The ticking time bomb of flawed incorporation

Coming across a Dental Practices that has not been properly incorporated is a problem that is becoming increasingly common.

The erroneous incorporation of a dental practice is a ticking time bomb which can have dire consequences for the practice owner when it detonates.

Having had the ability to trade as limited companies since 2006, it wasn’t until 2009/10 that incorporated dental practices began to appear in more significant numbers. Four years later, many of these practices are now being put on the market, only to discover that they have not been incorporated correctly.

The generic name for this situation is, “Flawed Incorporation”

There are a number of mistakes that can be made in the process of incorporation. Often the reason for the practice not being incorporated properly is down to unsuitable legal advice – or in many cases a lack of any legal advice whatsoever.

One of the most common problems is that practices with an NHS contract will purport to incorporate the practice without asking the PCT permission for a new contract to be issued in the name of the limited company. This lands the practice in a situation where although it has been incorporated, the NHS contract is still in the name of the individual practitioner. There are a number of problems with this. The idea of incorporation is that the assets owned by the dentist are transferred to the limited company, however, all NHS contracts state that they can not be transferred. So, without the consent of the PCT the purported transfer of the contract is a fundamental breach, which gives the PCT the right to terminate the contract.

Another problem is that when the time comes to sell, the owner won’t be able to sell their shares in the limited company because the NHS contract (usually the biggest asset) is still in their personal name, which means that this asset still belongs to them, even if the principal may have believed that it transferred and that tax savings have been claimed on this basis since incorporation.

Another common problem is the failure to notify practice funders, usually the banks, of the proposed incorporation of the practice. The transfer of goodwill without bank approval will be a breach of the terms of the borrowing and would allow a funder to call in the loan.

One wonders how much the tax saving would be considered to be worth in that scenario?

If the incorporation is flawed, then it may well be necessary for it to be unravelled in order to sell the practice. The importance of having the very best legal advice cannot be underestimated when looking to incorporate your practice. This is why it is advisable to seek the assistance of a legal firm like GoodmanGrant, who practice exclusively in the dental industry and are able to provide a tailor made service that suits each practice’s individual needs. The experience and knowledge of a specialist is unrivalled, and their comprehension of every key detail that needs to be addressed will ensure a successful incorporation.

As if the above issues were not enough, yet another risk that a practice runs by not following a proper procedure and ensuring that the right documentation is in place is that the Inland Revenue may decide to investigate. The number of Inland Revenue investigations is on the rise and if they discover that there is no written evidence of a transfer of the assets, no mention of what should happen to the property, no valuation of goodwill they may not recognise it as a proper incorporation. This will mean that the practice will have to pay back any tax it has saved, defeating one of the principal reasons for incorporating in the first place.

Making any professional move requires the time and advice of a specialist. In order to effectively and correctly incorporate a dental practice one should make an effort to seek the assistance of a dedicated dental law firm. With a wealth of knowledge and experience that directly relates to the dental sector you can be sure that when the time comes to sell your dental practice there won’t be any unwelcome surprises!

John Grant of GoodmanGrant Lawyers for Dentists  - a NASDAL member

For more information call John Grant on 0113 8343705 or email This email address is being protected from spambots. You need JavaScript enabled to view it.

www.goodmanlegal.co.uk

A NASDAL and ASPD MEMBER