Effects of Incorporation – October 2009
Dentists have had the option of incorporating their practice since 31 July 2006 and many have taken up this opportunity. The main reasons dentists incorporate is for the tax benefits, although there are other reasons you might want to set up a limited company as well. These include the protection of limited liability, ability to attract finance and external investors and ease of selling shares in the company to existing staff and outside investors.
Any specialist accountant will be able to provide the figures for how much the tax benefits are likely to be, however it’s just as useful to know what the disadvantages are.
One of the main disadvantages is that once you’ve done it, it’s very difficult to undo it and go back to being self employed. So you need to make sure that the savings are significant, worth the effort and are likely to continue. It’s important to note there’s no guarantee that the savings you’ll make this year will continue as the Chancellor could and probably will change the rates of corporation tax at any time. In fact in the present economic conditions it could be argued that it’s more likely these taxes will increase than in more stable financial times.
One particular story I heard recently was of a dentist who’d been advised to incorporate, had started the process of transferring assets into the new company, when the accountant realised the PCT were unhappy with the change and wanted to re-tender their contract! Whether changing to a limited company is actually a material change and a PCT has the right to re-tender is currently being challenged, but I wouldn’t recommend it unless you check with the PCT first.
Another change is that once you incorporate, the money in the bank account is no longer yours – even if you’re a 100% owner of the company. The cash belongs to ‘Your Dental Practice Limited’ and although you can take this through the payroll as salary or bonus, dividends, directors loan repayments or through a pension contribution, you’ll have lost a great deal of flexibility.
Directors loan repayments tend to be quite common as by selling the goodwill of your practice to the limited company you can take a tax free income from the business over the first few years. However it’s possible this will have an effect on any income protection plans you have. The reason is that protection providers will typically pay out up to 60% of pre-sickness earnings and directors loan repayments don’t count. It could also have an effect on getting a mortgage as your income could initially be artificially low.
Some final points to watch out for are the increased costs not just initially but ongoing. By setting up a limited company your reporting requirements will increase and your accountancy bill is likely to increase as well.
So if you do want to incorporate make sure you get the pros and the cons before you make up your mind.