Dentistry Matters: Ownership of a Dental Practice

With a changing economic environment and ever-increasing regulation, you could perhaps be forgiven for thinking that the demand for dentists and dental surgeries might be on the decline. Not so. Demand for healthy teeth and gums and cosmetic dental treatment remains high, and the market in dental practices, healthy; particularly those that can demonstrate a regular revenue stream from both private and NHS work.

This article examines the structures available for ownership of a dental practice, and the issues faced by practice owners when considering which structure to adopt.

Structure

As with most businesses, a dental practice can be owned and operated in a number of ways. Until relatively recently, a dental practice was, in the main, carried on either as a sole trader, or as part of an expense-sharing association, or as a partnership. With the exception of a privileged few set up many years ago, the law did not permit dental corporations to exist. But this changed in July 2006 and, since then, dental corporations have increased in popularity.

Characteristics

There are certain characteristics (and with them, advantages and disadvantages) attached to each type of ownership structure:

• A dental corporation offers its owners protection against liability for the trade debts of the business, employee claims, and breaches of contract and regulatory matters. The extent of an owner’s liability is limited to his investment in the corporation (although dentists will remain liable for their negligent work).
  By contrast, a sole trader or partner is personally liable (jointly and severally with his partners, in the case of a partnership) to third parties for all the debts and obligations of the business. Although a majority of the directors of a dental corporation must be dentists or registered dental care professionals, this does not extend to the owners of the company. This opens up potentially greater opportunity for third party investment, as does the regulatory framework affecting dentists and directors, which can provide the comfort required by investors, that the business in which they invest will be run in a proper manner.
• A sole trader or partner will generally suffer higher tax rates than that suffered by a shareholder in a corporation.
  Currently (in respect of the 2015/2016 period), a sole trader or partner will pay tax at the rate of 40% on annual profits between £31,786 and £150,000, and 45% on annual profits which exceed £150,000. By contrast, the applicable rate of tax for corporations is 20% on annual profits. Each owner of the corporation will pay tax on his dividends, and other remuneration (if any) at his personal income tax rate.
• A corporation must make annual disclosures to Companies House about its owners, directors and certain aspects of its financial position; all of which will be open to inspection by the public. There are no similar disclosure requirements (and with them, costs and expenses) for a sole trader or partner.

Incorporation and the General Dental Services Contract

Those dentists who perform NHS work and who wish to incorporate, and those who wish to acquire or invest in dental surgeries which perform NHS work, should have particular regard to the terms of the General Dental Services Contract (“the Contract”) with the practice for the following reasons.

• The nature and extent of any restrictions contained in the Contract will have an impact on the future marketability and sale price of the practice.
• A dentist will generally require the consent of NHS England (formerly the Primary Care Trust) in order to transfer the Contract to a new owner, whether that new owner is a third party sole trader or the seller’s newly incorporated entity. In relation to dental corporations, the Contract may prohibit a change in control of the corporation without the consent of NHS England.
• Seeking approval of NHS England to a transfer of the Contract, or a change in control of a corporation (as may be required under the Contract), may trigger a re-tendering process or re-negotiation of the Contract itself and, with it, a risk that the practice could lose certain benefits under the Contract, or lose the Contract altogether.

Internal Agreements

Whatever the ownership structure of the practice, it is essential for the business to have written agreements in place with its owners and its workers (be they expense sharers, associates, hygienists or other employees). The agreements will set out each party’s rights and obligations to each other, as well as setting out a process and procedure for exit. The agreements will help reduce the risk of any potential future dispute, and will be important to any potential purchaser of (including any additional partner to) the practice.

Conclusion

It is clear that there are a number of advantages and disadvantages associated with the way in which a dental practice is owned; and a structure that may be suitable and appropriate for one dentist or investor in any particular set of circumstances may not be suitable for others. Before the appropriate structure is determined it is vital to establish the facts, circumstances and aspirations of the parties, and, where a Contract is involved, to approach NHS England at an early stage. It is also important that the arrangements between the owners, and with the workers, are clearly documented to reduce the risk of misunderstandings and future dispute.

For more information on the content of this article contact Nick Mayles on 01206 217 010 or nick.mayles@tsplegal.com.

Nick has also written an article regarding the Transfer of Dental Practices, click here to read.