15 Oct 2020  •  Blog, Covid-19, Finance, Practice Management  •  6min read By  • Les Jones

How your trading structure forms the keystone to your dental business

Les Jones shares insights from Paul Griffiths, Specialist Dental Financial Consultant at Wesleyan, into how the trading structures of various businesses work and important considerations for your business…

While the current climate may be a time of uncertainty and unprecedented challenges for the dental profession in the wake of the ongoing pandemic, there’s also opportunities for the business-savvy.

If you’re currently considering or in the position to start up a new dental business, it’s important to remember that one size does not fit all when it comes to your trading structure.

Understanding your structure can be the key to a business’s overall success. So, looking at the pros and cons of the options available is essential. There’s a range you can choose from and will all have a different impact on how you run your business.

We’ll be breaking down the four main options alongside some of the implications they have on the running of a small business

Les: Let’s start deciphering the different scenarios and types of structure you can choose. What’s the simplest trading structure?

Paul: In many senses, the sole trader structure is the simplest. This is for someone who is self-employed and runs the business as an individual.

Sole traders are entirely responsible for the running of the business and are entitled to 100% of the profits. However, in a similar vein, they are also liable for any losses that the business incurs, which may need to be covered through personal funds.

This structure requires the business to register with HMRC, which is expected even as a one-man-band business. Sole traders are also required to pay personal income tax and National Insurance as per employed workers, but through a self-assessment tax return.

Les: What about any dental businesses who wanted to set up as a partnership?

Paul: The partnership structure is for business entities with two or more individuals looking to go into business with each other. These individuals generally share the profits, losses and responsibilities of running a dental business.

Like sole traders, partners are self-employed and have to pay taxes on the profits or losses from the business. This responsibility can be equally split or 60:40, etc. depending on what has been agreed between the partners when the business was set up.

A partnership agreement is usually drawn up to declare how the business will operate – an important document when it comes to business succession. If a partner had to withdraw from the business, either through retirement, serious illness or other such circumstances, it’s important for the partners to be clear on what they want to happen from a financial standpoint. Would the plan be for the other partner to buy out the partnership? This is what needs to be discussed and planned for.

Les: What about if a partner in the company had to share responsibility for misconduct or losses from the business?

Paul: A Limited Liability Partnership (LLP) is a step on from an ordinary partnership. A partner’s liability in this instance would only cover the amount they invest into the business and is effectively capped.

This option may provide some comfort for those who feel a standard partnership may jeopardise their financial future.

Unlike a partnership, an LLP has to be registered at Companies House (the UK’s registrar of companies under Her Majesty’s Government). Annual accounts need to be prepared and logged at Companies House for this structure.

Les: That leaves us with a Limited Company – in what scenario would this structure be used?

Paul: The company in this instance is a completely separate entity from the individuals who work for it as employees. These companies are owned by their shareholders and run by their board of directors. It’s a slightly more complicated set up, which can be off-putting, but this structure can be the most appropriate direction to take your business.

An important distinction for this kind of trading structure is that its finances are separate from the personal affairs of its owners. The company itself is responsible for everything it does.

Profit that the company earns is subject to corporation tax, as opposed to sole traders who are subject to income tax. Shareholders take the profits out of the company by way of a dividend and employees take a salary.

Similar to the partnership agreement, a shareholder agreement will need to be drawn up to outline what the majority shareholders would like to happen in the event of another shareholder leaving.

Les: What would be your recommendation for the dental profession?

Paul: There’s a large amount of scope within the profession, so the solution will very much depend on the individual business’s circumstances.

I always recommend seeking professional advice from a specialist dental accountant or solicitor. A dental accountant can add significant value in particular by discussing the tax implications of the different trading structures.

Having a short, medium and long-term goal is essential for the business. If your ‘plan A’ doesn’t come to fruition, having a ‘plan B’ and so on in place will help secure your financial future. A succession plan is very important for any trading structure, but particularly in a partnership or limited company.

Ensuring your accountant, solicitor and financial advisor are working together, communicating regularly and are on the same page is key.

Les: Thank you for your time Paul. There’s a lot to consider here for anyone looking at their first steps in setting up their own dental business.

If you would like to find out more valuable information about planning your financial future more effectively, you can visit www.wesleyan.com and Wesleyan’s financial advisors will be happy to support you.

 

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