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Dell - Business Structures for Medical Practices – What Are Your Options?


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Medical Business Structures for Medical Practices – What Are Your Options? Print


Date: 1/04/2009

A common belief among the medical community is that it’s impossible to sell a medical practice. It is usually thought that the value of the practice is tied up with the doctor’s experience and intellectual property. And all too often, the practice isn’t structured so that it’s a saleable entity. But if a medical practice is structured the right way, it is possible to build succession plans for the business, as well as exit strategies for the doctor or doctors who own the practice. The right structure will also deliver tax and other business benefits to the practice that other structures doctors traditionally use for their businesses can’t deliver. A New Approach According to David Dahm, chief executive officer of specialist medical practice management consultancy Health & Life, “the optimum structure for a medical practice splits the business into a practice management business and a separate clinical business.” The practice management entity is a service trust, which sells services such as IT support to the clinical business, provides property management services for the surgery and employs the surgery’s support staff. To access these services, the clinical business pays a fee to the practice management service trust, with the fee being a percentage of doctors’ fees. Dahm says it is usual for the fee paid by the clinical business to the service trust to be roughly 50 percent of the doctor’s fee for a consultation. The owner of the clinical business might charge a slightly higher fee to account for the additional costs and risks incurred in owning the business. Usually, some or all of the doctors that own the clinical practice also own the service trust and are paid a dividend from the trust as part of their income. This money can also be retained in the service trust to pay for investment in medical equipment, staff training and upkeep of the practice. Business Benefits Dahm says one of the main business benefits of using the service trust structure is that it creates an investment-ready entity that allows doctors to buy into and sell out of the surgery. “In the past doctors have found it hard to sell their businesses because often, there’s no business plan or structure in place to allow the transfer of assets,” says Dahm. But by structuring the practice into a service trust structure and associated clinical business, a medical practice can formalise income streams and profit sharing arrangements in the business so that they can be resold, allowing doctors to realise the value in the practice. Separating the practice management business from the clinical practice also means it makes good business sense for the service trust to invest in staff training and updated medical equipment. This adds value to the business as an asset, which is in turn positive for the resale value of the business. Making investments in staff and equipment also has tax advantages for the service trust, which can use these expenses as tax deductions against income earned by the trust. Risk Management The dual service trust and clinical practice structure for doctors’ surgeries also helps to mitigate risk in the business. Instead of being employed by either the clinical business or the service trust, doctors can provide their services individually to the business, and establish individual Australian Business Numbers (ABNs) and issue individual tax invoices for consultations. This differs from the common practice in which all the doctors that operate in the surgery own the business and appear together on the tax invoice and other paperwork related to a consultation. In this circumstance, all the doctors in the surgery are potentially exposed if a malpractice case is brought against one of the doctors in the business. But if the doctors attached to the surgery operate individually and a malpractice case is brought against the business, only the doctor whose name appears on the invoice associated with the claim is liable. “Which is why in a service trust environment it’s so important each doctor has a separate letterhead with a separate ABN,” says Dahm. Controversial Structure Although Dahm says the dual service trust clinical business combination is the most commercially sustainable structure for a medical practice, it’s not without its critics. In the past, the Australian Taxation Office (ATO) has instituted legal proceedings against businesses with service trust structures, arguing the structures were created for tax benefits only. Following these cases, the ATO clarified that service trust structures were within the law, provided the structures were created for sound commercial reasons. Dahm says more and more medical practices are shifting to the dual service trust/clinical business structure, as doctors increasingly view their businesses as saleable entities and ongoing economic concerns. It’s likely the use of service trust structures for medical practices will only grow over time, and it’s possible this will be the standard business structure for a medical practice in the future.


Dell - Business Structures for Medical Practices – What Are Your Options?

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Dell - Business Structures for Medical Practices – What Are Your Options 1.4.2009  

Dahm says it is usual for the fee paid by the clinical business to the service trust to be roughly 50 percent of the doctor’s fee for a cons...