The question on legal structures around pharmacy partnerships can be a difficult issue. To be correct, if I word that properly, there are lots of difficult issues.
For the purpose of this blog, I am using the term “partnerships” to mean the coming together of two or more people who have an interest in a pharmacy business. I am not referring to a partnership legal entity, unless otherwise stated of course. The choice of legal structures that can be used to “house” this arrangement is what I will delve into now.
When two or more people are coming together to buy a pharmacy, we have a bit more freedom of choice about what legal entity we choose. However, if a partner is being admitted into an existing pharmacy business, the incoming partner is restricted to the legal entity the current owner has. Meaning the incoming partner is either buying shares in the company, units in a unit trust, or is in partnership with the other owner. However, it is important that we carefully consider some critical issues.
1. The tax points – at what stage are the profits taxed, does the structure allow for income splitting and “tax efficiency”, and what are the tax implications of growing profits.
2. The ease at which partners can be admitted and exited.
3. Asset protection and liability issues
4. How the legal entity and owners’ interests are governed.
Here are a few points you need to be aware of with a few of the most common options.
Legal Partnerships
Partnerships themselves are not taxed. The partners are taxed separately on their share of the profit, not what profit was physically drawn out. This can potentially create an inequity, as the tax paid on what is physically draw out can be disproportional to normal marginal tax rates, particularly if some cash is being retained in the business for working capital, loan repayments or equipment purchases…
Partners are jointly and severally liable – this means that any single partner can enter into a deal or incur debt on behalf of the partnership, and therefore, on behalf of other partners.
A partnership structure, generally speaking, provides no asset protection.
Tax can be higher than in other structures because there is no way of sheltering income – the entire net profit must be distributed to the partners each year which can result in the partners paying tax rates above 30%, something that can be minimised if an alternative structure is used.
Partner joins or leaves? This will mean the old/existing partnership ends and a new one forms which can throw up legal, tax and many administrative issues and problems to consider.
Stamp duty is paid on a partner’s initial purchase. Subsequent purchase of minor interests only attracts stamp duty on the Fixtures and Fittings component.
The governance of the partnership is contained within the partnership agreement which will cover issues such as financial contributions, share of profits and losses, rights and obligations, how decisions are to be made, how disputes are to be handled, what happens if a partner wants to exit.
Note a partner in a partnership does not have to be an individual. It can be a company or a family discretionary trust.
Company
A company is its own separate legal entity. Meaning it owns its own assets, incurs its own liabilities and any profits made are retained within the company itself. In simple terms, it’s the company’s money not your money.
Any coming and going of “owners” is handled simply by the transfer of shares. The business continues to be retained by the company. Unlike partnerships where a new partnership is formed with every change. Companies are easy in this regard.
There is no stamp duty on the transfer of shares unless land is involved.
Owners’ interests in the company are via share ownership.
Owners can access the profits via the payment of dividends to the shareholders out of retained profits.
Shareholders pay the tax on the dividends received, minus the franking credits, i.e. they pay tax of the funds they physically receive.
Shareholders and Directors are different roles. Shareholding is who owns shares in the company. A shareholder does not have to be a director. Similarly, a director does not have to be a shareholder.
The governance of a company is contained within the company constitution and via Corporations Law.
Tax on the profits made by the company is paid by the company.
Companies have limited liability, meaning the liability of a company is limited to the assets of the company. Of course, there are exceptions to this rule, e.g., director personal guarantees.
A company structure is an advantage to have where the business is likely to be retained within a group, but just the partners are likely to come and go. This is particularly relevant for group scenarios.
Partnerships have partnership agreements; companies have shareholder agreements.
Unit Trust
A unit trust has similar features to both partnerships and companies.
Owners’ interests in the unit trust are via unit holdings.
Any profits made by the unit trust is distributed to the unit holders in proportion to the units held within the unit trust.
A Unit Trust does not pay tax. The unit holders pay tax on their share of profits they received.
Any coming and going of “owners” is handled simply by the transfer of units. The business continues to be retained by the unit trust. Unlike partnerships where a new partnership is formed with every change.
There is no stamp duty on the transfer of units unless land is involved.
The Unit Trust is managed via a trustee, which can either be individuals, or a company. In a business setting a corporate trustee is preferred as companies have limited liability, meaning the liability of a company is limited to the assets of the company. Of course, there are exceptions to this rule, e.g., director personal guarantees.
The governance of the corporate trustee is contained within the company constitution and via Corporations Law. The governance of the unit trust is via the Trust Deed.
Partnerships have partnership agreements; unit trusts have unit holder agreements.
If you are considering buying into a pharmacy, or an existing owner and want to know more, it is important you seek advice from your accountant and lawyer about how these issues apply specifically to you.
Also make sure you reach out to Priya Narsing or myself who will be able hold your hand and guide you through these very complex issues. Everyone’s situation is different. To book an obligations free consultation with us please click the buttons below.
