The debate on whether a medical practitioner should practice as a sole proprietor or in an incorporated entity, the sole called Inc, is ongoing. I often receive questions in this regard from clients or potential clients, wanting to know which option is more beneficial. The answer to this depends on a number of factors, the most important being the amount of taxable income that is derived from the practice.
A sole proprietor is not a company, but a natural person operating a medical practice in his or her own name. An incorporation is a specific type of company registered with the CIPC and usually used by doctors, lawyers and accountants to operate their professional services businesses. The owner and directors of an Incorporation does however not receive the normal liability protection that is available to other companies, as a result of the professional services that they render. They can be held liable by a patient or a client for negligence or damage in their personal name, even though they operate in an Incorporated entity.
So what is the real benefit then? Let’s look at how each entity is taxed:
- The income earned by a sole proprietor is taxed on a sliding scale basis at a rate from 18% to 45%. The practitioner is allowed to deduct business related expenses from income earned, to determine taxable income. The 45% tax rate is triggered on all taxable income in excess of R1 500 000 per annum.
- The income earned by a sole proprietor is taxed on a sliding scale basis at a rate from 18% to 45%. The practitioner is allowed to deduct business related expenses from income earned, to determine taxable income. The 45% tax rate is triggered on all taxable income in excess of R1 500 000 per annum.
The answer as to the optimal tax position between a sole proprietor and an incorporation lies somewhere in between and requires careful tax planning from an experienced tax advisor. Many other factors and personal circumstances may also have to be considered. One can see from the above that should your expected taxable income exceed R1 500 000 per annum, an incorporation may be more beneficial from a tax perspective.
My advice would be, engage the services of an experienced tax advisor and do proper planning, it could save you a lot of money. Be aware that other compliance costs are also applicable to an Incorporation. Your accountant can advise on this.