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Changing your structure should be a strategic decision that can influence risk management, capital allocation, talent retention and long-term legacy, incorporation goes beyond a tax discussion.
So, what are some of the key considerations for firms weighing up incorporation and practical next steps for those considering the transition?
Professional services firms can operate under a range of legal and commercial structures, each with different implications for risk, tax, governance, and succession. Common structures include:
When selecting or revisiting an operating structure, firms must balance commercial, tax, and regulatory considerations. Key factors typically include asset protection, tax efficiency, access to capital, risk management, succession planning, and the cost and disruption of change.
Traditionally, many professional practices have operated as partnerships, with profits distributed directly to Partners under a Partnership agreement. Tax is paid at the individual partner level, and service trusts are often used to house staff and administrative functions. While familiar and flexible, these structures can become strained as firms grow, seek capital or approach succession.
Under an incorporated structure, income and expenses are centralised within a company, commonly owned by family trusts. Partners typically receive market-based salaries, with profits retained or distributed as dividends. The company is taxed at the corporate rate (currently 25 per cent or 30 per cent, depending on eligibility), providing greater flexibility around profit retention and reinvestment.
For many firms, incorporation delivers benefits that extend well beyond tax outcomes, particularly as practices mature or diversify. The top benefits of corporate structures include:
The professional services sector is attracting significant interest from the wider investment community due to stability and growth prospects including family offices, private equity and multinationals. Ahead of this many firms are considering incorporation either in anticipation of such an investment or just to help them become more efficient, attractive to talent and weather the pains that growth brings.
Transitioning to a corporate structure involves navigating complex tax and regulatory considerations including:
While the transition can be costly and challenging, it’s important not to lose sight of the benefits it can deliver.
While incorporation can enhance transparency, it also brings a higher level of complexity, particularly in relation to financial statements, audits and tax reporting. Moving to a corporate structure introduces increased compliance and governance obligations, including adherence to Corporations Act and Directors’ duties, the need for shareholders’ agreements, and employee tax considerations as partners transition to employee status.
Businesses must also meet ASIC reporting and audit requirements, alongside navigating ATO guidance on profit allocation such as including PCG 2021/4, as well as the implications of Division 7A and Section 100A.
If you’re revisiting your existing operating structure, practical next steps would be to reach out to an independent expert for a discussion on what options are available to you.
Our national team of experts offer comprehensive support for firms considering incorporation that include identifying issues and needs, advising on options, provide a deep process analysis, implementation support as well as ongoing review and check-ins. We bring deep experience in business structuring, tax, compliance and advisory services tailored to professional practices.
Following on from the ATO’s guide to professional services firms’ allocation of profits in PCG 2021/4, the ATO has now further tightened its compliance scrutiny of individual professionals’ ability to assign or stream income away from themselves to family members by releasing its compliance approach to so-called Everett assignments.
The ATO recently published the long-awaited final Practical Compliance Guideline PCG 2021/4 for the allocation of profits by professional firms.
The ATO has published the long awaited draft revision of the Practical Compliance Guideline PCG 2021/D2 for the allocation of profits by professional firms.
