Keep It Legal.
Accountants have had their say on these pages, now lawyer Justin Cumberlege, a partner in Hempsons’ healthcare team, explains what should be considered when forming a corporate entity.
Should you incorporate your business? The answer is: liability.
Simply put, if you are not trading in a corporate entity, you are going to be personally liable for any uninsured losses.
If you are a sole trader or a traditional unincorporated general partnership, your house and all your other personal assets are exposed to be taken if a large claim is successfully made against you in connection with your business and the business has insufficient resources to meet the liability.
When you are trading as an incorporated body, your liability is limited to the value of the business.
There is also an additional benefit with a corporate entity; it has its own legal personality, so it enters contracts in its own name, whereas if you carry on your business as a sole trader or partnership, it is you – and each one of the partners – who enter the contracts.
While your individual clinical work may be covered by unlimited insurance cover, other risks are not usually, and that includes claims by employees, landlords or other contractors, which may either be uninsured or insured but subject to limits on the cover.
If you incorporate the business effectively, such claims would be brought against the corporate entity rather than against you individually – although you would still remain personally liable for clinical claims – and so you would shelter your hard built-up wealth.
This remains a prime motivator for incorporating as claims get higher and the willingness to sue greater.
There are two primary forms of incorporation: the company and the limited liability partnership (LLP).
The tax treatment of the different forms of corporate entity is the remit of your accountants and tax advisers, but, aside from tax considerations, it is worth considering the model which is preferrable for you when considering the functions you want the structure to achieve.
First, if you are a sole trader, you may form a company, but an LLP requires two members, as it is a form of partnership, albeit with its own distinct corporate personality.
If you start with two partners, and your partner leaves, you have a six-month window of opportunity to find another partner, otherwise the benefit of being an LLP is lost.
As a company, by default, you will have model articles of association imposed if you do not write your own.
An LLP does not have a members’ agreement under statute, and the risk of not having one is great, because there will be no evidence as to what you have agreed for profit-sharing, capital investment in the business, how decisions are made, exit provisions and the other terms and conditions typically found in a partnership agreement.
If you are going to have different ownership rights and returns between members, a company is usually the preferred option, because, with a company, you are able to vary the shareholding of members and, with it, the weight of their voting, the amount they receive in dividends and the interest in the capital in the company.
While it is possible to replicate something similar with an LLP, it is not as straightforward as utilising a company share structure.
The extraction of profits from an LLP is relatively easy, as they are attributed to the partners. With a company, you may leave the profits in the company for future investment or to pay out at a later date.
Tax burden reduced
Losses may be off-set against future profits, which helps reduce the tax burden for companies, so if you are starting up a business, this may be attractive.
You may expel members of a company, although it is more complicated to remove a shareholder than a member of an LLP, provided you have an LLP agreement which provides for the expulsion of a member, normally by simply passing a resolution.
Shares in a company can only be dealt with in specific ways as set out in the Companies Act 2006.
If you do decide to incorporate, you create a separate legal person and therefore none of your existing registrations or contracts will be valid unless you take the appropriate action to either transfer them or make new arrangements in the name of the company or LLP.
You will have to register the new entity with the Care Quality Commission as a provider of healthcare services, as well as register with the Information Commissioner’s Office.
Insurance cover will need to be taken out by the new entity and cover for medical negligence, as the corporate may be sued as well as the individual clinician in such circumstances.
All the contracts of the business will need to be assigned or novated over to the new entity. Some contracts may be deemed to be terminated in such circumstances and a penalty incurred for early termination, so you must check them beforehand.
Other contracts may have a ‘change of control’ provision, meaning the other party is able to terminate the contract if the ownership of your corporate entity changes. Sometimes there is a threshold of, say 25%, but in a small company that might easily happen.
Staff will be transferred automatically upon the business transferring in accordance with the Transfer of Undertakings (Protection of Employment) Regulations. But it is important that you follow the statutory procedure, otherwise staff may be entitled to compensation.
If you have a lease of premises, the landlord will have to agree to the assignment of the lease to the new entity in most cases. If you own the premises personally, then you should either put a lease in place permitting the corporate entity to occupy it so that you are able to claim all the expenses off the business or sell the property to the corporate entity.
Landlords and some other contractors may require personal guarantees from the members of the LLP or directors of the company, so, in these cases, having limited liability through the corporate entity will have been circumvented and therefore lost.
Do not forget to set up a new bank account for the business in the name of the new corporate entity. The bank may require personal guarantees from you as well.
Once up and running, it is important to comply with the statutory requirements of a corporate entity, particularly the filing of accounts and other changes that occur, such as changes of directors, and a compliance statement must be filed every year. While they are not usually particularly onerous, it is important to comply with the requirements.
There are significant differences between companies and LLPs, so it is important from the outset to decide which one you want to form and to be clear about the reasons why and the advantages it would bring in carrying out the functions of the business.
Discuss this with your lawyers and accountants – probably together – to determine which would be the most favourable for you and the others running the business with you.
Justin Cumberlege (right) is a partner in Hempsons’ healthcare team
Disclaimer: This article is for information purposes only and should not be relied on as legal advice. Neither the authors nor Hempsons will be liable for losses arising from reliance on the information in this article. The article is based on the law of England and there might be variations in other jurisdictions.