You may have heard that entering into a dental partnership is like entering into a marriage….
Unfortunately, it is not…
It is harder.
Both are gigantic commitments that change the course of one’s life. They both require trust, respect, and communication.
They both require the same philosophy on spending and saving money.
The truth, however, is that a dental partnership is much more difficult to maintain than a marriage.
According to Forbes, roughly 50% of marriages ultimately end in divorce, however, for business partnerships the number is closer to 80%.
Similar to going to a marriage counselor, here is some background information on dental partnerships and some ideas for success.
California Dental Partnership FAQ's Covered:
What is a California Dental Partnership?
A Dental Partnership occurs when two or more dentists, act as co-owners of a dental practice, for profit.
Dentists must be very careful because unlike a professional corporation, a dental partnership can be entered into on accident. Simply working together and sharing expenses and profits can be interpreted as dentists being partners (Corp. Code Section 16202(a)).
Accidentally entering into a dental partnership isn’t so bad right?
Wrong! One of the major drawbacks of entering into a dental partnership is that general partnerships have unlimited liability to each of its partners.
This means that if your partner incurs a debt or judgment for malpractice while they are acting on behalf of the partnership, if you are found to be a partner, you will be responsible for repaying that obligation. To overcome this major drawback, partners should draft a clear dental partnership agreement with an indemnity provision.
In addition, we suggest that each partner of the dental partnership form a Professional Corporation. This way, your corporation will still protect your personal assets if you incur liability due to the partnership.
Who can be a partner in a California Dental Partnership?
The general rule is that only a dentist can own and operate a dental practice. However, there are a few minor exceptions. One exception is by setting up a Dental Support Organization (DSO). Under a DSO a non-dentist works with a dentist to manage the business (non-clinical) aspects of the practice.
This allows the dentist to fully focus on the clinical side of the practice and leave the business operation to his or her partner to handle. In addition, there are also opportunities for dental hygienists, dental assistants, physicians, or surgeons to have a minority equity stake in dental practice.
So Why Would You Want To Partner With Another Dentist?
There are several benefits to partnering with another dentist:
Your partner can cover the overhead and manage the business when you are away. (Everyone needs a vacation from time to time);
- Your partner can have strengths where you have weaknesses;
- Partners can help keep each other motivated to grow the business and generate new ideas;
- Partners can rely on each other for advice on unfamiliar or unusual treatment needs;
- For a new dentist, having an experienced dental partner who can act as a mentor is priceless;
- For an experienced dentist, having a young, eager dental partner to take an emergency call and bring new energy and technology into the practice is priceless;
- The practice as a whole can grow faster with two sources of capital investment.
These are only a few reasons why dentists benefit from finding a partner.
Choosing a Name for A California Dental Partnership
If only it were that easy…
According to the Dental Board of California, any dentist “who is practicing or will practice dentistry, under a false, assumed fictitious name, either as an individual, firm, corporation or otherwise, if he/she has ownership in the practice” must apply for a fictitious business name.
Put simply, any name that does not include the last name of each partner, or implies that there are additional owners, is a fictitious business name. [Bus. & Prof. Code § 17900(a)(2)]
The partnership should apply for a fictitious business name through the dental board and again through the county or city where the practice is located.
The cost to apply through the dental board in 2018 is either $650 or $325 depending on when your dental license expires.
The California Dental Partnership Agreement
A partnership can be formed inadvertently through the actions of the partners. When this happens, California law dictates the rights and responsibilities of the partners by default.
In order to avoid having to follow California’s default rules, we advise that all dental partnerships have a Dental Partnership Agreement.
A dental partnership agreement can be oral, written, or implied, among the partner dentists. If the dental partnership agreement does not cover any part of the relationship between the dentists, then California Law will step in to manage that part of the relationship.
That is why we feel it is imperative to have a comprehensive written partnership agreement.
While an oral or implied partnership agreement is technically legal, they are a terrible idea. If the dental partnership agreement is not put into writing, the law looks to the language and conduct of the parties to determine the partner’s intentions.
As you can imagine, there are usually misunderstandings that will likely escalate into ligation.
When a dispute arises having a well-crafted dental partnership agreement can be the difference in shutting down the practice, a gigantic, expensive, legal battle, or continuing in prosperity.
Here are some reasons why you should have a well-drafted written dental partnership agreement:
- Clarify each dental partner’s rights and obligations (prior to starting);
- Eliminate any ambiguities about how the practice should be run;
- Predetermine how the business will be valued if one partner decides to exit;
- Predetermine the rights of a partner to kick another partner out, or add another partner to the partnership.
Specific Terms to Include in a Dental Partnership Agreement
1. Identify the Business Purpose of the Dental Partnership
The Dental Partnership Agreement should cover what type of business the partnership will be conducting.
It may be wise to define the purpose of the dental partnership with specificity rather than a broad statement such as “Dentistry and any other legal business purpose”.
Specificity is beneficial because each partner is an agent to the partnership and will bind the partnership to any activities that fall under the partnership’s purpose. If the purpose is too broad, the partnership could be liable for a partner’s acts unrelated to dentistry or the practice.
The purpose provision will also be important in situations where partners are required to devote a certain amount of time to the partnership’s business. The partner may have to present certain business opportunities to the partnership or not to compete with the partnership.
2. Covenants, Powers Rights, and Duties of Each Partner Dentist
This provision will layout what each partner is responsible for. A well-drafted partnership agreement will help to prevent deadlock.
It will allow the dental partners to enter into contracts (such as the office lease) and pay bills on behalf of the partnership.
It may also dictate limitations placed on each partner, such as engaging in work for another dental practice. In particular, this section should cover (at minimum):
- The amount of time that each dentist is required to devote to the practice;
- Who is responsible for the management of Practice;
- Business and clinical decisions that require majority consent of all dental partners;
- Business and clinical decisions that require unanimous consent of all dental partners;
- Covenant not to compete, not to solicit, and not to derive income by each partner during the partnership and after they leave the partnership
3. Patient Records in a Dental Partnership Agreement
A well-drafted California dental partnership agreement should state who will be the custodian of the patient records.
It should also discuss the partner’s duties to comply with all HIPAA requirements and state and federal confidentiality rules and regulations.
4. Capital Contributions and Share of Profits and Losses & Distributions for a Dental Partnership
In the early stages of negotiating a partnership agreement, the partners should agree on how much capital each will invest to start the partnership.
Along with the initial capital investment, the partners should agree on their ownership percentages. It is common, but not mandatory, to have the ownership percentage correlate to the amount of the partner’s capital contribution.
The partners must agree on when they will be required to contribute additional capital. By default, profits and losses are split between dentists based on their ownership percentages.
It is a good idea to work with a dental CPA to deviate from this model and come up with a custom system for splitting the profit and expenses of the practice.
The partners should determine how the practice expenses should be split up.
5. How to Split Expenses in a Dental Partnership:
Split Expenses in the Dental Partnership Agreement Based on Ownership Percentage
The easy, however usually unfair, the dental partnership model is to split all expenses based on ownership percentage. This split is done regardless of who is working and incurring the expenses.
Split Expenses in the Dental Partnership Agreement Based on Production AND Ownership Percentage
One model, that many prefer, is to split the practice expenses according to each dentist’s production. At the end of each month, the partnership will calculate each partner’s expense percentage based on that dentist’s gross monthly production.
Under this model, dental and office supplies are also split up based on the dentist’s percentage of production. Rent and other fixed monthly expenses will usually be split 50/50 in a two-person partnership. All remaining expenses will be allocated to the individual who incurred them. Once all expenses have been accounted for the remainder is profit.
Again, most dentists prefer to split the profit in proportion to the ratio of each dentist’s production. If one dentist produces 80% of the dentistry, that dentist should receive 80% of the profit. It is also a very smart decision to set aside 10-20% of the profit each month for the practice operating expenses.
6. How to Handle Hygiene Revenue in a Dental Partnership
In a general dental partnership, there will likely be a hygiene revenue stream. Some partnerships may decide to split the hygiene revenue pool based on each dentist’s production ratios each month.
Others decide to split the hygiene revenue based on which dentists conducted or referred to the hygiene exam.
Under this latter model, each dentist will likely compete to conduct the hygiene exams in order to seek additional revenue.
When is the right time to hire a California experienced dental partnership attorney?
It is a good idea to reach out to a dental attorney as soon as you have decided that you would like to partner with another dentist.
An experienced dental partnership attorney will help you to choose and vet potential partners.
In addition, when you work with an experienced dental attorney, they can have difficult conversations with your future partner that may be hard or awkward for you to have.
Those are usually the discussions that are the most important, and there should be a clear understanding by both parties. Lastly, if you agree to all of the terms prior to talking to an attorney, there is a good chance certain terms may be re-visited and re-negotiated which usually upsets one or more of the partners.
Odgers Law Group’s experienced dental partnership attorney’s are here to help!
Odgers Law Group regularly sets up Partnerships for Dentists in addition to practice purchases and practice start-ups. This was just a short outline of what should be considered when drafting partnerships for dentists.
Each partnership has its own unique circumstances and facts that require custom drafted provisions.
Similar to entering into a marriage, entering into a partnership is no small venture. If you take it seriously and get the proper help, it can lead to a beautiful successful dental practice.
If you rush to get it done and do not cover all of your bases it can be one of your biggest mistakes. Contact one of our dental attorneys at Odgers Law Group if you need help with your dental partnership agreement or any other dental transaction needs.
We will be glad to step in and help you get started on the right foot.