Practices have, in principle, always been able to use a limited company as a business vehicle, but few have done so because it requires the consent of NHSE to migrate the core contract into the company. We’ve noticed a recent increase in the number of practices successfully persuading NHSE to provide consent, so we have set out in this blog some of the opportunities and challenges associated with running the practice through a limited company.
Most obviously, running the practice through a limited company limits your potential liability to the capital which you have invested in the company, plus any undistributed retained profits. This can be attractive to partners concerned about the unlimited liability in an ordinary partnership.
Because a limited company separates out ownership and management (shareholders and directors), senior staff can have a management role without needing to contribute any equity or take any ownership risk. Company directors do not need to be shareholders, so are free to manage the business without putting any personal capital at risk. Likewise, the shareholders can put in capital, but do not need to have any day to day involvement in the practice.
There can also be tax and pension advantages with limited companies. These depend on individual circumstances and advice should always be sought, but they include the ability to target a particular income number to manage your tax liabilities and ensure that you do not exceed the annual pensions allowance. Other tax reasons include the different tax structure for ltd companies and certain tax allowances which are only available to limited companies.
Differences between a company and a partnership
In a company, all staff including the directors are employees and therefore have employment rights. The partners in a partnership are self employed and have very limited employment law protection.
Companies have to make certain information publicly available, such as their accounts, the company constitution, the directors and people with a significant interest in the business; whereas in a partnership, everything is confidential.
Limited companies have no concept of capital accounts for each shareholder. As a consequence, there is no obvious way to ring-fence an individual’s capital or ensure that they are able to withdraw it upon leaving the practice. This needs to be thought about carefully from the outset if that is what you are seeking to do.
There is no automatic mechanism for expelling a shareholder from a company. In a partnership you can expel a partner, but you cannot normally take away a person’s shareholding.
Partnerships dissolve automatically on the retirement of any individual unless the partners agree otherwise, which is one of the main purposes of a partnership agreement. A limited company, by contrast, continues indefinitely until somebody decides to wind it up. This means that once a GMS/PMS contract and a surgery building are held by a limited company, they do not need to be varied as partners/shareholders come and go.
Now that NHSE are becoming more open to limited companies, we expect to see their use in primary care increase significantly. However, GPs should be aware that there are major differences between partnerships and companies, and they should take advice from specialist accountants, solicitors, and their bank and IFA before attempting to make the change.