06 Jun CONSIDERATIONS FOR CO-OWNED PRACTICES

One can’t predict how well a practice relationship between two or more dentists will work out or how long the relationship will last. There are simply far too many issues and different personalities to consider. However, the fact that conflicts often develop between doctors working in the same practice is a near certainty! Like in a marriage, it is virtually impossible for two or more doctors to agree on every single issue, every single day. The lucky doctors will be able to work through these issues with no major damage to the relationship. But, should such a critical relationship rely on luck?

It is frightening how many doctors choose to practice in a group environment without contractually addressing the specific needs, obligations and responsibilities of each the doctors in the group, both during and following the term of the relationship.

But, as dangerous as not having an operating agreement in place may be, there is arguably something even more dangerous. That is having an inadequate operating agreement in place. An inadequate operating agreement only provides a false sense of security. Either most of the pertinent “dental-specific” issues of the non-solo professional relationship are not addressed at all OR the issues are addressed in such a way that the provision actually contradicts other provisions in the agreement thus creating ambiguity throughout the operating agreement. Once a problem occurs, the doctors realize that their agreement does not address the problem directly or possibly not at all and this typically creates even more problems.

Ambiguous agreements make it virtually impossible for anyone to determine the correct course of action. Thus, ambiguous agreements frequently cause doctors to end up in litigation and often the court resorts to discarding the agreement entirely and making decisions that will have a lasting impact on the doctor’s career and life! The ironic thing is that the cost of the litigation will almost always far exceed (by ten to twenty times) the cost of having a non-ambiguous, equitable and comprehensive agreement drafted in the first place. Unfortunately, for many doctors this is a lesson usually not learned until it’s already too late.

In this article, we have listed a few of the issues and contractual considerations that should be considered before two or more doctors begin working together in a non-solo practice environment.

PRACTICE ENTITY CONSIDERATIONS

Should a co-ownership practice be structured as a corporation, a limited liability company or a partnership?

If a dental practice is operating as a corporation, should the corporation elect to be treated for income tax purposes as a “C” or an “S” corporation?

If a dental practice is operating as a limited liability company (LLC, PLLC, etc.), should the LLC elect to be taxed as a corporation? Should the LLC be structured as a multi-member LLC? What happens if a multi-member LLC fails to select a tax status and is deemed to be a “disregarded entity” for Internal Revenue Service purposes?

How does the practice entity selected impact the practice equity value?

Are my personal assets at risk due to the actions of the other doctor even if I am not present in the practice when the action occurs?

What are my personal liability concerns if I am entering into an office sharing relationship?

What are my personal liability concerns if I am entering into a space sharing relationship?

What are my personal liability concerns if I am simply adding a non-equity “hired gun” associate?

PRACTICE EQUITY CONSIDERATIONS

How can an office sharing relationship impact my practice equity value?

How can a space sharing relationship impact my practice equity value?

Do I need a contract for either an office sharing or space-sharing relationship?

What are my practice equity concerns if I am simply adding a non-equity associate?

Do I need a contract for a non-equity “hired gun” associate?

Has proper contractual consideration been given to protecting the hundreds of thousands of dollars of practice equity before entering into a non-solo practice environment?

PRACTICE OWNERSHIP CONSIDERATIONS

Should equal ownership be immediate or should ownership be phased into based on the individual production contributions of the doctors?

How will practice growth be considered if a prospective practice owner works in the practice as an associate prior to becoming a practice owner?

How should the practice value be determined once a doctor is eligible for practice ownership?

Should there be a “free look” period before practice ownership occurs? If so, should there also be another time period after the “free look” period before practice ownership occurs?

Should the practice sell the ownership interest or should the existing practice owners sell a portion of their individual ownership interests in the practice?

What are the rights and obligations of a minority owner?

What are the rights and obligations of a majority owner?

Can a majority of the practice owners elect to change the basic structure of previously agreed upon transaction?

Should practice owners have seniority rights and, if so, what are those seniority rights?

Do ownership options differ depending on the entity structure of the practice?

Do income tax considerations differ depending on the entity structure of the practice?

PATIENT RECORDS

Who owns the rights to the patient records.. the practice or the individual doctors? Unless it is clearly addressed in the operating agreement, the doctors may forfeit significant tax benefits when they wish to sell their ownership interest in the practice.

If one doctor wants to leave and practice elsewhere how do you determine each doctor’s patients of record? How much does the departing doctor pay the other doctors for those records, if anything at all?

What happens if one doctor maintains poor patient records or no records of his or her dental services?

What happens if one doctor does not maintain patient confidentiality?

SCHEDULING

What happens if one doctor wishes to practice part-time and the other doctors maintain a full-time schedule?

How are expenses (and income) divided when the doctors are not practicing and providing patent coverage on a similar schedule?

If a doctors wishes to slow down, does that doctor have the right to hire a nonequity doctor to provide professional services so the owner-doctor who wishes to slow down can continue to earn his or her share of the profits from the practice?

At what point would a doctor who is cutting back on clinical time be required to relinquish practice ownership?

How are new patients to be distributed among the doctors?

PRACTICE OWNER LIMITATIONS AND WARRANTIES

What contractual limitations are placed on the owner doctors to limit their ability to…

• transfer their ownership interest in the practice without the consent of the other practice owners?
• utilize the credit of the practice for their own personal benefit?
• utilize the credit of the practice for the benefit of the practice without the consent of the other practice owners?
• pledge their practice ownership as collateral on personal loans?
• release patients from paying a portion or all of their charges?
• cause practice revenues to be deposited into a bank account other the practice bank account?
• copy and/or remove patient records for their own personal or professional use?
• provide patient treatment in a dental office other than the primary office of the practice?
• allow a judgment to be filed against the practice?
• practice in the same geographic area and solicit practice patients after relinquishing practice ownership?

COMPENSATION, BENEFITS AND EXPENSES

Are expenses of the practice paid according to individual production thereby placing responsibility for a larger portion of practice overhead on the larger producers?

How is it handled if one practice owner wants the practice to acquire some expensive dental equipment that the other practice owners do not wish to acquire?

How are the practice owners compensated for the day-to-day management of the practice?

How are the practice owners compensated for their personal dental services to the patients of the practice?

Does each doctor pay his or her own lab fees (and other costs such as implant hardware) or does the practice pay these expenses regardless of the production level of each doctor?

What if one of the practice owners who is a major producer wants the practice to provide him or her with an expensive, luxury automobile while providing the rest of the practice owners with a much less expensive automobile or no automobile at all?

How should the inequity in the cost of continuing education, vacations, and other non-practice operation expenses and/or benefits for one doctor over another doctor be handled?

How do you determine if an expense is to be treated as necessary practice expenses for all practice owners or is to be treated as a non-essential, elective expense for the benefit of a single practice owner?

Are the practice revenues to be divided according to doctor production, thereby limiting practice owners who are equal owners from receiving equal profit distributions and/or corporate dividends?

DEATH AND DISABILITY

Must a disabled or critically ill practice owner, who can no longer produce, sell his or her ownership interest in the practice?

Should a practice owner continue to benefit from practice profits during a lengthy disability or extended illness? If so, should there be any limitations imposed as to how long this participation can continue? If so, what limitations would be fair for all practice owners?

Is consideration given to a practice owner who continues to contribute to the growth of the practice even though the doctor is permanently disabled and can no longer provide patient care?

Are the remaining practice owners obligated to purchase the owner’s interest of a practice owner who dies or is deemed to be permanently disabled?

Do the remaining practice owners have the right of first refusal to acquire the ownership interest of a deceased practice owner if the deceased owner’s estate finds a ready, willing and able purchaser?

Must ownership buy-out insurance be in place in the event of a practice owner’s death?

If so, how are the proceeds of the life insurance to be handled? Are the beneficiaries of the insurance obligated to use the insurance proceeds to acquire the ownership interest of a deceased owner? Is it the practice, the deceased owner’s family or the remaining practice owners who will receive the tax-free advantage of life insurance proceeds?

MANAGEMENT

Which practice owners will be responsible for the day-to-day management of the practice?

How are those owner/managers to be compensated for the added burden of the day-to-day management of the practice?

Are there any approval limitations placed on the managers of the practice (i.e. can a manager unilaterally approve salaries, staff hours, staff vacations, etc., etc.)?

Can a practice owner make unilateral decisions that affect the compensation and benefits of the other practice owners? If not, what happens if such a unilateral action does occur?

How will disputes between the doctors be settled? Should the agreement provide for mediation and arbitration in the event of a such a dispute? If so, is the agreement clear as to when and how this process will be utilized?

TERMINATION AND OWNERSHIP REDEMPTIONS

Upon termination of a non-solo relationship, should the contract force the owners into a restrictive covenant so the owners can’t compete with the practice (even though one or more of the owners may have been the most influential in developing and building the practice)?

After a termination of the non-solo relationship, are there any restrictions for soliciting each other’s patients and/or referral sources?

After a termination of the non-solo relationship, are there any restrictions for soliciting each other’s employees?

Is there a method spelled out for distribution of patients and other practice assets upon dissolution of the practice entity (corporation, limited liability company, partnership, etc.)?

Are there provisions to determine the value of the practice for purposes of an ownership interest buy-out that covers both the intangible asset value (goodwill value) as well as the value of the tangible assets (equipment, supplies, furniture, etc.)?

Are the terms for financing an ownership interest buy-out clearly defined?

What is collateral for a seller loan, if applicable, and how is the seller’s security interest established after the sale of an ownership interest?

How are contingent liabilities handled at the time of the sale of an ownership interest?

How are contingent liabilities handled after the sale of an ownership interest?

Does the practice have a right of first refusal for the acquisition of a doctor’s ownership interest?

Are there any restrictions on the sale of an ownership interest?

Are the parties required to indemnify each other, during and subsequent to the term
of the relationship?

Should the practice or the existing owners personally acquire the ownership interest of a doctor who wishes to redeem his or her ownership and retire from the practice?

Do ownership redemption and ownership acquisition options differ depending on the entity structure of the practice?

These are just a few of the considerations that should be addressed before committing to a non-solo practice relationship. It is paramount that you protect yourself and your practice with a comprehensive contract. Having no contract subjects you to a multitude of very costly and quite common problems. However, having a contract is not enough. Poorly drafted contracts are of no value and often cause more problems than the contract resolves.

The practice entity is also extremely important both from an income tax standpoint as well as for personal liability protection. The personal liability risks that can result from the actions of the other doctors in non-solo practice relationships cannot be overstated. The importance of the entity structure of the non-solo practice is critical to ensure that you and your personal assets are protected.

The choice is yours. You can take an ambiguous and/or non-contractual “roll of the dice” with your future on the line or you can seek professional guidance and set the non-solo relationship up properly.

Contact PARAGON to schedule your complimentary consultation. No obligation… just a very worthwhile education!