Dental Partnership Agreements – Plan Your Finances To A Tee
It is well documented that entering into a business partnership can be an advantageous venture for all parties, but did you know that there are different types of agreements within dental partnership business structures? Here, we’ll bring you up to speed on Expense Sharing Agreements, Profit Sharing and Silent Partnerships.
An Expense Sharing Agreement (ESA) is basically what it sounds like – a type of partnership where business expenses such as staff wages, equipment, rent, everyday supplies, marketing costs and so on are shared evenly between all those involved in the agreement.
Unlike general, traditional partnerships, however, dentists with an ESA do not share the profits that they earn at the practice, instead keeping all expenses and assets separate – altogether, an excellent way to boost business and increase monthly take-home.
An ESA also ensures that important details – such as how patients are to be allocated, what happens in the event of incapacity, absence or death – are outlined, so that all partners involved have a clear idea of what to expect and where they stand.
As with any formal, legal agreement, there are potential risks that can occur, including possible disagreements and relationship breakdown. For that reason, it is always advisable to utilise the help of a professional agency to draw up a solid contract.
Remember – because the agreement effectively means that separate businesses operate from the same practice, all dentists are personally reliable for their own commercial risks and taxation payments.
Profit Sharing Agreement
Another agreement that dentists can utilise is Profit Sharing. Without an agreement, partners share profits equally, but when a Profit Sharing contract is in place, profits can be divided in any way imaginable, as long as it is legally agreed upon. During the formation of the ratio, partners can factor in any reasoning for their profit sharing – the main considerations are usually responsibility and capital contribution.
Responsibility is where profits are divided according to each partner’s roles and day-to-day responsibilities within the practice. For instance, if Partner B is to have more involvement with administrative duties, work longer hours and in general have more of an input with the running of the business, then a Profit Sharing Agreement could be drafted to ensure that Partner B receives a percentage of the profit that reflects this.
Capital Contribution is where profits are split based on the amount of capital that was put into the business at the start of the partnership/practice purchase. For partners that are keen to utilise the concept ‘you get out what you put it’, there is a good chance that a Profit Sharing Agreement is the ideal structure.
Like you would with any other formal agreement, it is always advisable to seek advice when putting the contract together and outlining restrictions and clauses, including:
• What a partner can do with company resources.
• How the partner can liquidate the business.
• What would happen in the event of sickness or death.
A quasi partnership is, in some ways, considered to be an agreement that is half way between several business formats. In other words, the practice operates like a limited company on paper, but in practical terms is run as if it had a partnership agreement. For instance, the principals are paid based on individual income but the associates profit is split equally between the partners.
Unlike an Expense Sharing or Profit Sharing Agreement, a silent partner has nothing to do with the day-to-day running of the business – for all intents and purposes they are just a passive financial investor. Thus, for partners seeking more start up capital, a silent partner can be hugely advantageous.
Other potential benefits include expansion of contacts and the use of the silent partner as a mediator when disagreements on finances arise between partners.
However, it is important to remember that just because the investor isn’t involved with daily tasks and responsibilities, it doesn’t mean they won’t have their own financial agenda. For instance, they may have limitations on what they will and won’t invest in.
For optimum results and to minimise the risk of issues arising, it is always best to seek expert advice.
If you are looking to enter into a dental practice partnership, make sure that you consider all agreement options that are available to you. To get the most from your business, start planning today.