This article describes the various legal structures that are common and gives you a general starting point in thinking about what fits your purpose and what balance of compliance risk vs efficiency you're willing to take.
Recommendations / Summary / TLDR
It is impossible to say that there is one best solution for all people. It simply depends on what you are wanting to achieve and what you are willing to put in to make it happen. So for instance, if you really just want to go to work and come home and not think about it after you clock off then you're probably best suited to employment. Sometimes that comes with a paycheque but more and more frequently we are seeing employment pop up in the guise of "Contracting". If you are wanting to build something unique and revolutionary, to take risks and put your savings (and assets) on the line then please get a Pty Ltd company structure in place and never sign a Directors guarantee if you can avoid it. Some structures that are legally watertight add enormous cost and little value relative to the risk and penalty of an adverse finding yet seem to drive some people into tail spins trying to avoid any form of compliance risk. These tail spins end up creating real and tangible costs for all parties without having a discernible protection for the "at risk" party in the agreement. With these caveats and the full disclosure that no lawyers were harmed in the forming of these opinions my top picks are... it depends. Sorry.
eg: Working in public sector role or similar. Pros: simplicity of a paycheque, paid leave, predictable income. Cons: Often lower take home income, loss of control in a large organisation.
Self employed aka Sole trader
eg: Hiring a room and only ever working solo. Pros: Access to potentially higher hourly rates which sometimes flows through to higher take home pay. Greater control over presentation type and treatment process. For some the ability to get broader recognition may be a non-financial benefit. Cons: You need to run a business (most psychs are never trained to do this) and are surprised at how hard it can be. You income will fluctuate and it may be harder to get bank loans amongst other things. If you don't enjoy solving problems then its probably best not to take on running a business.
Eg: Two or more psychologists operating the business together and sharing the profits in some fashion. Pros: Relative to self employment, there is reduced risk because there are more people sharing the load of operating the business and therefore with many hands and varying skill sets it is more likely for the business to succeed. Cons: Partnerships don't generally work. Why? Someone will do (or perceive they do) more work than is fair. The only form of partnership that I have seen working is either where the partners come from entirely different skill sets for instance when an accountant a publican and a chef team up and bring their unique skillset together to be collectively more valuable than each individually. I don't recommend partnerships in psychology (I've seen a few fail).
Collectives / Joint ventures
Eg: A collection of two or more psychologists that share some assets and costs, similar to a partnership, but rather having a single ABN and a central pool of revenue, where profit is shared after costs are paid from this central pool of funds the operations of a joint venture business are paid for from a trust or JV agreement bank account and each of the JV partners dip into their independent revenue buckets to pay the shared costs which are invoiced to them by the JV. Pros: Things like rent and even admin staff costs can be apportioned by usage and this is therefore much less risky for any individual if the JV holds the lease for instance. Cons: It adds a degree of overhead in the calculation and distribution of costs but worse the decision making tends to grind down to a lowest common denominator approach similar to strata housing. For instance will you realistically kick out one of the partners who can't afford to pay their share of a new $10,000 website but you are losing referrals if you don't replace the website? Also be mindful that this choice of business structure may limit your choice of practice management systems. For instance CorePlus allows each clinician to run their own ABN and separate merchant facilities, PowerDiary and Halaxy don't.
Eg: Any time you see Pty Ltd in the name. Pros: Ability to take on staff, nominally this is safer than operating a sole trader business because if you go bankrupt then your creditors can't take your house... sort of. You can also retain profits across years using franking credits and balance that with loss making years whereas a sole trader is treated as though every cent earned this year is taxable at this year's rate even though it's the first year you've made a profit and the last two years you made a loss they didn't chip in to help. Cons: Setting up and maintaining a company takes time and money. Expect to pay at least a couple of thousand extra each year in accounting costs. Every serious creditor will circumvent the protections offered by a Pty Ltd structure by requiring the Directors to enter into a Directors guarantee whereby if the business fails then the Directors are liable for the liabilities of the company. For instance it is common in commercial leases for the Directors to be on the hook if the Company folds. If you are paying $100,000 pa in rent and you have a serious health condition that forces you to close your company just inside the 3 year lease option then a Director's guarantee might open you up personally to pay $300,000 to the landlord if you can't transfer the lease, even though you have had to close the company.
What about Contracting?
Eg: Taking a percentage from an established practice who have excess demand and will pass on some proportion of the invoice or payment amount in return for your labour. Let's be clear... this isn't a business structure it is a form of employment - why? Because you will not meet the independence requirements in 99.9% of private practices. But if they have an ABN then they are an independent contractor aren't they? No. If they are a Pty Ltd company then maybe but there was a spate of businesses that for example would force brickies labourers (no skill and no tools) into getting an ABN and the government has made it clear that if: the worker is not free to choose when to do the work; if they aren't free to sub-contract the work to someone else; if they have no warranty responsibility; if they are paid by the hour rather than the outcome etc then regardless of what paperwork has been signed it is simply an invalid contract and this is an employment arrangement. But they only work 2 days with me and they work their other days somewhere else! Irrelevant. check Fair Work for more info. Some people get really riled up by the phrase "sham" contracts or "deemed employment" which describe this arrangement and yet these agreements are pervasive in this industry. Why? Because they actually work for both parties. Imagine having a part time employee choosing to do one day a week on Mondays... 8% of Mondays are public holidays... does that come out of the salary?
In most private practices, the simple imperative to convert hours in the chair to dollars. In an employment arrangement there is an inherent tension between seeing another paying client vs doing some extra reflection and paperwork. If you are in a large department or corporation like Ramsey then they can afford managers and oversight processes that are hard to implement in small practices where the director is also a clinician and supervision with the clinic Director can cause conflict of interest issues anyway. Employment is what is happening but there needs to be strong alignment rather than strong management controls.
If you are the employer of contractors in this form of employment then please consider at a minimum paying their superannuation and workers compensation. If you don't you could be liable for a lot of unpaid entitlements. But again, being a "contractor" is not a business structure it is an employment arrangement. Our recommendation is to pay the minimum national employment standard for 38 hours pw regardless of whether the psychologist sees 0 or 30 clients in a week and then separately pay a "bonus" for each contact hour such that the effective take home pay is the same each year but there is no burden of managing PAYG tax, GST and ABN tax returns on the psychologist and they are paid holiday and sick leave at the minimum rate to avoid breaching the law. It adds very little additional book-keeping cost to the employer and it rightly shift the onus of responsibility onto the employer for the paperwork. By meeting the minimum requirements of the Act it has the closest effective alignment of motivation possible rather than creating a paperwork tension as above. This might look like paying $40ph plus 20-50% of the gross revenue each week as a "contact bonus" but the particulars of your award and chargable rate matter. The effect is that it should balance out the same as the deemed employment but be less risky.