Buying as a Limited Company?

In 2005 The Dentists Act 1984 was amended enabling dental bodies corporate (DBC) to carry on the business of dentistry.  This can be a very attractive proposition for dentists as with appropriate advice there can be significant tax advantages. As such we have seen increasing numbers who have taken advantage of this alternative business vehicle, as opposed to the traditional sole practitioner/partnership structure.

A DBC is a separate legal entity (think of it as separate legal person) and can enter into legal contracts and hold property etc. This is advantageous to a dentist or registered dental care provider as it means that they have limited liability in the day-to-day operation of their business. To put this in context, if dentists operating in partnership had personally entered into a leasing agreement on which both or either of them had defaulted, then the lease company could of sue one or both of the partners personally for the breach of contract potentially leaving their personal assets under threat (i.e. their house). If the dentist traded as a DBC however, with the lease in the DBC’s name, then any liability under the leasing agreement would fall on the DBC and not in most cases the dentist personally..

One word of warning however – as the DBC will be new and will have no trading history and probably very limited assets, until it has some “substance” the individual dentist may well find that banks, suppliers, landlords etc may well require personal guarantees from him in his capacity as a director before they extend facilities.

Fundamental to setting up a DBC is an understanding of the distinction between directors and shareholders. These terms can often can be confused but are actually quite distinct (although frequently a dentist or registered dental care provider will be both)

  1. Directors – make up the board and are responsible for running the business on a day-to-day basis. Under the amended Dentists Act the majority of directors in a DBC need to be either  a registered dentist or a registered dental care provider;
  2. Shareholders – own the DBC in proportion with their shareholding. There is no set obligation under the amended Dentists Act for any of the shareholders to be dentists or registered dental care providers making a dental body corporate a very attractive trading vehicle for outside investment if applicable.

Shareholder Protection?

If a DBC only has one shareholder it goes without saying there can’t be any shareholder disputes, but care should be taken in a situation where there is more than one, ( particularly if there is outside investment)

Ask yourself these questions:-

  • How would you deal with a fellow shareholder who doesn’t “pull their weight”?
  • How do you stop a shareholder selling their shares to someone you don’t know?
  • How do you value the shares when it comes to buying-out one of the other shareholders?
  • How do you resolve a deadlock situation between equal shareholders?

If you are not sure how to deal with theses issues, then you should seriously consider a shareholder’s agreement.

Shareholders Agreement

This is a confidential and binding agreement between the shareholders/directors that puts in place agreed mechanisms,  to resolve problems should they arise in the future and hopefully reduces the need for argument and potentially expensive litigation. It can be entered into at any point during the life of the DBC although it is obviously best at the beginning of a business relationship when all parties get on!

Generally speaking it is recommended that the shareholders sit down with a solicitor experienced in this area, who will then take them through a “checklist” of potential conflict points and suggest solutions to them. It is important to note that there is no one-size fits all shareholders agreement. Each DBC is different and the solutions need to be proportionate to the size and complexity of the business and reflect the existing relationship of the shareholders.

Once agreed and executed, the shareholders agreement can then, subject to periodical reviews, hopefully be put away in a drawer safe in the knowledge that a relatively small investment in time and money now, can mitigate a lot of pain further down the line.

Cross-Option Agreements

Another often neglected area of planning for many businesses is how to cope with the death (or critical illness) of one of the key shareholders?

If your business partner dies what will happen to their shares? They will probably pass under their will, meaning that in effect you will suddenly find yourself with a new (possibly equal) and potentially very active shareholder. Alternatively, the new shareholder may have no interest or understanding in the business. All circumstances which as you can imagine, could prove very disruptive for the future of the business.

The objective of the cross-option agreement is to put in place a binding process to enable the DBC to continue in the hands of the surviving shareholder without the shareholdings being diluted, sold on or transferred to parties outside of the company.

Life cover is put in place by the shareholders to ensure that on the death of one of the them, the proceeds would be made available to the survivors to buy-out the deceased’s shares. This provides a purchaser (and funds) for the shares and releases money to the family of the deceased (in a tax efficient way) that would otherwise be tied up.

Conclusion

A shareholder’s agreement when used in combination with a cross-option agreement can be an invaluable tool to help a DBC plan in advance how deal with difficult decisions and circumstances when they arise – taking the right advice and getting the correct documentation put in place now, can lessen the need to suddenly having to fire-fight if the unthinkable occurs.

GUEST CONTRIBUTION FROM LOUISE FEGAN, SENIOR ASSOCIATE – MORRISONS SOLICITORS

Louise Fegan is a member of NASDAL and dental lawyer at Morrisons Solicitors LLP

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