, the completion of any express purpose, the effluxion of time, or the death/incapacity of a partner.
Taxation: Partners will pay tax on their individual interest in the partnership. A partnership is not treated as a separate taxable entity; however, it is required to lodge tax returns through its ABN.
- Income is taxed at the personal rates of the partner (assuming they enter the partnership in their personal capacity);
- Individuals who enter a partnership may be eligible for a capital gains tax (CGT) discount of 50%; and
- Partnerships have comparatively lower start up and maintenance costs.
- There is no continuity of business in the event of a partner’s death or exit, and a CGT event will occur on each change in partners;
- A partnership does not allow for the payment of wages to a partner, which are tax deductible for company’s; and
- Each partner has unlimited liability for the debts/conduct of the business and other partners.
A company is a separate legal entity that is owned by shareholders and managed by its directors. The core characteristics include:
Ownership: The company owns its assets, and anyone may be a shareholder in the company, subject to the company’s constitution.
Control: Shareholders will elect directors who will be charged with control of the company and its daily operation.
Method to establish: A company is incorporated through registration with ASIC.
Members: A proprietary company (as opposed to a public company) is limited to 50 non-employee shareholders.
Method to end: A company may be wound up or voluntarily deregistered.
Taxation: Companies are taxed at a rate of 30% of their net income. However, companies earning less than $50 million in annual revenue are taxed at 25%. A Company is a separate taxpayer to its shareholders/directors.
- A company allows for perpetual succession in that the company will survive the death or transfer of its members;
- A company enjoys the protection of limited liability, meaning its shareholders and/or directors are not liable for the company’s losses, assuming no personal guarantees have been provided;
- Profits may be retained in the Company for reinvestment in the business, or distributed to shareholders as dividends;
- Companies allow for different classes of shares to be distributed; and
- Funding can be raised for the business through selling the company’s equity.
- In larger companies, there may be ineffective control by shareholders over the decision making of the company;
- Tax losses are generally trapped in the company and carried forward; and
- Companies do not enjoy a 50% CGT offset offered to natural persons.
Choosing the commercial structure that is right for your pharmacy will require a clear understanding of how each structure can help achieve your business objectives. It is important to obtain expert advice at the inception of your business, as changing corporate structures can be costly and often involve an unwanted realisation of capital gains or losses. This will include accounting/tax advice as well as legal advice. If you require assistance in deciding which commercial structure is right for you, please contact the commercial team at Long Saad Woodbridge.
Important Disclaimer: The content of this article is general in nature and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.