Problems with incorporation

The key incentive for incorporation is usually the potential tax saving to the dentist and the protection of personal assets. However, incorporating can lead to some unexpected costs or even unforeseen advantages. In this article I propose to highlight some of them:

Sickness cover

Once incorporation takes place, the amount drawn out by the dentist will be in one of the following forms, or a combination:

By drawing money out from the director’s loan account, the dentist’s overall taxable income will be reduced but this could have a drastic effect on the amount of permanent health insurance cover available, usually based on salary plus dividends.

The potential reduction in insurance cover is an important consideration to bear in mind when deciding whether to incorporate or not and advice should be sought from a qualified independent financial advisers.

Mortgages

Once you incorporate, your choice of mortgage lender is considerably reduced because you can no longer demonstrate a high level of personal income. Lenders work on ‘taxable income’ and any amounts drawn out through the directors’ loan account are excluded. It is not always easy to persuade the lender that the dentist and his company are one and the same and that it is the profitability of the company, including the salary and dividends that should determine ‘income’ for the purposes of obtaining a mortgage.