Choosing the Right Business Structure for Your Medical Practice: Sole Proprietor vs. Incorporated

Starting or managing your medical practice comes with serious decisions, and one of the most important is selecting the right business structure.

Typically, a business owners would setup a (PTY) Ltd for their business since this protects them from personal liability. Regrettably, the HPCSA requires that healthcare practitioners take personal liability for their services – meaning they cannot hide behind a corporate structure, and should a patient successfully sue for malpractice, the directors will be personally liable for the claims.

Doctors in South Africa typically choose between operating as a sole proprietor or an incorporated (Inc.), each with different tax and regulatory implications. This guide will walk you through their key differences and help you decide which option may be better suited to you.

Overview

Both business structures have their advantages and disadvantages, depending on your income level, risk tolerance, and long-term goals.

Here’s a breakdown of each structure and its implications for taxation, liability, and compliance with bodies like the Health Professions Council of South Africa (HPCSA) and the South African Revenue Service (SARS).

Key Comparisons: Sole Proprietor vs. Incorporated

Advantages and Disadvantages

Sole Proprietor

Advantages:

• Simplicity: Minimal start-up costs and compliance requirements. You file business income and expenses directly with your personal tax return.
• Low Cost: No need to register a separate entity or file annual returns with CIPC. You just start trading.
• Flexibility: All decisions rest with you, allowing for straightforward management.

Disadvantages:

• Unlimited Liability: You are personally responsible for any business debts and liabilities, including malpractice suits.
• Higher Tax at Higher Income: If your practice earns significant income, you could be taxed at the highest personal rate of 45%.
• Limited Growth: It’s harder to scale, raise capital, or bring in partners compared to an incorporated structure.

Incorporated (Inc.)

Advantages:

• Lower Corporate Tax Rate: Company profits are taxed at 27%, which may be beneficial for high earners.
• Growth and Scalability: Easier to expand, raise capital, and bring in additional partners.
• Dividends Tax Flexibility: You can delay dividends tax until the profits are distributed, allowing for better cash flow management.

Disadvantages:

• Personal Liability for Directors: While the company is a separate legal entity, directors remain personally liable for debts incurred during their tenure.
• Increased Compliance: Incorporation requires registration with CIPC, annual returns, and compliance with the Companies Act, increasing administrative costs.
• Dividends Tax: Although corporate tax is lower, distributing profits as dividends incurs an additional 20% tax.

Tax Efficiency: Which is Better?

The choice between operating as a sole proprietor or incorporating your practice largely depends on your income level:

• Sole Proprietor: For lower-income practices, especially those earning below the top income tax bracket, a sole proprietorship may offer tax advantages. The sliding scale of individual tax rates, combined with available tax rebates, can make this structure more efficient.
• Incorporated: For high-income earners (above R1,817,001 annually), incorporating may be more tax-efficient. Corporate profits are taxed at a flat 27%, and dividends tax can be deferred, allowing you to plan your tax payments more effectively. In addition, if you qualify as a Small Business Corporation (SBC), further tax benefits are available.

Wealth Protection for Doctors: Forming a Family Trust

We often see medical practitioners registering an Inc. and stopping there. This is merely the first step in the tax structuring and wealth protection process. Since medical practitioners take personal risk on their health care services, we advise that business interests be held in a trust structure which has the following benefits.

1. Asset protection;
2. Tax optimisation;
3. SBC recognition; and
4. Estate Planning.

Conclusion: Which Structure is Right for You?

For small or medium-sized practices, especially those starting out, a sole proprietorship is often the better choice due to its simplicity and lower administrative burden. At lower income levels, the sliding tax scale and personal rebates can result in significant savings compared to the corporate tax structure.

However, as your income increases, especially if you’re moving into the highest tax bracket, incorporation becomes more appealing. The flat 27% corporate tax rate and the ability to delay dividends tax can result in substantial tax savings. Incorporating also provides better opportunities for growth, capital investment, and long-term succession planning.

As a medical professional you need accountants that understand and deliver tax services specifically for doctors to ensure that your wealth is protected, and your practice runs efficiently.

Reach out to GAS Accounting (hello@gasaccounting.co.za) for a free consultation to guide you on this journey.