The Health Professions Council of South Africa (HPCSA) lists the following business models as acceptable for health professionals:
Solo Practice
Partnerships
Associations
Incorporated Practices
Any other business model/formation or structure outside of these models is unacceptable and could lead to potential prosecution by the HPCSA.
The question that health practitioners ask on a regular basis is whether it is a good idea to register a Personal Liability Company (Incorporated) or not. Best advice is YES!, incorporate the practice as early as possible.
The structure of your medical practice is critical in determining how your income will be taxed and the legal frameworks which you will need to comply with. These decisions often spark debate amongst medical practitioners. We, therefore, thought we would share some of our insight into the topic.
Tax efficiency is often at the top of medical practitioners minds. As a starting point, you will need to understand the difference between a sole proprietor and an incorporation.
A Sole Proprietor is an individual like you and me. When running a medical practice as a sole proprietor, you are your own business.
An Incorporation is a registered business, similar to a private company. You own the shares in your business, and you are also an employee of your business. Incorporation however does not protect practitioners from liability as the ultimate responsibility remains with the practitioner; it is not a shelter for unprofessional conduct.
How are these entities taxed?
Sole proprietors are taxed on a sliding scale (per the SARS individual tax tables) from 18% to 45%. Income earned less your allowable expenses results in a profit. This profit is then applied against the individual tax tables to determine the amount of tax you will need to pay.
Incorporations are taxed at a flat rate of 28% on the profit (income less allowable expenses) earned by the incorporation. Part of the deductable expenses in determining this profit would be your salary earned from your incorporation. The salary that you earn is taxed on the same individual tax tables as a sole proprietor mentioned above. Therefore, before you receive your salary each month, a calculation would be performed by your accountants to determine the amount of tax you would need to pay. This tax, called PAYE (pay as you earn), is deducted from your salary and is paid to SARS, the remainder is paid into your bank account.
When to incorporate
The follow up question is – “what is the best time to incorporate a practice, early or late?” – again the general quick answer is: Incorporate as early as possible in the life of the practice. The reason is that it is more cost-effective as fairly new practices do not have a lot of assets and liabilities that may have to be transferred to the new entity.
Another question that often gets asked revolves around financial audit requirements. The Company’s Act, 2008 stipulates that audited financial statements are required on the date that the company files its annual return with CIPC, if the aggregate value of assets held at any time during the financial year exceeds R5 million.
The following are the general characteristics of a Medical Personal Liability Company
Only natural persons registered under the HPCSA may enter into the Inc. as directors.
A Personal Liability Company’s name must end with the word ‘Incorporated’ or with its abbreviation ‘Inc’.
Naming of the company must comply with rule 5 of the HPCSA Ethical Rules of Conduct.
An Inc is required to have a minimum of one director and a maximum of 50 on the board of directors.
Each partner/director must have their own PCNS number linked to the Incorporated practice number
It’s generally good practice to separate your business and your personal life for many reasons, if you want to sell your practice one day then the division between personal expenses and business expenses is very clear and you will be able to ascertain the true value of your practice.
Also with a solus practice all your personal assets and liabilities are all tied in together and to extricate these in case of a divorce for example becomes very messy whereas if your business is separate, it’s much easier and it means your personal assets are not tied in with business assets. For further reference read the following article by Wilma Erasmus:
Advantages to an Inc.
Separate legal entity
Directorship
Ability to have different branches with managing directors
Financial implications
Lower Tax for companies compared to an individual as outlined above
Directors have UIF, PAYE & pension benefits
Directors earn a monthly salary from the Inc. with all benefits as stipulated in the labour act
Dividends - Directors get to split company profit
Simplifies the process of reselling the practice
Owning shares in the Inc.
Adaptable to small and large businesses, as well as solus practices
Disadvantages to an Inc.
Need to comply with the Company Act
Some set up costs
Need an auditor - statutory requirement
VAT on invoice – if annual turnover is over R1mil
Jointly liable for debt