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InPsych 2016 | Vol 38

Cover feature : Private practices into the future

Business models applied to the private practice setting: Finding a sustainable model that works for you

Psychologists in private practice are operating in a business environment and by necessity, will adopt one of the various business models that function in the private practice environment. As the previous article describes, the reforms to the primary mental health system suggest that it would be advisable for many psychologists, particularly those operating smaller practices, to reflect on the type and relative benefits of the various business models and employment structures to ensure they are well placed to thrive in the changing private practice landscape.

This article provides an overview of the main business models as they apply to private practice and reviews each of these models in terms of the opportunities, challenges and some of the legal requirements of each model.

Sole Trader

Definition:

A sole trader (or a sole proprietor) is a private individual carrying out a business under their usual personal name as opposed to a partnership, trust, or company. Their business revenue and expenses appear on their personal tax return.

Examples:

  • Individual private practice in the psychologist’s own room/s.
  • Individual private practice in the psychologist’s own rooms and subletting rooms to others.
  • Individual private practice subletting rooms from others.

Opportunities:

  • Maximum flexibility and not dependent on others – including for decision-making which can be made swiftly if need be.
  • Fewer legal and tax formalities compared to setting up a partnership or company, and therefore cheaper.
  • Information about sole traders is kept private unlike that of a corporate entity where certain details are made public after registration.
  • Full control of the business and how it is run.
  • Ownership of the business assets and full benefit of the business profits.
  • Potentially a more personal service can be offered having more local roots and ties which can be more appealing to potential clients in the community – compared to a more corporatised service.

Challenges:

  • Fully responsible for every aspect of running a psychological practice, including earnings, client intake, financial transactions (including management of debt), record keeping, marketing, tax, superannuation, professional development, peer consultation and staffing.
  • Legally responsible for all aspects of the business.
  • Private assets such as the home, contents and vehicles could be exposed if business debt cannot be serviced and default occurs.
  • Lack of ready access to collegial support in the management of difficult cases and workloads.
  • Subletting of a practice room and the responsibilities attached to this.
  • The raising of funds to finance business expansion may be more onerous.
  • Sole traders may be unable to take advantage of economies of scale which could mean having to charge higher prices for their services.
  • Some contract work may be inaccessible because a company business structure is a requirement.

Independent associates contributing to shared resources

Definition:

Individual private practice subletting rooms from others and contributing to shared facilities and functions such as a receptionist employed by one of the psychologists.

Example:

This is a model used by many GP and medical specialist clinics.

Opportunities:

  • Efficiency benefits, such as sharing the cost of office fit-out, furniture, waiting room, computers, telephone, other office equipment, internet, HICAPS (electronic billing), receptionist, advertising etc. This efficiency may not only be cheaper but may provide more available facilities than could otherwise be afforded as a sole practitioner.
  • Casual social contact with other people sharing the offices, and opportunities for peer consultation and support.
  • Independent associate legal agreements for health services practices can assist to better manage legal compliance and protection.

Challenges:

Each clinician has to establish and operate his or her own independent practice. This brings the same challenges as a sole trader and possibly more obligations and/or responsibilities to associates.

Partnership

Definition:

A partnership is a legal form of business operation between two or more individuals (practitioners) who share decision-making and management and profit proportionally. The partners usually enter into a partnership agreement which sets out their legal rights and obligations. A partnership differs from a company in not being a separate legal entity.

Example:

A firm of psychologists offering a range of services who have a managing partner or practice manager overseeing day-to-day administration.

Opportunities:

  • Relatively inexpensive to set up.
  • Efficiency benefits the same as a sole trader contributing to shared resources but with responsibility legally shared amongst each partner in the partnership.
  • Capacity to afford higher rental or larger premises purchase or more support staff than possible as individual practitioner.
  • Ability to partner with psychologists with shared expertise or interests.
  • Ability to market practice as a specialised clinic/service.

Challenges:

  • Partners equally share responsibility as a group but also individually. For example, if one partner is unable to meet a payment or contribution, the liability must still be borne by the remaining partners (joint and several liability). Partnerships can be like share houses – it seems like a great homely idea at first until the dishes and bills start piling up – such as differences in partners' plans for the practice, goals, philosophy, approach to financial management, personalities etc.
  • Costs obtaining any necessary initial advice and of the legal documentation to properly establish and administer the partnership such as the partnership agreement.
  • Private assets such as the family home, contents and vehicles could be exposed in circumstances where partnership debts need to be settled.

Consortium: A variation of the partnership model

A consortium refers to a type of partnership where psychologists (as individuals or through their companies) come together – or come together with other businesses, or organisations – in a formal co-operative arrangement governed by an agreement to maximise effectiveness and resources. This consortium model typically suits a special purpose project. It is also more suited to a project on a larger or more specialised scale requiring more substantial funds and expertise. Sometimes the consortium may have a lead partner, or a dedicated company or entity to oversee the initiative and to minimise risk.

Company

Definition:

A company is a type of business which operates as an incorporated legal entity regulated by the Australian Securities and Investments Commission (ASIC), as distinct from a sole trader or partnership. A company may consist of one person (that is, a single director and shareholder as an alternative to being a sole trader) but it is still a separate legal ‘person’ at law.

Example:

The practice or business conducted by a group of psychologists can be owned by a company in which they are shareholders and directors and in which (unless it is a more sizeable concern) proprietorship is limited.

Opportunities:

  • Other business opportunities may be facilitated, for example, with government departments which may not be willing to enter into contracts with non-corporate enterprises such as sole traders.
  • Shareholders are not liable for the debts of the business and structuring as a company offers increased protection of personal assets. The debts are those of the company. Access to directors’ and officers’ insurance against a range of potential losses in certain proscribed circumstances.
  • A corporate structure is more suited to capital raising.
  • Company profits are not subject to the traditional
    double layer of tax.

Challenges:

  • A company may be more expensive to establish and maintain (for example, ASIC compliance and greater tax reporting requirements).
  • Control is in the hands of a board of directors.
  • Directors have both statutory and common law duties (including the duty not to trade whilst insolvent).
  • Directors may be required to provide personal guarantees to better secure the liabilities of the company (for example, when entering into a contract with a supplier or with a lessor for the practice premises).

Franchise

Definition:

A franchise is a type of licence agreement between a franchisor and a franchisee (for example, a psychologist) whereby the franchisee is allowed to have access to the franchisor’s proprietary knowledge, processes, methods and trademarks to allow the franchisee to provide a particular service (in this instance, professional psychological services) (or sell a product) in a particular way, under the franchise name, usually in a designated area.

Example:

A psychology practice in a company structure conducting a business under a franchised name and logo.

Opportunities:

  • An immediate and regular source of clients.
  • Significant assistance with things such as centralised client intake and reception, marketing, obtaining finance (possibly including access to cheaper finance), employee contracts, business advice, peer support, and developments in the sector (e.g., eHealth).
  • Associates you with an established brand.

Challenges:

  • An initial outlay for legal fees in order to be properly advised about the suite of franchise documents prior to entry into the franchise relationship.
  • The business must be sufficiently capitalised to afford franchise fees which are generally comprised of an initial up-front investment and ultimately the business needs to be viable enough to afford ongoing royalty payments.
  • As franchises are usually based on a franchise formula or proven business model and a given geographical territory, running the business will usually mean ongoing stipulated requirements about how the business operates. This means far less flexibility or latitude than some other options (see
    www.franchise.org.au/franchising-code-of-conduct.html for more detailed information).
  • Not all franchise arrangements are suitable for a very small business or sole traders and usually favour a corporate structure.
  • Adherence to the Franchise Agreement and ‘the formula’ is an additional form of compliance required of the franchisee corporate.
  • The franchise and the brand may fail.

Businesses with employees or independent contractors

Definition:

Any business can be an employer or take on contractors, regardless of whether the business is a sole trader, partnership or company.

Opportunities:

This can create opportunities for people to work in the private sector who are not interested in setting up their own private practice, are not sufficiently capitalised, or do not feel confident to do it – thus expanding opportunities for a greater range of psychologists to continue to practice.

Challenges:

  • Making decisions as a business about whether to take on employees and/or contractors can be complex and requires careful consideration. For example, the type of employment agreement (e.g. permanent employee, casual employee, contractor) may only change some obligations (e.g. sick leave, annual leave) but not others (e.g. WorkCover, superannuation guarantee, long service leave, minimum hours of work, split-shifts, penalty rates) depending on what State/Territory you are in, and what percentage of income the employee derives from your company.
  • Further, compliance with the National Employment Standards and the relevant national awards can add complexity as well.

The first author can be contacted at john.brown@psychsessions.com.au

References

Disclaimer: Published in InPsych on October 2016. The APS aims to ensure that information published in InPsych is current and accurate at the time of publication. Changes after publication may affect the accuracy of this information. Readers are responsible for ascertaining the currency and completeness of information they rely on, which is particularly important for government initiatives, legislation or best-practice principles which are open to amendment. The information provided in InPsych does not replace obtaining appropriate professional and/or legal advice.