When two or more dentists pursue a joint venture in practice they will typically form a general partnership. Each dentist should hire his or her own individual legal counsel to represent each of their distinct interests in the transaction. A written partnership is strongly advised as state law will govern any entity of two or more persons in the absence of a customized partnership agreement.
The checklist below sets forth some of the terms that dentists need to address in a partnership agreement when forming a group practice under the structure of a general partnership.
Nature of General Partnership
Individual Partners or Corporate Partners.
Will the general partnership consist of individual dentists as partners or a partnership of corporations in which individual dentists are shareholders of the partners? As each partner is individually liable for the acts of the other partners, a partnership of professional corporations may be advisable to limit the liability of a partner for acts of the other partners or the partnership.
Name of Partnership.
The partnership must include the names of the partners.
Term of Partnership.
The number of years during which the partnership will exist should be set forth in the partnership agreement.
How much of an initial contribution will the partners make to the partnership, if any? A certified public accountant may be able to assist with the determination of the initial capital contributions to a partnership.
If the partnership requires additional capital contributions and one or more partners are unable to make a contribution, how will the partnership structure loans from some partners to the partnership on behalf of other noncontributing partners?
Profits and Losses.
Dental partnerships can allocate profit among partners based on the production of each partner, the percentage of ownership days worked or a hybrid of the above. Profits based on share ownership may not take into account the differential profit generation of each partner.
The amount to be maintained as a reserve in the account of the partnership should be able to meet the partnership’s expenses for at least several months.
A certified public account will be able to help a partnership determine whether the partnership should use a cash basis accounting or accrual basis accounting method. Most businesses use a cash basis accounting method.
The partners can either co-manage the dental practice simultaneously, allow individual partners to manage the practice or distribute management duties in alternate years.
Each partner must agree to be present and provide patient treatment for a minimum number of hours each week or month to prevent: (1) insufficient revenues to pay for partnership expenses and/or (2) excessive profit payments to be made to a nonworking or underperforming partner.
The partners should agree to meet a minimum number of times each year for management and decision-making purposes.
The partnership agreement shall determine what partnership actions require a majority, supermajority, or unanimous vote.
Appointment of Tax Partner.
The IRS requires appointment of a partner with defined authority to address tax matters for the partnership. Specific language needs to be added to document the powers of the tax partner to act on behalf of the partnership.
Use of Facility.
Each partner will generally have equal use of the dental practice premises.
Allocation of Patients.
The agreement may determine how new patients are distributed among the partners. If a dentist is purchasing an interest in an existing practice, then the buyer must ensure that the partnership agreement includes terms whereby the dentist selling a portion of his or her interest will transfer to the buying dentist the percentage of patients or production equal to the purchase interest to the buyer. Existing partners should determine how new partnership patients are distributed to each partner.
The partnership agreement must entail whether the hiring and termination of employees and contractors shall be based on a unanimous or super-majority decision.
Reimbursement of Expenditures.
The partners should also agree on which expenditures the partnership will pay on behalf of its partners with advice from their respective certified public accountants.
Each partner may bind the partnership by their act and the partnership is liable for agreements made by one partner with an outside person or entity. If desired the partnership agreement should allocate the responsibility of each partner to a third party for acts not approved by the other partner(s).
Covenant Not to Compete.
A partnership agreement should include non-compete provisions restricting each partner, as an individual and corporation, from competing with the partnership during the term of the partnership and when a partner exits the partnership if the remaining partners have paid consideration for the goodwill of the exiting partner.
The partnership agreement should also have additional non-competition covenants such as a covenant not to solicit patients and employees, a covenant not to disclose confidential practice information, a covenant not to solicit referral sources, and a covenant not to treat or derive income from the treatment of patients.
Noncompetition covenants can be enforceable in a partnership agreement and buy-sell agreement if the selling party receives consideration for the purchase of goodwill and the covenants are reasonable in scope and geography as to not prevent the selling party from having the ability to earn a livelihood.
The partners should delineate within the partnership agreement the terms of a future sale of a partner’s interest, which includes whether the exiting partner’s interest will be valued through an appraisal process or whether the partnership agreement will have a set formula for the valuation of the interest to be purchased. Such a formula can be a set amount determined by the partnership on a periodic basis or a formula that may be based on the exiting partner’s collection for treatment rendered by that partner, the value of partnership property and outstanding accounts receivable.
Each partner should have the option to leave the partnership either due to retirement or a voluntary decision to leave. The agreement should include provisions for notice of termination, who remains on the premises post-termination, right of first refusal for existing partners to purchase interest, mechanisms for purchase by a third party, rejection of a third-party sale, requirement to purchase interest if the rejection of a third-party sale and valuation of interest on voluntary or involuntary termination.
Death or Disability.
The manner in which a partnership interest will be transferred due to a partner’s death or disability should also be detailed in the partnership agreement including any reduction in the value of goodwill to be purchased from the appraised value of value established by a formula.
Key Person Insurance.
Each partner should acquire life insurance on the life of the other partner in order for the remaining partner to receive insurance proceeds upon the death of the other partner with which the remaining partner can pay the heirs of the deceased partner for the deceased partner’s partnership interest. Disability buyout insurance is also an option for the purchase of a disabled partner’s interest.
The agreement should include detailed provisions on what acts may allow partners to cause the involuntary termination of another partner's partnership right. These provisions need to be severe breaches. Such provisions normally include rights to cure the breach and an appeal process. An involuntary termination provision may include the right or obligation to purchase the involuntarily terminated partner's interest and valuation of those partnership shares.
In the alternative to involuntary termination, partnership agreement must include terms regarding the types of events that would cause dissolution of the partnership. Some terminating events may include a partner’s loss of licensure to practice dentistry in California, the conviction of a felony, incapacity, and the assignment of assets to a creditor.
Winding Down of Partnership Affairs.
The partners should agree in advance on which partner will manage the winding down of the partnership’s affairs upon dissolution.
In the event two or more dentists desire to enter into a group practice, in addition to the above legal terms, the dentists should conduct due diligence and confirm that the group practice model will be beneficial for each partner.