When buying a dental practice, one of the most critical considerations is understanding its legal structure. The structure determines the legal, financial and operational framework of the practice and has significant implications for taxation, liability and governance. Here’s a detailed look at the common business structures—sole trader, partnership/associateship and corporate entity—and their implications for potential buyers.
1. Sole Trader
What Is a Sole Trader Structure?
A sole trader practice is owned and operated by one individual who is solely responsible for all aspects of the business, including debts and liabilities.
Legal Implications for Buyers
Transfer of Ownership: The buyer typically purchases the assets of the practice (e.g. goodwill, plant, equipment, stock, intellectual property) rather than the business entity itself.
Liability: As the new owner, you’ll assume full personal responsibility for the practice's operations and debts.
Simplified Transition: The transfer process is often straightforward, as there is no need to create new corporate structures or deal with existing corporate structures/shareholders.
Considerations:
Ensure that all assets, including intellectual property and patient records, are properly transferred.
Understand the implications of personal liability, including obtaining adequate insurance.
2. Partnership/Associateship
What Is a Partnership Structure?
A partnership involves two or more individuals or entities sharing ownership, responsibilities, and profits of the practice. Partnerships can be general (equal liability) or limited (varying liability based on contribution).
Legal Implications for Buyers
Partnership Agreement: Review the partnership agreement carefully to understand your rights, obligations and exit options.
Liability: Each partner is typically liable for the debts and obligations of the partnership, unless it’s a limited partnership.
Control and Governance: Decision-making may require consensus among partners, which can complicate operations.
What Is an Associateship Structure?
· An associateship involves two or more individuals or entities, however ownership of each associates’ assets remains with the individual - similarly profits of each individual retain with that individual. The actual associateship covers joint expenses (rent, employees etc) usually under an umbrella entity.
Legal Implications for Buyers
Associateship Agreement: Review the associateship agreement carefully to understand your rights, obligations and exit options.
Liability: Each associate is typically liable for their own debts and obligations. There will be joint liability of the associateship, for example obligations pursuant to the premises lease.
Control and Governance: Decision-making for joint obligations may require consensus among associates, which can complicate operations.
Considerations:
Conduct thorough due diligence to identify ongoing disputes or liabilities involving current partners/associates.
Confirm the terms for admitting or exiting partners/associates.
Assess compatibility with existing partners/associates, as disagreements can impact the practice’s success.
3. Corporate Entity
What Is a Corporate Structure?
In a corporate structure, the practice is operated as a company, which is a separate legal entity from its owners (shareholders). This company can also act as ‘trustee of a trust’; as such the practice is operated as a company as trustee of a trust and governed by the trust, with underlying ownership held by the unitholders in the trust.
Legal Implications for Buyers
Share/Unit Purchase or Asset Purchase: Buyers can either purchase the company shares/trust units or its assets. A share/units purchase involves acquiring the entire entity, including liabilities, while an asset purchase typically excludes liabilities.
Limited Liability: Owners (share/unitholders) are generally protected from personal liability for the company/trust’s debts.
Governance: Decision-making is governed by directors, with rules outlined in the company’s constitution, along with unitholders, with rules outlined in the trust deed. Governing ‘equity agreements’ are also commonly prepared, known as shareholder agreements or unitholder agreements.
Considerations:
Conduct thorough due diligence to identify liabilities, such as tax debts or pending litigation.
Review corporate documents, including the constitution, trust deed, trust register and share/unitholder agreements, to understand ownership and governance.
Ensure the company is compliant with ASIC requirements and other regulatory obligations.
Key Factors to Evaluate Across All Structures
Liabilities: Regardless of the structure, ensure you identify and understand all potential liabilities, including debts, leases, and litigation.
Compliance: Verify compliance with industry regulations, such as AHPRA registration and privacy laws.
Transition Plan: Plan for a smooth transition, including the transfer of leases, licenses, patient records, and supplier agreements.
Choosing the Right Structure Post-Purchase
If you’re acquiring the practice through an asset purchase, you may have the flexibility to change its structure post-acquisition. For instance, you might decide to incorporate the practice to benefit from limited liability or set up a trust for asset protection and tax planning – however, it is best to set up your structure properly prior to acquisitions, as the process to ‘roll-over’ can be burdensome.