Considerations for Dental Partnership Agreements
Dentists can structure their practices using a variety of different legal entity forms. Is one of the most common arrangements, a partnership, right for your practice? Here’s what you should know if a partnership agreement will govern your practice’s ownership and management.
In today’s dental marketplace, many dentists opt to partner with one or more other dental practitioners rather than pursue the traditional solo practice. The rise in dental partnerships can be traced to a number of factors, including increasing costs of new technology, flat or decreased reimbursement rates, and greater competition with new graduates and mid-level dental practitioners with expanded scopes of practice.
While some dentists may bemoan the loss of complete independence that comes with a solo practice, there are potentially a wide range of benefits from partnering with other dental practitioners. These can include reduced overhead, greater purchasing power, continuity in staffing, mentorship, and expansion into specialty practice areas.
But as with most things, partnerships can have their drawbacks, too. If not structured properly, a dental partnership can lead to unfair disparities between practitioners, foster mismanagement, and create ambiguity about succession or growth planning.
Given these risks, every dental partnership should have a written agreement that sets forth a mutually agreeable vision for operating and growing the business. In this post, we consider some critical areas that any dental partnership agreement should address.
What Is a Dental Partnership?
Before any prospective dental partners get underway drafting their partnership agreement, it’s important to understand what a partnership really is. Although the term “partnership” is often used informally, it’s actually a legal term of art with a specific meaning.
Generally speaking, the law deems a partnership to be an association of two or more persons who carry on as co-owners of a business for profit. Notably, a partnership is more than just the sum of its parts; it is a separate legal entity, capable of entering into contracts, acquiring property, and suing or being sued.
Unlike other legal entities through which a dentist may structure his or her practice, partnerships are not subject to nearly as many formalities. Indeed, given the facts and circumstances, a partnership may form just by one or more dentists practicing together, even if the dentists did not mean to technically form a partnership. No written agreement or filings are required.
In most jurisdictions, once a partnership forms, a default set of governing rules applies. These default rules typically presume that all partners are equal. Thus, all partners will have an equal right to participate in the management of the partnership and will equally share profits and losses.
Likewise, once the partnership is created, partners will have equal liability for any contractual or tort liabilities that any of the other partners incurs on behalf of the partnership. Thus, for example, if one partner enters into a contract with a vendor, the vendor could seek any payment owed from any of the partners.
The liability risks that come with a partnership underscore that the formation of any partnership should be intentional and clearly understood in its terms. To this end, the best practice for any partnership is to be governed by a written agreement. Not only will this memorialize the parties’ mutual assent to form the partnership, but it will also provide a means by which the parties can contract around the default partnership rules, which may not be appropriate and potentially could even be detrimental to the business.
Dental Partnership Agreements: Issues to Consider
Equal rights to manage the dental practice may not be desired, especially where a more junior dentist is joining a partnership of more senior practitioners. To avoid the default rule of equal management rights, the partnership agreement should specify who is authorized to make which decisions (e.g., the managing partner or a committee) and to whom such decision-making authority may be delegated. The agreement may also stipulate that certain management decisions (e.g., incurring a certain threshold of debt or leasing space or equipment) are subject to approval by the vote of the partners. To prevent deadlocking, the threshold for approving certain decisions may be a unanimous vote.
Non-Competition and Non-Solicitation Restrictions
Some dentists may be hesitant to partner with other practitioners out of concern that the partnership will just be a launchpad for the others to pursue further professional ventures. Non-competition and non-solicitation restrictions are common in many dental partnership agreements to alleviate these concerns. These clauses set forth the restrictions on the partners’ ability to join or start competitor practices and poach from within the partnership. Due care must be made in drafting these provisions, including the scope of activities subject to the restrictions and the time period and geographic reach of the restrictions. In some jurisdictions, overly broad or vague non-competes may be unenforceable.
Admission of New Partners
The partnership agreement should lay out a clear procedure for admitting new partners and thereby expanding the practice. This procedure may include stating a minimum capital contribution that a prospective partner must make to join the practice. The agreement may also clarify whether the decision to admit a new partner is subject to vote by the other partners. To ensure the new partner meets the partnership’s standards and qualifications, the agreement may include representations and warranties to be made by the incoming partner, including on matters relating to licensure and malpractice history.
Just as the partnership agreement should address the admission of new partners, the agreement should also address the exit of existing partners. Points to consider are whether a partner may dissociate before a set period of time and which events may be grounds for dissociation. The agreement may provide that where a partner dissociates in violation of the partnership agreement, the partner must pay liquidated damages to the partnership.
The agreement should also enumerate a buy-out formula that applies when a partner seeks to dissociate in accordance with the terms of the agreement. The methodology may be based on a sliding scale of productivity, so that the valuation of an outgoing senior partner’s interest will be less if he or she were less clinically productive in his or her later years as a partner, and vice versa. This could ensure that more junior partners pay a fair price for the more senior partner’s interest and mitigate conflicts where the remaining partners refuse to buy out the disassociating partner.
Be Wary of Generic Agreement Forms
A dental partnership agreement should be treated as a living document that reflects the mission, vision, and values of your dental practice. A generic, boilerplate agreement will not do the job.
We recommend that you seek out a healthcare lawyer in your state who understands both the business imperatives and the regulatory environment of your clinical practice.