Rebecca Johnson, a specialist financial planner at Wesleyan Financial Services explains why it’s important for dentists to have business agreements in place.
Business agreements are the heart and soul of most companies and organisations. They help ease business operations and processes without friction between the parties involved. And when executed correctly, they can help to manage business expectations and avoid liability. Without the right agreements in place, business continuity, business succession, tax allowances, and business relief are all impacted, and no business should operate without a written agreement in place.
Businesses of any kind, including the dental industry, can be subject to disputes at any time and difficulties can arise when less strict agreements are in place setting out how the business should operate. Agreements provide written guidelines as to how any conflict will be dealt with allowing issues to be settled quickly and easily. They also bring clarity to all parties involved in the practice.
Outdated legislation
It’s important to realise that even if there’s no formal legal structure in place around any business, if two or more individuals conduct business together with a view to making a profit, then a partnership will exist in law. And this means that the liabilities and duties of the partner will be governed by the Partnership Act 1890, which is obviously not likely to reflect what happens in today’s business environment.
There’s no chance that this act will be updated anytime soon. So, it’s always going to be the case that unless there’s a formal agreement in place to supersede it, partnerships will be subject to the terms of the 1890 act.
Under the act, if one of the partners resigns, retires or dies then the partnership will automatically dissolve. As well as this, all partners must share equally in the profits of the business, regardless of the amount of investment in time and capital that they contribute. This could obviously become a bone of contention at any point during the lifetime of that business.
No control
An example of this is where there is a partnership operating at the moment with no agreements in place and where one of the partners has fallen ill. His illness means he can only work a couple of days a month. This makes life difficult for the healthy partner who continues to work full time and is the one generating most of the profit for the business.
The health of the partner who is ill is not likely to improve enough in the future for them to be able to return to full-time work, and the healthy partner doesn’t have the funds to be able to buy out the other partner of the business. This situation obviously affects the profitability of the business, as well as its value and the operation as a whole. It also affects the healthy partner’s personal finances, as they are completely limited by the situation, and have no control over things.
However, if they’d had the right agreements and financial plans in place prior to the partner suffering ill health, this situation could have been avoided entirely. We never think anything bad is ever going to happen to us, but sometimes it does.
Review arrangements regularly
There’s no hard and fast rule as to how often you should review your business arrangements but it’s a good idea to check periodically that they still reflect the current state of your business set up. Perhaps assess them as part of your annual financial review. Spending a small amount of time on something that will have a huge financial impact at some point in the future is worthwhile. And, if you do this on a regular basis then it needn’t be time consuming. Just a routine check that will give you reassurance that things are set up properly in case the worst should happen.
‘WESLEYAN’ is a trading name of the Wesleyan Group of companies.
Practice Plan Limited (Registered in England and Wales No. 03089948). Registered office: Cambrian Works, Gobowen Road, Oswestry, Shropshire, SY11 1HS Telephone number: 01691 684120. Practice Plan Limited is an introducer appointed representative of Wesleyan Financial Services Limited.
Wesleyan Financial Services Ltd (Registered in England and Wales No. 1651212) is authorised and regulated by the Financial Conduct Authority. Registered Office: Colmore Circus, Birmingham B4 6AR. Telephone: 0345 351 2352.
About Rebecca
Rebecca Johnson is an experienced Dental Specialist Financial Planner at Wesleyan Financial Services, supporting dentists, their families and their practices with financial planning to secure their financial future