If you’re thinking of going into partnership to run your practice, have you given any consideration to the structure of the practice? Michael Royden explains why.
Running a successful dental practice can be really hard work! There are a lot of management responsibilities beyond the day job of being a dentist. In turn, covering all of these bases on your own can be doubly difficult and can consume a large part of your working day.
For this reason, many practitioners decide to own a practice along with one or more other principals. This would be most likely in partnership, or alternatively within the structure of a limited company (a dental body corporate).
Sharing the load with other principals can be hugely beneficial, but at the same time there are a number of issues that you need to think about from the outset when going into business with others. Unfortunately, as lawyers, we see the fallout from practices where the future has not been properly thought out. For that reason, we always recommend that anyone setting up a practice with others considers the structure of the practice so that there is a route map for everyone to work to going forward.
Issues to consider
There are a huge range of issues that need to be thought through when setting up a new practice or bringing another principal in, and these include the following:
- Income sharing – there are a number of ways in which practice income can be shared between principals. This ranges from equal sharing of profits between the partners, to arrangements where there is a prior allocation of profits which is linked to the work done by each principal, or alternatively there are full expense sharing arrangements
- Each principal generally goes into practice on the basis that they will all be fully committed to the practice. However, significant difficulties can arise when principals become unable to work, for example through illness. Once again, at the outset of the practice, thought should be given as to what should happen if one principal becomes unable to fully participate in the practice, how profit sharing should change in such circumstances
- Similarly, whilst everyone would hope that this doesn’t happen, from time to time a principal in a practice might die. Again thought should be given as to what the position of the continuing principals should be in that scenario, and also what rights the executors of the deceased principal should have
- Tracking the structure of the practice – detailed documentation might be put in place at the outset of the practice to record the rights and obligations of the principals. However, if the practice structure changes at any stage, then the practice arrangements should similarly be altered to reflect the new structure
- Property arrangements – in many cases we see practices where the focus is entirely on the goodwill and little regard is had to the structure of the property. However, without a building to practice from, the goodwill of a practice can very quickly dissipate. We always recommend that the principals ensure that the property arrangements are suitable for the practice. Also they should again think about eventualities. As an example, it has been popular in the past for practice premises to be put into a self-invested personal pension (SIPP) for one or more principals. This can prove a difficult structure to deal with when one of the principals leaves the practice, in that the principals will still be intrinsically linked through their SIPPs as owners of the practice premises. That might not be what they want, but it may be very difficult for them to extricate themselves from that structure.
Finally, whatever arrangements you put in place for your practice, they should be very carefully documented. This would involve a partnership agreement in the context of a practice operated as a partnership, or a shareholders’ agreement in the case of a dental body corporate. Getting those documents in place from the outset, and having them very clearly record the relationship between the principals, should minimise the risk of unexpected issues arising as the practice develops over the years.