An ill-planned incorporation can turn sour. Here Nathan Poole highlights some of the key issues around incorporation and explains the risks that might await the unprepared.
Do you recommend that your dentist clients incorporate?
Yes and no! Some of our clients enjoy the challenges and opportunities that being incorporated brings and are happy to set aside time getting to grips with those issues.
If clients prefer simplicity, then being self-employed can still be beneficial and we recommend they don’t incorporate.
Often the best option when buying a practice using a large loan is to do so through a limited company because this brings significant tax advantages.
Are you aware of dentists who have got into difficulty?
Sadly, yes. We are sometimes called upon to help dentists who incorporated without a good accountant. Usually, it’s when it’s time to sell their business that they or their broker realise they need help. It takes some effort to disentangle their affairs, which can delay the practice sale.
We expect to help our clients if they choose to incorporate so they are never in the position of having to unpick a poorly managed incorporation.
It’s surely the point of incorporation to protect yourself financially, so how can things go wrong?
It’s true that by setting up a company you are distanced from exposure to business debt – but you need to know what you are doing.
Moving the goodwill that belongs to a sole practitioner or a partnership into a limited liability company takes some finessing. Careful planning of how much and when funds are extracted is essential.
Through incorporation you can limit your tax liability, but you need to know what you are doing to make the most of it.
What kind of mistakes can be made?
Well, one common example is the dentist who sees that their company has lots of money in the bank and decides to invest that money within the company.
When the time comes to sell the dental practice, any investments in the company could become part of the sale transaction.
Most often, the dentist will want to retain any investments and cash in the company and only sell the goodwill.
Restructuring the company to move the investments out, so only the dental practice is sold, can be complex.
What other kinds of difficulties can occur?
By selling the goodwill and assets of the dental practice to a company, you are changing its status. As a result, you will need to inform all stakeholders about the change: your landlord, the Care Quality Commission, your bank (if you have a loan), the NHS (if you have a contract) and any patient membership scheme that you are signed up with.
Forget to inform any one of these organisations, and you could find yourself in difficulty.
So you don’t personally own the dental practice goodwill anymore?
Correct. Your company owns the goodwill, and you operate through a limited company, which means there are restrictions on how you manage the company finances.
Most dental incorporations start with a high value of assets as the dental practice goodwill has been acquired by the company.
What else should dentists be aware of?
When you sell the goodwill to the company, there will not be enough assets for the company to pay for it, so you create a director’s loan account (DLA).
Instead of taking dividends, you can repay money from the company though the directors loan.
For our incorporated clients, the DLA is central to planning how we can maximise profits and minimise tax.
You may choose to pay no tax in some years but then plan to pay tax at the lower rate in future years.
You can also use the director’s loan to average your earnings.
This is interesting. How do you do this?
So if you have a year when you take out a significant amount of money, you can choose not to balance the director’s loan with dividends, which means you may owe money to the company.
In following years, when drawings from the company are lower, we will issue higher dividends to repay that loan, so that you are not paying high amounts of income tax for the year in which you borrowed significant sums of money.
Are there any hidden dangers to be aware of?
If you were to go out of business and there were loans to the director in place, the liquidator would expect you to repay the money owing.
We know of an instance where a company owner was working with an accountant who failed to warn that the company was at risk. The owner though he was protected from debt, not realising that he was responsible for the repayment of the loans.
Fortunately, he was able to borrow £100,000 from his daughters – but who wants to turn to their children?
So, whats the moral of the story?
It is very unlikely for a dental practice to go into liquidation, but it’s worth being aware that when you have a company, there may be consequences of taking money out of the company on a whim.
The money in the company is not completely yours to do what you want with, unlike the assets of a self-employed person!
If a client wants to incorporate, we will draw up a detailed report examining the pros and cons so they can considers the decision in detail.
The moral of the story is to use your accountant for expert advice, that’s what they are there for, not just filling out and filing tax returns.
This article first appeared in Private Dentistry magazine. To receive a copy, sign up to Dentistry Club.
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