Flawed Incorporation – And how to avoid it… John GrantFeatured Products Promotional Features
Posted by: The Probe 7th February 2018
In simple terms, incorporation is where a dental practice owner sells assets of their practice to a newly formed limited company, in which they typically own all or the vast majority of the shares. For practices looking to incorporate, there are a number of considerations to take into account – particularly for NHS practices.
Here is a basic checklist, as it were, to ensure you cover all the main areas.
If you are transferring all of the assets of the practice, you will need to de-register from the CQC as an individual and re-register as the new limited company. If you are transferring everything except the NHS goodwill, which remains with you as the dentist, you will need to maintain your individual registration but also register the limited company. If neither process is completed, a criminal act is being committed.
When you incorporate, your staff will transfer to the limited company pursuant to the Transfer of Undertaking (Protection of Employment) or TUPE Regulations. There are obligations to consult with all members of staff before this happens and it is best practice to issue new contracts with the newly formed limited company as the employer. Generally speaking, as associates are self employed, they do not transfer automatically under TUPE. Their existing agreements therefore need to be terminated and notice given to the associates. New associate agreements then need to be issued that take into account the new set-up of the business. The same would be true for dental hygienists and dental therapists – who are self employed.
If this is not done, there would be no formal agreement in place between the individual and the practice. This means there would be no protection for the business as no binding out clauses would be present to prevent an associate from leaving and setting up their own practice down the road. It also means that in the event of a dispute with the associate and with no formal agreement in place, there is a far greater chance of the individual being treated like an employee, with entitlement to standard employment rights and the potential to claim compensation from the business.
If you have borrowed money to buy the practice, then it would usually be a condition of that borrowing that you don’t dispose of any of the practice assets either without paying off the loan or without getting the bank’s permission. If you incorporate and sell assets to the limited company, that puts you in breach of your agreement and the bank could request repayment of the loan. When seeking its permission for incorporation, the bank will almost certainly wish to revisit the whole lending and put the new agreement in the limited company’s name. This is likely to incur legal work and the fees that go with that.
If you own the building and decide to retain this ownership when you incorporate, you will need to lease the premises to the limited company. If you don’t, the Inland Revenue could challenge the incorporation on the basis that the business doesn’t have the right to occupy the premises. Similarly, if you already lease the building from someone else, this will need to be transferred to the limited company for the same reasons. You will therefore need to approach your landlord for permission to transfer the lease to the limited company. Not doing so could put you in breach of your lease and gives the landlord the right to terminate the agreement. It is often the case that the landlord would require you as the individual to guarantee the performance of the tenant’s obligations in the lease, including payment of the rent.
When we talk about ‘flawed incorporation’, the most common flaw is that practices don’t apply to NHS England to transfer the NHS contract into the name of the limited company. In 2014 NHS England issued guidance on incorporation so, in theory, it should be possible and not like the postcode lottery as it was prior to the issue of the guidance. If application to NHS England for permission to incorporate is not made, then it is possible that giving the company the benefit of the NHS contract (for example by sub contracting to the limited company) is a breach of the agreement. The LAT would have the right to terminate the contract – in our experience this is very unlikely, but it is a possibility. Usually, this is only a real problem when you come to sell the practice, as the NHS goodwill isn’t owned by the business but rather by you individually. This could mean you have to apply for a transfer of the NHS contract just before or during a sale transaction, which will delay proceedings, or you may have to dis-incorporate leading to all manner of problems and contract issues. There is also the risk that the Inland Revenue could challenge the incorporation once again at this stage.
Becoming a limited company does transfer liability of the practice from the individual, plus there may still be tax advantages available. However, it is not always the most effective option for dental practices today, so seeking advice from a dentally aware accountant, as well as a dentally aware solicitor, is crucial for ensuring that you do the right thing for you. The importance of working with a dentally aware solicitor is clear if you are considering incorporation. Equally, if you have already incorporated, it’s essential to double check that you can tick all the above points to ensure the legality and effectiveness of your new business arrangement.
John Grant of Goodman Grant Solicitors – contact on
For more information visit www.goodmangrant.co.uk or contact your nearest office:
London: 0203 114 3133
Leeds: 0113 834 3705
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