In a nut shell, when it comes to ownership of an optometric practice, there are two fundamental issues at play. The rules are intended to protect the public against persons or entities not governed by the professional medical code. They may be driven by financial reward and may not always act in the best interest of the patient. In other words, non-optometrists, cannot own an optometric practice. Secondly, professional liability, should not be veiled by the business entity used to practice optometry. This in particular, points to the entity of a Private Company. Private companies enjoy limited liability under company law. This means, that the shareholders of a company cannot be held responsible for the company’s financial woes or other misdemeanors (there are exceptions as we will see later). The HPCSA does not want an optometrist to escape a malpractice law suit by claiming that only the Private Company can be held liable. For this reason, ABC Pty Ltd is not an option for an optometrist as a business entity. Optometrists may practice under a Personal Liability Company, also known as an Incorporated Company. It has therefore become fairly common practice that optometrists use an Incorporated Company, where all the revenue is related to professional service and fees. The retail/administration part of the practice can be run from a normal Private Company.
Acceptable Business models 1
- Solo Practice
- Personal liability companies (Incorporated Companies – Inc.)
- Franchises (subject to compliance with the ethical rules)
Any of the above, can establish a company to manage the administration, provided that such arrangement is not in violation of the established ethical rules of Council.
Any other business model/formation or structure outside of these models must go to HPCSA for consideration or approval by the HPCSA.
Undesirable business models1
A person, whether a natural person or a juristic person, who is not registered in terms of the Act and in accordance with the Ethical Rules, does not qualify directly or indirectly, in any manner whatsoever, to share in the profits or income of such a professional practice and which, without limiting the generality of the foregoing, may take the form of:
- transferring the income stream (or any part thereof) generated in respect of patients from the practice to such a person; or
- giving (directly or indirectly) shares or an interest similar to a share in the professional practice to such a person; or
- transferring income or profits of the professional practice to a service provider through payment of a fee which is not a market related fee for the services rendered by the service provider.
- paying or providing a service provider with some or other benefit which is intended or has the effect of allowing the service provider or persons holding an interest in such a service provider to share, directly or indirectly, in the profits or income of such a professional practice or to have an interest in such a professional practice.
Direct or indirect corporate ownership of a professional practice by a person other than a registered practitioner, in terms of the Act is not permissible.
Corporate Involvement means the provision of services by corporate entities, (whether of a financial, administration, legal, rental or similar nature) to a professional practice in terms of an agreement (other than a simulated agreement) negotiated on an arms-length basis and in terms of which an objectively determined market related and fair remuneration or fee, is payable by the professional practice to the entity or such other person, for the services rendered.
All health care practitioners should at all times act in the best interest of the patient and place the clinical needs of the patient paramount. To this end, a health care professional should always try to avoid potential conflict of interests and maintain professional autonomy, independence and commitment to the appropriate professional and ethical norms. Any conflict of interests or incentive or form of inducement which threatens such autonomy, independence or commitment to the appropriate professional and ethical norms or which does not accord first priority to the clinical need of a patient, is unacceptable.
Corporate involvement is permissible on the following conditions: –
- ethical rules and policies of HPCSA are complied with;
- practitioners take full responsibility for the compliance of the corporate unregistered party with the ethical rules and policies of Council;
- practitioners are not able to hide behind the corporate veil but are able to take individual responsibility for all business transactions and operations of the business;
- no provision is made for hiving off fees to a corporate entity;
- no coercion by corporate entities on practitioners to enter into arrangements that would violate ethical rules.
The sole proprietorship is the simplest and most common form of business conducted by a single individual owner. A sole proprietor can operate under the name of the owner or it can conduct business under a separate trading name.
There are no legal formalities to establish a sole proprietorship. No registration with the Companies and Intellectual Property Commission (CIPC) is required. In effect, you are conducting business in your own name and not in a separate entity. This means that all the profits the business generates are lumped together with the owner’s drawings as taxable income and the net income from the business is taxed only once. This is in contrast, with the income from a company, which is taxed twice: once when the corporation is taxed, and again when the income is distributed to shareholders in the form of dividends. Sole Proprietorship income tax (normal tax) is levied at progressive rates ranging from 18% to 45%.
Moreover, the Sole Proprietor is not subject to a compulsory audit. A Sole Proprietor lasts as long as the owner is alive. Once the owner dies, the business has to be wrapped up. This can have serious estate duty implications, since all the personal assets and business assets are seen as one and the same thing and subject to estate duty. There are more complications here, when assets are frozen until the estate is wrapped up, which will take time and cause serious cash flow issues for the beneficiaries of the estate. A major disadvantage of a Sole Proprietor, is the fact that there is no protection in your personal capacity for claims against the business. Unlike trading as a Private Company, with limited liability, you share the risk of the business in your personal capacity. This might impact negatively on the owner as creditors of the business will be able to attach some of the owner’s personal assets in the event of insolvency of the business.
It may be difficult to raise finance with this form of enterprise, since the owner cannot raise capital by selling an interest in the business. Due to potential financing challenges, which are typically faced by a sole proprietorship, it may hamper the opportunity to expand the business of a sole proprietorship.
A private company is treated by law as a separate legal entity and must also register as a taxpayer in its own right. It has a life separate from its owners, with rights and duties of its own.The owners of a company are the shareholders. Shareholders are generally not responsible for the liabilities of the company; however certain liabilities do exist. This includes an employer or the person, who performs functions similar to a director of the company, who will be personally liable for employees’ tax, VAT, additional tax, penalty or interest, for which the company is liable (where these taxes have not been paid to SARS within the prescribed period). Unlike individuals, a company or CC pays 28% income tax on its taxable income for the tax year and 15% secondary tax on companies on the net amount of dividends declared.
The name of a private company must end with the words ‘(Proprietary) Limited’ or ‘(Pty) Ltd’.
Advantages of a Private Company (Pty) limited)
- Life span is perpetual
- Shareholders have limited liability
- Act only imposes personal liability on directors, who are knowingly part of the carrying on of the business in a reckless or fraudulent manner
- Ease of transfer of ownership
- Easier to raise capital
- Efficiency of management
- Adaptable to both small and large businesses
- Not required to file their annual financial statements with the Registrar of Companies, thus, they are not available to the general public
- No stringent audit requirements anymore.
Key points of a Private Company (Pty) limited)
- Subject to certain legal requirements depending on turnover size.
- Difficult and expensive to establish, compared to Sole Proprietorship (a new Close Corporation may not be registered since 2011).
- A Private Company (Pty) limited), must have at least one shareholder. This can be a foreign entity or another Pty Ltd or a Close Corporation.
- A Private Company (Pty) limited) must have at least one director.
- A Private Company’s (Pty) limited) articles must restrict the right to transfer its shares, and prohibit any offer to the public for the subscription of any shares or debentures of the company. A Private Company (Pty) limited) cannot, therefore, be listed on the stock exchange.
- A private company cannot issue share warrants or bearer shares.
- The quorum for a meeting is two shareholders for a Private Company (Pty) limited) (except in the case of a one-person company), unless the Memorandum of Incorporation provides otherwise.
- The voting rights of shareholders of a Private Company (Pty) limited) must be determined by the Memorandum of Incorporation.
- Certain Private Company’s (Pty’s) limited) have to have their annual financial statements audited.
- Shareholders have limited liability, that is, they are generally not responsible for the liabilities of the company.
- Certain tax liabilities do exist. One such liability is where an employer or vendor is a company, every shareholder and director who controls or is regularly involved in the management of the company’s overall financial affairs shall be personally liable for the employees’ tax, value-added tax, additional tax, penalty or interest for which the company is liable, that is, where the taxes have not been paid to SARS within the prescribed period
- Personal liability on directors.
- The Companies Act 71 of 2008 imposes personal liability on directors where in common law, such liability may not exist or be difficult to prove. Any person, not only a director, who is knowingly a party to the carrying on of a business in a reckless (gross carelessness or gross negligence) or fraudulent manner can be personally held liable for all or any of the debts of the private company.
Incorporated or Personal Liability Company
All the rules and ramifications are essentially the same as for a Private Company. The fundamental difference is, that an optometrist cannot escape a malpractice suit in an Incorporated Company, as would be the case in a Private Company on account of limited liability. This is why the HPCSA does not allow an optometric practice to trade as a Private Company.
From an optometric perspective, the business is not compelled to have an annual audit if trading as a Sole Proprietor. As a Private Company, there are three choices:
- No audit
- Independent review
- Proper audit
In the past, one of the main barriers to the Private Company, was that annual audits were compulsory and this could be expensive. This is no longer the case. Audit requirements are determined by the Public Interest Score, which are very unlikely to be applicable to an optometric practice. It is worth noting that, in the event of wanting to sell your practice, an astute, potential buyer, will insist on proper audited financial statements.
There are important implications, depending on the trading entity. In the case of the Sole Proprietor, the business and personal assets are lumped together and frozen, which cause serious cash flow problems for the surviving partner and family. This may be circumvented with a life insurance policy. However, there will be heavy estate duties to be paid.
In the case of a Private Company, shares can be placed in a Trust. Unlike the Sole Proprietor, the Company can continue to trade, in spite of shareholders passing away. Because of the seriousness of the scenarios that can unfold here, it would be prudent to take professional advice and put plans in place to protect the estate. It is very important for Sole Proprietors to be fully aware of the pitfalls here.
Professional Indemnity insurance6
It’s coverage you hope to never use, but you’ll be glad to have when you need it.
Requirements for indemnity cover 5
In terms of the HPCSA regulations, a healthcare practitioner, registered and practising in the category ‘independent practice’, must obtain a professional indemnity cover, which must be fully maintained at all times.
A health practitioner must:
- provide the Council on an annual basis with documentary proof and details of the required professional indemnity cover; and
- obtain the professional indemnity cover from a person registered in terms of section 7 of the Short-Term Insurance Act to carry on short-term insurance business.
A person who, on the date of publication of these regulations, was already providing professional indemnity cover to a health practitioner, but was not registered in terms of section 7 of the Short-Term Insurance Act, must register within 4 months from the date of publication of these regulations.
Professional Liability Insurance (Malpractice insurance) is designed to protect professionals who provide medical services or give health and wellness-related opinions as a means to earn a living. In today’s litigious society, going without this type of insurance can be catastrophic. It provides coverage for the cost of legal fees, judgments, or settlements that result from claims or lawsuits against you, plus loss of income.
If the optometrist makes a mistake, resulting in inadequate vision, which may put the patient and/or others in harm’s way, there may be grounds for a law suit. The most common claim against optometrists is failure to diagnose ocular pathology. This may result in the patient suffering vision loss or may even be faced with a life-threatening situation.
Whether you’re a seasoned optometrist, with thirty years’ experience, or a newly minted professional just starting out, having the right Professional Liability Insurance is essential. Working part time as a locum does not diminish the risk. You are the one who will be sued, not the practice. Professional Liability Insurance will enable you to arm yourself with a strong defense against malpractice claims. Not having Professional Liability Insurance can result in financial ruin and place your career as an optometrist at risk.
For example, you may examine a patient who does not reveal to you that he is diabetic. You may well have covered the question in the case history, but did not write it down in the patient record. He may suffer from occasional bouts of blurry vision. Should he have a car accident as a result, there may be cause for a liability claim. Without Professional Liability Insurance, it would be very difficult to defend yourself against a claim like this.
Why do I need Professional Indemnity Insurance?
- It will pay for loss of income: Regardless of guilt or innocence, legal proceedings can take months, if not years, to settle. This can mean time away from your practice. A Professional Liability policy will not only pay for the loss of your personal earnings, but will cover all practice expenses you are unable to cover, due to the loss of turnover.
- It will pay for your legal fees: Even if you are innocent, the costs to defend yourself can be astronomical. Legal teams may want guarantees in place before taking your case. With Professional Liability, you can choose limits up to R10 million to cover these expenses.
- It will pay for any settlements the court rules: Any optometrist may find himself/herself facing the nightmare situation of an indemnity claim. We are human and mistakes will happen. With adequate insurance, it does not have to result in financial ruin and a shattered career.
- Professional reputation: In healthcare, reputation means everything. The word that you’re defending a case of negligence can seriously tarnish your reputation. It is therefore vital to have the strongest possible defense team to fight for your reputation. Securing Professional Liability Insurance indicates that you take your profession seriously and you’ll stand ready to protect your good name.
Follow the protocols
Following the strict protocols of your discipline is your best defense against unwarranted accusations. Record keeping is such a vital aspect when it comes to defending your work. The court will take the view, if you didn’t write it down, you didn’t do it. We are fortunate that in South Africa, Professional Indemnity Insurance is very cheap, considering the protection one can enjoy. It would be silly to buy the cheapest policy without due consideration of the benefits. Buy according to the best benefits, not the lowest monthly premium. Professional liability claims are on the rise in South Africa. These days, cover for ten million rand can no longer be considered excessive.
- HPCSA – Policy Document on Business Practices as at 26 October 2016
- Eric Parker –Road map to business success 2006, Pg24, Front runner publishing Pty Ltd.
- Business Owl – http://businessowl.co.za/business-articles/different-types-of-business-entities-in-south-africa/
- Iaan Marx CA, LDP Accountants, Helderberg street, Stellenbosch
- Health Professions Act 56 of 1974 – Regulations relating to indemnity cover for registered health practitioners. Published under Government Notice R755 in Government Gazette 33498 of 30 August 2010.