Becoming a co-owner: It's more than just sharing toothpaste (Proceedings)

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Becoming a co-owner: It's more than just sharing toothpaste (Proceedings)

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Apr 01, 2010

Co-ownership issues often arise when veterinary practitioners enter into a partnership with other owners, or when two or more associates jointly venture into practice acquisition. In most aspects co-ownership of a veterinary practice is akin to marriage, and it is vitally important to agree on the principal terms governing the relationship before getting hitched. The fundamental issues that need to be addressed upfront are how "power", "money" and "risk" will be allocated among the partners. Contrary to "common sense thinking", these 3 criteria are not related proportionally. For example, a partner with a 10% interest in the company, may get "10%" of the profits; "0%" the power, and "100%" of the liability.

Of all the business arrangements with which individuals become involved, partnerships are the most challenging. This is because the relationship may span decades, during which time the dynamics of these relationships are inherently subject to significant change. Parties of healthy partnerships revisit the terms of their partnerships no less frequently than every 3 years, thereby ensuring that the changing circumstances of their co-ownership relationship are addressed. While most veterinarians seldom allocate much time outside of the practice of veterinary medicine to address such matters, it is far preferable to resolve co-ownership issues at an early stage rather than to wait until a dispute arises, as denial and misunderstanding are the handmaidens of messy divorces.

Consider the following key co-ownership issues:

1. What type of Legal Entity is Your Partnership?

What basic form should the practice take? ("C" corporation, "S" corporation, Limited Liability Company (LLC), partnership (general or limited), sole proprietorship) When buying less than all of a practice, the buyer usually must accept the existing structure. Even when buying 100% of already existing entity, adverse tax consequences often preclude transforming that entity. Those purchasing assets or starting from scratch generally have greater latitude. Selecting the right entity is a complex decision that should be thoroughly explored with the owners' accountant and attorney. Generally, tax considerations are determinative, but liability is also an important aspect. For example, while general partnerships often permit added flexibility, each partner is responsible for his share of the losses run up by the other partners (i.e., joint and several liability). Thus, if a partner incurs malpractice losses exceeding the practice's insurance coverage, the other partners will be responsible for the shortfall.

2. How are Salaries and Profits Distributed Among the Partners?.

How will owners be paid for their efforts as veterinarians? Will their compensation be based on their individual gross revenues, on practice gross revenues, or will they be paid a flat salary? Or should it be a combination of the foregoing? Note that owners are almost always also employees of the practice and permitted to take advantage of various tax advantaged employee benefit plans.

How will the practice's profits be shared? Should each owner's "take" be based on his ownership interest in the practice, his relative contribution to the practice's gross revenues, his ability to bring in knew clients (i.e., "rainmaking"), other factors, or a combination of several? Some business entities, such as partnerships, allow more flexibility than others in distributing profits. Beware of the double taxation consequences of distributing dividends from a "C" Corporation. "S" corporations are less flexible because the profits are distributed in proportion to ownership interest.

3. How is Your Partnership Governed and Managed?.

Governance of the selected practice entity are addressed in its constituent documents or more frequently in a shareholders' agreement (partnership agreements for partnerships, operating agreements for LLCs). When two equal co-owners join, typically all decisions will require unanimity, subject to perhaps dividing the day to day management duties among themselves. Three or more owners, particularly if they don't have equal shares in the practice usually require more complicated schemes. For example, majority vote needed for all decisions, other than certain enumerated strategic matters such as the acceptance of a new partner, or approving capital expenditures over a certain threshold, which require a super majority vote (e.g., 66.66%) or even unanimity.