My name is Constance Kawelenga and I am a registered Chartered Accountant and Auditor, and today we’re going to talk about a common question that we get from medical practitioners, and that is the question of whether they should incorporate as a Personal Liability Company (commonly referred to as an “Inc”), or register a Limited Liability Company (“Proprietary Limited” or more commonly referred to as a Pty Ltd), or to just operate as a Sole Proprietorship.
But before we get started, it’s important to note that the below article is not intended to serve as advice, but rather to raise awareness of your options available. I hope to empower you with some insights so that you can have a more detailed conversation with your financial and legal advisors.
As a medical practitioner in South Africa, one of the crucial decisions you face is determining the most suitable legal structure for your practice.
Should you opt for a Personal Liability Company (“Inc.”), a Limited Liability Company (“Pty Ltd”), or simply operate as a Sole Proprietorship? This article aims to shed light on these options, providing insights and considerations to empower you.
Understanding the Legal Landscape
The legal landscape for medical practices in South Africa is influenced by the principles established by the Health Professions Council of South Africa. These principles emphasize the concept of Personal Liability, which affects the available legal structures for your medical practice.
The common legal structures for medical practitioners in South Africa include Sole Proprietorships, Partnerships, Groups, Organisations, Associations, Personal Liability Companies, and, in some cases, Franchises (predominantly for optometrists).
The Case for Incorporation (“Inc.”)
For professionals in fields where professional advice plays a crucial role, such as auditors, lawyers, and doctors, incorporating as a Personal Liability Company (“Inc.”) is often recommended. There are several compelling reasons to consider this option:
Practice Sale and Succession Planning: If you anticipate selling your practice in the future or planning for succession, incorporating as an Inc. provides a structured and efficient process for ownership transfer.
Clarity in Financial Performance: Operating as an Inc. allows for a clear separation of personal and business finances, simplifying financial management and reporting.
Tax Efficiency: Arguably one of the most significant advantages of choosing the Inc. structure is its impact on taxes. Sole proprietors are subject to a variable tax rate based on their taxable earnings, which can range from 18% to 45% in their personal capacity. In contrast, an Inc. is taxed at a flat rate of 27%. This can result in significant tax savings, especially for high-earning professionals.
While the tax benefits of incorporating as an Inc. are evident, it’s crucial to recognize that this decision should not be made solely based on tax considerations. The decision to incorporate should align with your specific circumstances and financial goals. Incorporation tends to be more tax-efficient if you are in a higher income bracket, where you would otherwise be subject to a personal tax rate greater than 27%.
Scenario Planning and Advisor Collaboration
To make the right choice, engage in scenario planning with your financial and legal advisors. Consider various factors, such as your income level, long-term practice goals, and the potential for selling your practice. Run calculations based on the South African Revenue Service’s (SARS) sole proprietor tax table to understand the impact of different legal structures on your tax liability.
Conclusion
Choosing the appropriate legal structure for your medical practice is a decision with far-reaching implications.
While incorporating as an Inc. offers distinct advantages in terms of practice sale, financial clarity, and tax efficiency, it’s essential to make this decision based on a comprehensive assessment of your unique circumstances.We recommend consulting with your financial and legal advisors to conduct a thorough analysis and scenario planning.
By doing so, you can confidently select the legal structure that aligns with your professional and financial objectives. In the dynamic world of healthcare, making informed decisions about your practice’s legal structure is a crucial step toward securing your financial well-being and long-term success.
You are also welcome to contact us for help selecting the right legal structure for your business. Zuva Financial Services is an accounting firm in South Africa helping businesses with accounting, payroll, secretarial, taxation, audit, and assurance among other related services.
