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 forms when two or more dentists co-own a practice for profit.
Dentists must be cautious, as unlike a professional corporation, a dental partnership can create unintentionally. Simply working together, sharing expenses and profits can legally establish a relationship (Corp. Code Section 16202(a)).
Accidentally creating a dental partnership isn’t harmless. One major drawback is that general partnerships carry unlimited liability for each partner.
Who can be a partner in a California Dental Partnership?
Dentists can own a practice individually or through a professional corporation. In California, they cannot operate as an LLC.
Generally, only dentists can own and run dental practices, with a few exceptions. One exception is forming a Dental Support Organization (DSO), where a non-dentist manages business operations.
This allows the dentist to focus on clinical care while their partner handles business operations. Additionally, dental hygienists, assistants, physicians, or surgeons can hold minority equity stakes.
11 point Checklist for a Dental Partnership
Role of Dental Partnership Attorneys
The role of a Dental partnership attorney is essential in managing legal and financial aspects, allowing dentists to focus on patient care.
Here are some of the roles briefly:
- Drafting and Reviewing Partnership Agreements: Attorneys draft and review agreements covering finances, liability, and exit strategies, ensuring they are legally sound and specific to the practice.
- Navigating Regulatory Compliance: They ensure compliance with healthcare, tax, licensing laws, and HIPAA to avoid legal risks.
- Resolving Disputes: Attorneys mediate conflicts, helping avoid litigation and maintaining stability.
- Assisting with Practice Mergers or Sales: They handle legal paperwork, due diligence, and negotiations during mergers, partnerships, or sales to protect interests.
- Providing Liability Protection: Attorneys advise on structuring partnerships to limit liability and reduce legal risks.
- Ensuring Long-term Stability: They provide ongoing legal support to ensure compliance and promote growth.
Types of Dental Partnerships
Common Types of Dental Partnerships include:
- General Partnership (GP): Partners share equal management and liability, making this easy to set up but increasing personal financial risk.
- Limited Liability Partnership (LLP): Partners are liable only for their own actions, offering shared management with reduced personal risk.
- Professional Corporation (PC): Provides liability protection and tax benefits by holding the corporation, not individual dentists, responsible for debts.
- Limited Liability Company (LLC): Offers flexible management and tax options while limiting personal liability, ideal for small to mid-sized practices.
Consulting Odgers Law Group ensures the right structure for asset protection and tax planning.
Key Considerations Before Entering a Partnership
Before committing, dentists should assess these key considerations to ensure the partnership aligns with their professional and personal goals:
- Shared Vision and Goals: Partners must align on long-term goals, such as growth strategies and treatment philosophies, to avoid future conflicts. Clear communication is key, whether expanding or staying small.
- Roles and Responsibilities: Defining roles early prevents confusion. Decide if duties will be divided (e.g., one partner handles admin, the other clinical) or shared equally to streamline operations.
- Financial Contributions and Profit Sharing: Partners should agree on financial contributions (capital, equipment, or sweat equity) and how profits/losses will be shared to prevent disputes.
- Exit Strategy: An exit plan is crucial for handling retirements, sales, or health issues, ensuring smooth transitions and protecting the practice.
- Legal and Liability Issues: Shared liability means each partner’s actions, like malpractice or debt, affect the other. A dental lawyer can help draft a partnership agreement to minimize risk.
- Compatibility and Trust: Personal compatibility and trust are vital. Open communication and professionalism help resolve disputes and build a strong, successful partnership.
Importance of a Dental Partnership Agreement
A dental partnership agreement is important for a successful practice, providing a clear legal framework that prevents misunderstandings and disputes. It defines each partner’s roles, financial contributions, and profit-sharing, ensuring transparency and fairness. The agreement also protects against liability by outlining how malpractice or financial issues will be handled.
So what are the benefits for having a dentist partnership?
There are several benefits to partnering with another dentist: Having a dentist partnership offers many benefits:
A partner can manage the business and cover overhead while you’re away.
- Partners complement each other’s strengths and weaknesses.
- They motivate each other to grow the business and generate new ideas.
- Partners offer advice on unfamiliar treatments.
- New dentists gain mentorship; experienced dentists gain help with emergencies and fresh energy.
- Two partners allow the practice to grow faster with more capital.
Challenges of Dental Partnerships
Dental Partnerships offer benefits but also face key challenges such as:
- Differences in Vision: Misaligned goals can create tension if partners don’t share a common vision.
- Unequal Contributions: Imbalanced financial or operational efforts can cause resentment without clear role definitions.
- Decision-Making Conflicts: Disagreements can disrupt operations without established decision protocols.
- Financial Disagreements: Profit distribution and expense management can cause tension without a clear financial plan.
- Liability Risks: One partner’s legal or financial issues can impact the practice, making legal protection essential.
These challenges require clear communication and structured agreements to ensure partnership success.
How to Choose a Name for A California Dental Partnership
Unlike naming a regular business or Professional Corporation, California’s Secretary of State places no restrictions on naming a general partnership.
However, the Dental Board of California requires any dentist practicing under a false or fictitious name to apply for a fictitious business name.
Any name that excludes the last name of each partner or implies additional owners is considered fictitious [Bus. & Prof. Code § 17900(a)(2)]
Does California require dentists to have a Dental Partnership Agreement?
No, California does not require dentists to have a dental partnership agreement, but forming one is strongly advised. Without an agreement, California law imposes default rules that govern the partnership..
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. However, written agreements are crucial to avoid misunderstandings and legal disputes. If parts of the relationship aren’t covered in the agreement, California law steps in to fill the gaps.
Oral or implied agreements are legal but risky, as the law relies on conduct and language to interpret intentions, often leading to costly litigation. A clear written agreement helps prevent disputes and keeps the practice running smoothly.
Strategies for Successful Partnership Management
Successful Partnership Management require strong communication and clear planning to ensure smooth operations and alignment. Key strategies include:
- Clear Communication: Regular, transparent discussions keep partners aligned on goals and performance.
- Defined Roles: Assigning clear responsibilities allows partners to focus on strengths and avoid confusion.
- Structured Decision-Making: Establishing processes like voting or role-based decisions helps prevent conflicts.
- Financial Transparency: Regularly reviewing finances ensures trust and minimizes disputes over profits and expenses.
- Conflict Resolution Plan: Having a plan in place resolves issues quickly and prevents escalation.
Adaptability, performance reviews, and a solid partnership agreement further support long-term success.
Here are some reasons why you should have a well-drafted written California 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 clearly define the type of business the partnership will conduct.
It’s wise to be specific rather than using broad terms like ‘Dentistry and any other legal business purpose. Specificity helps limit liability, as each partner’s actions bind the partnership to activities within its defined purpose. A broad purpose could expose the partnership to liability for non-dental activities.
The purpose provision also clarifies expectations for partners, including time commitment, presenting business opportunities, and avoiding competition with the partnership.
2. Covenants, Powers Rights, and Duties of Each Partner Dentist
This provision will lay out 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, partners should agree on how much capital each will invest and their ownership percentages. While ownership often correlates with capital contribution, it’s not mandatory.
Partners must also decide when to contribute additional capital. By default, profits and losses are divided based on ownership percentages.
Working with a dental CPA can help create a custom system for splitting profits and expenses.
5. How to Split Expenses in a Dental Partnership:
Ownership Percentage Model:
This simple model splits expenses based on ownership, but it can be unfair since it doesn’t account for who incurs more costs.
Production and Ownership Percentage Model:
A more balanced approach splits expenses by each dentist’s production. Supplies are divided based on production, while rent and fixed costs are usually split equally. Remaining expenses are assigned to whoever incurred them.
Profits are typically split by production, with high producers earning a larger share. Setting aside 10-20% of profits for operating expenses is also recommended.
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.
A dental attorney can handle tough conversations with your partner, ensuring both parties understand crucial terms. Agreeing on terms before consulting an attorney may lead to renegotiation and frustration.
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.
