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Written by Paul Griffiths, Specialist Dental Financial Consultant

Setting up a dental practice - Trading structures

dentists
5 min read
Smiling female dentist sharing the screen of a tablet with a smiling female patient

If you've decided that now is the time to buy a dental practice or you're planning to purchase one in the next few years, there's a lot to consider.

One of the key factors that it's important to think about from the get-go, is what kind of trading structure is right for the business you want to build.

Choosing the best one for you and what you want to achieve is vital for success. To do that, you need to understand the options.

There are four main types of trading structures: sole trader, partnership, Limited Liability Partnership (LLP), and limited company.

Below, I'll discuss these four options, their pros and cons and what the implications of each are for running your business.

Sole trader

As a sole trader you run the business as a self-employed individual, and as such you are entirely responsible for running the business.

If you choose to operate as a sole trader, you'll need to register with HMRC - even if you're a one-man band operation - and you'll need to complete a self-assessment tax return in order to pay the required personal income tax and National Insurance.

In many ways, this is the simplest trading structure for running a business and one that allows you to receive 100% of the profits.

However, on the flip side of the coin, you're also liable for any losses incurred by the business, which may need to be covered by personal funds.

Partnership

Partnerships are for businesses that are run by two or more individuals who, generally, share the profits, losses and responsibilities of running a dental business.

Similar to sole traders, partners are self-employed and pay taxes on the profits or losses from the business.

A partnership agreement is usually drawn up to detail how the business will operate. This is an important document and will contain information such as how the profits or losses will be split between the partners, e.g. 50/50, 60/40, etc.

The agreement document is also helpful when it comes to business succession. If a partner needs to withdraw from the practice, this document will set out what should happen from a financial standpoint and who is responsible for what. 

For example, if one of the partners retires or needs to withdraw due to serious illness, would the plan be for the other partner to buy out the partnership? This is what needs to be decided and laid out within the partnership agreement from the beginning.

Limited Liability Partnership (LLP)

The Limited Liability Partnership (LLP) option is the next step on from an ordinary partnership.

If you create an LLP you will need to register the business at Companies House (the UK's registrar of companies under Her Majesty's Government). You'll also need to prepare and log annual accounts at Companies House.

Unlike a regular partnership, in an LLP partners' liability is limited to the amount they invest into the business and is effectively capped at that.

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

Limited Company

In a limited company, the business is a distinct entity from the people who work for it who are classed as employees and are paid a salary from the profits.

A limited company is a more complicated set-up as it is owned by shareholders, who are paid dividends from the profits, and run by a board of directors.

As a distinct entity from the people who work for it, the company is responsible for everything it does. This means that it's finances are completely separate from the personal affairs of the business owners.

Profit is subject to corporation tax, which is different to sole traders who pay income tax.

A shareholder agreement will need to be drawn up (similar to a partnership agreement) which  outlines what the majority shareholders would like to happen in the event of another shareholder leaving.

How do you choose the right structure for your practice?

There is huge variety in the types of dental practices in the market, from high-end boutique private practices, to corporate or small groups, mixed practices, NHS practices, etc. Choosing the right trading structure will depend on your business's specific needs and goals.

Having a goal is essential for the success of any business and it should be part of your decision-making process when it comes to choosing how you are going to set up your company.

When it comes to setting a goal, it's important to have short, medium and long-term goals, and having a succession plan, particularly for a partnership or limited company, is also key.

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.

It's also worth communicating regularly with your accountant, solicitor and financial advisor, to make sure everyone is on the same page and working towards the same goal. 

If you're planning to move into practice ownership and want to discuss the options, you can book an appointment with a Wesleyan Financial Services Consultant or call 0808 149 9416.

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