6 Forgotten Issues Regarding Legal Structures When Buying a Pharmacy

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The choice of what legal entity you use to own your pharmacy or own your partnership interest through is a critical issue and very complex, often with no perfect answers. To go through all the issues in detail that you need to consider would require me to write three books the size of Lord of the Rings, which doesn’t suit the small framework for this blog.

What I would like to touch on today is the often forgotten about, or not often considered issues that need to be addressed. Often the time in which new entities or structures need to be put in place is at a stage when offers need to be presented, when things are rushed, and time is short. Rushing decisions like this can be risky, and without careful consideration of the issues a mistake at this stage can be costly and difficult to fix.

So, let us touch on some of the often forgotten about issues regarding legal structures you need to consider when buying a pharmacy.

1.       Consider the difference between accounting profits and drawings.

As we all know there is a difference between profits and cashflow. Often the cash of the business is wrapped up in stock and working capital, loan and finance repayments etc. However, when you consider entities such as partnerships and trusts, the entire profit must be distributed out to the partners or beneficiaries which they are taxed on. The drawings for those partners/beneficiaries can often be less. Resulting in you paying tax on profits you don’t see (just yet). Sometimes that is the benefit of using a company. The company pays tax on its profits at 27.5%. You, as a shareholder only pay tax on the dividends you receive. A slightly fairer position.

2.       As is common with partnerships, partners can come and go.

Each time there is a reconstitution of the partnership, the old partnership comes to an end and a new one starts. The business itself never actually gets sold from out of the core partnership. But it can create administrative nightmares with new ABN’s/TFN’s, new bank accounts, contacting suppliers and customers with business changes, multiple financial statements and tax returns within one financial year etc. Sometimes a company can come into play here. The company owns the pharmacy and any changes in “partners”, or shareholders in this case, is just simply a share transfer. The business within the company continues with no changes. Same bank account, same ABN/TFN. Simplicity is sometimes a good thing.

3.       It is important you understand when owning pharmacies in a company, that the company owns the business.

You don’t. It’s not your money, it’s not your assets. You can’t just do whatever you like with the funds sitting in the bank account. There are vast reams of paper devoted to Corporations Law and company taxation laws that need to be adhered to.  It is important you understand this and get direction from your accountant on what you can and can’t do.

4.       Short term versus long term considerations.

I can recall several situations where a young pharmacist is buying into a partnership and we are discussing the validity of family trusts and being able to distribute profits out to other beneficiaries on lower tax rates. Sometimes at this stage they may be unmarried, but things can change, and change quickly. And within the space of 5 years they could be married and with kids. Whilst there may be no advantages in setting up family trusts now with only one potential beneficiary, the length of time these young pharmacists own the pharmacy can be very long. So, it is important to consider long term advantages. The tax savings over the life of the family trust can be considerable, despite no advantages in the first few years.

5.       Flexibility of choice.

We often don’t know where our future is heading, what opportunities come our way, and what obstacles we must overcome. Allowing for flexibility in any structuring choice is important. For example, we should be considering the future growth prospects of the business and the associated income levels and tax consequences. Plus, we also need to consider any additional pharmacy investments the owners may make and the relationships between the different businesses and entities.

6.       Wage cost considerations.

An often forgotten about issue is your choice of legal structure and whether it will impact the types of awards that will apply to your team. Particularly when you are looking at buying a business, you would need to consider if you will be changing awards and if that will impact your wage costs and profitability when you take over the business.

These issues are by no means exhaustive. There are a lot of issues that need to be considered when deciding on a legal structure that suits you, your business and your future. Make sure you get good advice here and take the time to consider this critical choice.

If you have any questions or would like your current legal structures reviewed, please contact John Thornett and Victoria Le at Peak Strategies.

Written by John Thornett- Director at Peak Strategies