Limited companies

Company types include private, public and community interest:

Private limited companies (Ltd) – company members are limited to a specified group, which is usually defined in the Company’s rules
Public limited companies (PLCs) – shares may be sold to the general public
Community interest companies (CIC) are social enterprises that use profits and assets for the public good. CICs have a company identity but work for the
benefit of the community. CICs are often used for community dental services.

Company structure

A company provides a defined governance structure for running the business and contracting with customers, suppliers and staff.

Shareholders and directors

A limited company is owned by its members (shareholders). There can be a single shareholder or multiple shareholders, each holding a defined number of shares. The company is managed by a board of directors, appointed by (and responsible to) the shareholders. The board need not include shareholders.

PLCs must have at least two directors; private limited companies can have only one. Single-member companies are common in dentistry, where the sole shareholder is the only director.

Company rules

The memorandum and articles of association set out the rules of a limited company:

The memorandum sets out the name of the company, the registered office and the purpose of the company, for example to carry on the business of dentistry.
The articles provide the rules for running the company’s internal affairs.

Templates are available from Companies House.

Meetings

Larger companies often hold general meetings of shareholders to set strategic policy and hold directors to account, to approve certain transactions and appoint directors. Many companies only hold one annual general meeting (AGM). The notice and documents for such meetings must be sent to shareholders within the agreed timescale (usually 14 or 21 days).

Smaller private limited companies may decide against holding AGMs and reflect this is their articles. Formal decisions can be taken by written resolution (especially if shareholders work in the business).

Company officers

Company directors

A company director must be over 16 years and not be disqualified from acting as a company director or an undischarged bankrupt. You must maintain a register of directors and notify Companies House of their details.

As a company director, you must comply with your legal duty to

Act within your powers (as described in the company rules)
Promote the success of the company
Exercise independent judgement
Exercise reasonable care, skill and diligence
Avoid conflicts of interest
Not accept benefits from third parties that could affect your objectivity or create a conflict of interest
Declare an interest in a proposed transaction or arrangement with the company.

If you act improperly, you may become liable for the debts of a company or its insolvency, be fined, be disqualified from acting as a director or be subject to criminal prosecution. Acting improperly could include making a negligent or fraudulent misrepresentation when negotiating a contract between the company and a third party, defamation or false accounting.

Company secretary

A company secretary deals with company administration – preparation of papers for board and general meetings, minutes of meetings, maintaining the company register of directors and submitting returns to Companies House. PLCs must appoint a company secretary; private limited companies do not need to (but can if they wish).

Auditor

An auditor’s report considers whether company accounts have been properly prepared, comply with legal requirements and give a true and fair view of the company’s financial affairs.

PLCs must produce audited accounts. A private company is exempt this requirement if it meets at least two of the following criteria: the annual turnover is below £10.2 million; the assets are less than £5.1 million; or it has fewer than 50 employees (on average over the course of the year).

If you are exempt the need to produce audited accounts, your accounts should explain the reasons. Audited accounts have the advantage of demonstrating to banks, customers and suppliers that your business is sound.

Share allocation

Company shares have a nominal (or face) value, which is the amount initially invested by shareholders in exchange for the shares. Share capital can be ‘paid-up’ (where the company has received payment for the shares) or ‘unpaid’ (where shareholders owe the company the nominal value of the shares).

Companies must have a statement of capital which details: the total number of shares and their aggregate nominal value; the nominal value and any rules and rights attached to each type of share; and the amount paid-up and unpaid on each share.

Although PLCs must have a minimum share capital of £50,000, private companies have no minimum capital requirement. The company rules can be used to set a maximum value (authorised share capital). This used to be a legal requirement, so some existing companies may have a maximum value stated in their rules.

Companies must keep a register of shareholders’ names, contact details and date of when they became a shareholder.

Founding members of a company are given an initial allocation of shares. Changes to the initial allocation of shares is usually agreed by existing shareholders – for example, an increase in the number of shares for existing members, the sale of an existing member’s shares to a new or existing shareholder, or the allocation of new shares to a new member. The company rules should describe the procedure for such transactions and may require the need to hold a general meeting to pass a resolution. Shares in a private company cannot be sold openly to the public.

Company tax

Tax is seen as a main advantage of running your business as a company. The following provides a brief overview of the issues that you should consider but you must seek independent financial advice.

Wages

As a director, you become an employee of your company and pay tax on your income from the company under the PAYE scheme and employee’s Class 1 National Insurance (NI) contributions. You should have an employment contract with the company.

Dividends

As a shareholder of your company you will be taxed on the dividends and other payments that you receive.

Director’s loans

You may have to pay tax on a director’s loan, which is any money that you or your family take from your company that is not salary, dividends or expense repayment or money you have paid into or loaned to the company.

Corporation tax

You should register your company for Corporation Tax and PAYE as an employer at the same time as registering with Companies House. Corporation tax is payable on the company’s taxable profits, including trading profits, returns on investments and capital gains.

Capital gains tax

Capital gains tax must be paid on the goodwill of the business that is transferred to the company when you incorporate, although you may be eligible for incorporation relief. The goodwill value transferred to the company can sometimes be treated as a loan and repaid by the company to the dentist in instalments.

Business assets

Practice assets (including premises, equipment, stock and goodwill) normally transfer to the company – undertake a valuation of these assets before the transfer takes place. Capital gains tax may be payable on the assets transferred from your personal ownership to your company. Retaining personal ownership of assets used by the company could have financial implications and require a legal agreement between you and your company; seek advice from your accountant.

Potential savings or drawbacks

Seek advice on how to arrange your earnings, bearing in mind the varying rates and allowances and allowable expenses for different types of income, corporation tax and loans. Also, how you can minimise your personal tax, for example, by drawing a smaller salary and paying yourself dividends, which may be subject to corporation tax as they are paid from profits. However, taking a smaller salary could have implications for or a mortgage/loan applications, state benefits and your level of earnings for sickness insurance.

Accountancy fees

Your on-going accountancy fees as a company can be considerably higher than as a sole trader.

If your accountant advises that incorporation will generate tax savings, you should understand how and request an illustration of your income after tax, both as a company or a sole trader/partnership. It is not always beneficial to incorporate and unprofessional accountants may want to take advantage of increased accountancy fees. Use an accountant with dental experience; legislation relating to dentistry needs to be understood during incorporation. Dentists have been wrongly advised to incorporate by non-dental accountants.

Death of a director

Should a dentist director die, the company can continue if the company has another director or the representatives of the deceased dentist appoint another director as soon as possible. If the board of directors continues to comprise a majority of GDC registrants, the company can continue as before. Companies House should be informed of the changes. See BDA advice Death and serious illness.