THE majority of independent veterinary practitioners around the country have traditionally operated as partnerships or sole traders. However, increasing numbers are now forming limited companies as a vehicle for running their businesses.
In this article, we elaborate on some of the main legal considerations when forming a company to run a veterinary practice.
Pros and cons of incorporation
It is important to consider the pros and cons of adopting a corporate structure as opposed to being a sole practitioner or partnership. The main considerations will be: (1) financial issues; (2) liability; (3) ownership versus management; and (4) flexibility versus formality.
- Financial issues
Martin Hall, an accountant with Dodd and Co. who specialises in veterinary accounts, estimates that a typical veterinary practitioner could save £7,500 annually by incorporating. “The savings are achieved by reducing or eliminating the amount of tax paid at 40% and reducing the national insurance liability,” Martin explains.
There may be some additional administrative costs associated with operating as a company (see below for more on the administrative obligations of a company) but these are likely to be minimal compared to the level of savings that Martin Hall predicts may be achievable.
It is important to note that the tax savings that he describes will only apply to incorporation as a limited company: limited liability partnerships are corporate structures from a legal point of view but are taxed as partnerships. For this reason, this article focuses only on incorporating as a private company limited by shares.
You should speak to your accountant about the financial implications of incorporation in relation to your own practice before making any decisions.
- Liability
Another advantage of incorporation is that the owners of the business (the shareholders, formerly the partners) enjoy the benefits of limited liability. As a partnership, each partner is jointly and severally liable personally for the debts and obligations of the business.
While the majority of the practice’s liabilities are likely to be covered by insurance, if things do go wrong, individual partners could suffer huge personal losses.
Where there is a company structure, the company is a legal person in its own right and bears the liability itself. Shareholders will only lose the paid-up value of their shares in the capital of the company if the company goes under.
However, for new companies or those with limited capital, banks and landlords may still seek personal guarantees.
- Ownership versus management
Whereas a partnership business is owned and managed by the partners themselves, with a company there is an important legal distinction between the shareholders as owners and the directors who are responsible for running the company.
In a small veterinary practice, the shareholders and directors are likely to be the same people but it is nonetheless important to maintain the distinction between the two roles.
Some issues, as a matter of law, can only be decided by the shareholders. For example, a resolution of members (passed in accordance with the articles of association) is required to amend the articles, approve a service contract of a director of more than two years, or reduce share capital.
Directors’ duties are heavily regulated. For example, a director has a statutory duty to promote the success of the company, to exercise independent judgement, to exercise reasonable care, skill and diligence in performing his duties and to avoid situations in which he might have an interest that conflicts with the interests of the company.
Although the liability of members is limited, directors could be personally liable if they breach certain duties (for example, if they allow the company to trade while insolvent).
- Flexibility versus formality
On the down side, companies are subject to a rigid statutory regime. While recent legislative changes under the Companies Act 2006 (the Act) have relaxed the rules for private companies, there are still numerous formalities that must be adhered to.
The company’s constitution (as set out in the articles of association) must be filed at Companies House and must conform to the provisions of the Act. The company must also keep certain registers (for example a register of members), file an annual return and advise Companies House when certain events occur (such as the issue of shares or a change in directors’ details).
Transfer of assets and contracts
It is advisable to prepare a transfer agreement whereby the assets of the partnership practice are formally transferred to the new company. The company is a legal person in its own right and will need to purchase the assets (such as equipment, intellectual property and goodwill) from the individual partners. Some practices may hold contracts for the provision of veterinary services which are valuable assets and will need to be transferred to the company. All practices will have contracts with suppliers, utility companies, insurers and so on.
You will need to check the terms of such contracts to see whether it is possible to assign them to the company or, where this is not possible, to cancel them and find new suppliers. Consent of the suppliers to transfer of contracts may be required and some contracts may include early cancellation penalties.
The individual partners should ensure that they obtain a release from their obligations under contracts held by the partnership so that they no longer have any personal liability going forward.
Registrations and notifications that the practice is required to have, and that have been in the names of the individual partners (such as notification to the Information Commissioner under the Data Protection Act), will need to be amended.
Staff
Assuming that the company will continue to provide all or a majority of the services formerly provided by the partnership, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will apply. This operates so as to preserve the employment rights of employees of the practice when the business transfers.
Under TUPE, the company will take over all liabilities relating to the practice employees and must continue to employ the staff on the same terms and conditions. The company would not be permitted to dismiss a transferring employee or change a person’s terms of employment unless there is an economic, technical or organisational reason necessitating a change in the workforce (namely, a redundancy situation).
The ability to dismiss or take other action for performance or conduct issues is unaffected, and the restrictions only apply to measures which are connected with the transfer of the business to the company.
The partnership will need to comply with information and consultation obligations contained in TUPE so that staff are told about the transfer of the practice to the company and how it will affect them, and given an opportunity to be consulted about any measures that may be taken as a result of the transfer.
Premises
Martin Hall advises that where the partnership owns the premises, it is preferable for tax reasons for the partners to retain ownership (perhaps through a self-invested personal pension) rather than to sell the premises to the company. In such a situation, a lease would be granted to the company. Again, you should discuss this with your own accountant whether this is the best approach for your situation.
If the partnership occupies the premises under a commercial lease as tenant, the lease will ideally be assigned to the company. You will need to check that the terms of the lease permit this and, in some cases, the landlord’s consent will be required.
If the lease does not permit assignment, an alternative is to sub-let the premises to the company, although this is also subject to the terms of the lease itself and is likely to require landlord consent.
Sub-letting is far from desirable as the partners will remain directly liable to the landlord under the lease. Even if assignment is permitted, it is possible that the partners as former tenants will need to provide personal guarantees to the landlord.
Shareholders’ agreement
As explained earlier, the company’s articles of association are a public document that is filed at Companies House. While the articles contain the main framework for the company’s constitution, there will often be a number of more detailed matters that will need to be addressed and these are commonly included in a shareholders’ agreement, which is in many ways akin to a partnership agreement.
A shareholders’ agreement is a private agreement between the owners of the company and will contain provisions governing the relationship between them.
It will typically contain detailed provisions about respective work commitments and obligations, distribution of profits, decision making, leave entitlements as well as entry and exit provisions.
The agreement will need to cross-refer to the articles of association and, possibly, also to service contracts held by the individual shareholders (see below).
Service contracts
As well as being shareholders and directors of the new company, the former partners may well be employees of the company. Where there is an employment relationship, the company and the employee should enter a service agreement which sets out the terms of the engagement.
Retirement and entry of a partner
As with a partnership, one of the main considerations when setting up your company will be what happens if a shareholder wants to leave the practice.
Consideration should be given to whether the other shareholders should have a right of first refusal to the shares (known as pre-emption rights): such rights can be included either in the articles of association or in the shareholders’ agreement. You should also include provisions setting out how the shares will be valued.
You may want to provide in your agreement a requirement that if there is a transfer to a third party (in the event that pre-emption rights are not exercised), this must be approved by the other shareholders and/or that the third party enters a shareholders’ agreement with the other shareholders on similar terms to those contained buin the agreement between the original parties.
You need to be careful that your provisions do not result in a situation whereby the other shareholders do not exercise their right to purchase shares and also fail to approve a transfer to a third party: the shareholder wishing to retire would then be stuck holding shares he does not want.
Finally, you should consider the inter-relationship between the roles of the partners after incorporation. If a shareholder leaves, must he also cease to be a director and employee? If a shareholder is dismissed as an employee or disqualified as a director, can he continue to hold shares?
Must an outgoing shareholder sell his share in the surgery premises if owned separately? Similar questions must be considered in reverse for a new shareholder buying into the business. These are all provisions that should be set out in the shareholders’ agreement in order to avoid disputes in the future.
Announcements
You will need to inform your clients and suppliers that the partnership has ceased to exist and that the business has been transferred to the company. Suppliers should be formally notified by letter but in most cases a notice in the reception area should be sufficient notification to clients.
The exception is where a practice has an on-going contract with a client (as may be the case, for example, with a specialist equine practice) in which case the contract will have to be transferred to the company with the consent of the client as outlined above.
In addition, notice of the dissolution of the partnership should be published in the London Gazette and in local newspapers in order to avoid the risk of the partners incurring further personal liability in connection with the practice after the transfer of the business.
Name and stationery
You will need to think of a name for your company and check that it is available for use. Your letterhead and other stationery and publicity material will need to be amended to include the company name, registered address and number.
You should seek advice on your choice of name and, if you have one, your logo to ensure that you are not infringing an existing registered trademark or inadvertently passing yourself off as another business with a similar name or logo. You may also wish to consider registering your name and logo to prevent others using it.
As the company is a legal entity in its own right, you will need to open a new bank account in the company name and set up new direct debits and standing orders to your various supplies, as well ensuring that your clients have the new details so that they can make payments to the company rather than to the partnership.
Conclusion
The company structure is probably, on balance, a useful one for small businesses. However, it is important that you seek independent financial advice regarding the pros and cons of incorporation from a financial perspective.
You will also need specialist legal advice to ensure that the structure and constitution of your company properly accommodates your requirements.
- Disclaimer. This article provides general information and is not intended as legal advice. Neither the author nor Lockharts Solicitors will accept liability for losses arising from reliance on the information in this article.
