The grass might be fine on the “solo” side of the fence

As physicians search for the true meaning of the word “balance,” some are looking at expanding their practice. Since this often leads to entertaining the notion of adding medical and ancillary staff, different forms of association arise. These can be employment agreements, space-sharing arrangements, or the broadly utilized term “partnerships.” As labor laws vary from state to state, it is vital that any physician who is considering bringing on anyone new to a practice gain adequate knowledge surrounding the pending proposition prior to entering into any situation that could potentially be detrimental—if not catastrophic—to the existing practice. A poorly executed plan without proper documentation can lead to a legal quagmire, which can result in hundreds of thousands of dollars spent by both sides, with no winners but the attorneys. Sadly, unless physicians have started their careers at the same time in a partnership, very few partnerships survive the test of time. This article explores the potential scenarios available to the physician and highlights the various nuances specific to each.

Define Your Goals

One of the most common faults of many physicians is that they embark upon business decisions based upon emotion and not fact. What are your immediate and long-term goals for your practice? Make a list. Hire an attorney with labor law experience. Hire an accountant with medical practice experience. Introduce these people to each other, and share your goals with them. Have a business plan and budget created for you. Stick to it. This includes attorney’s and accountant’s fees. Become familiar with your state’s laws regarding employment agreements and partnerships. Some bad decisions made early on may not be reversible; or if they are, it may be expensive to do so.

What is your motivation for seeking a partnership? There are benefits to successful partnerships. The potential for increasing income and decreasing overhead can lead to more family time and balance. Shared camaraderie on a daily basis as it relates to clinical medicine—knowing someone is always there to help—has a calming effect.

The cons to partnerships are also alive and well. The innate ego factor of physicians, the sense of entitlement seen with young physicians, a need to control, or the inability to relinquish control can be impediments to a successful partnership. Poor communication skills are often a starting point for deterioration of the relationship.

Partnerships can also exist between the physician and the ancillary staff within the practice, or with other professionals within multispecialty scenarios. In these cases, the physician must check state laws to always be in compliance with Stark Laws and the “Corporate Practice of Medicine” Laws. These differ from state to state, and are designed to protect patients from unscrupulous physicians who put profit before the appropriate care of patients.

Finding the Right Person

A business partnership has many similarities to a marriage. The person you select will hopefully be with you until the end—in this case, until you no longer wish to practice. You will spend as much, if not more, time over the span of your career with your business partner as you will with your spouse.

So ask questions at the outset. How well do you get along? How well do you share? With this in mind, the “dating process” prior to consummating a partnership should not be taken lightly, and should be well thought-out. Medical partners who “divorce” go through the same amount of stress that married couples endure when they split up. Asset divisions can lead to setbacks for all parties, which may not be made up over time. Children of the medical practice (also known as employees) face losses as well. Losing jobs, choosing sides, and accepting change lead to stress that will be felt on all sides.

So who should you look for? Several factors should be considered. Make a list. Prioritize what the most important factors are to you. Like a marriage partner, no medical partner will be perfect. Within your list, if you have to bend, decide what flaws you can live with and those areas in which you should not compromise.

The selection criteria should be the same, whether you are bringing on a new associate or starting a new practice. First and foremost, your prospective partner should be an excellent doctor who will never compromise on quality or integrity. Book smarts, street smarts, and people skills should be evaluated. Psychological scales of compatibility can be tested. Leadership qualities should be assessed. In an environment of conflict, competition, or change, can this person arouse, engage, and satisfy the motives of followers so that they take a course of action toward a mutually shared vision? Can this person allow, facilitate, or reframe experiences for others so that individual actions serve organizational purposes? What are the potential partner’s expectations of you? Are these realistic? Can you live with these expectations and not be a disappointment to your partner? No matter how you may articulate your idea of the “ideal partner,” again, like a marriage, it will take constant work on both sides for it to succeed over time.

Options for Professional Association

Once you have decided on the right person, there are options, particularly if you are bringing a new associate into an existing practice. The first option is to hire the person as an employee until it becomes clear whether this is the right person. This gives you some time to evaluate the candidate’s skills and compatibility. A well-thought-out employment agreement that takes into account individual state laws must be in place prior to commencing employment. Several factors should be included in the contract:

 1) Duties and responsibilities: Outline what is expected of the employee. While the employer is able to determine, control, and supervise the duties performed, there can be no infringement upon the principles of medical ethics of the American Medical Association (AMA) and the customs and rules of ethical conduct prescribed by relevant medical associations and societies.

 2) Outside investments: An employee may have these, but not to the extent that they compete with or reflect in a negative manner upon the employer.

 3) Devotion of time: The employee should devote his or her entire time, energy, abilities, and attention to the employer. The employee shall work for no other person unless written permission is obtained from the employer.

 4) Noncompetition by employee: A strong noncompetition clause is a good deterrent for potential defecting associates. Be careful! Some states do not honor this clause; and if you have it in your contract in one of these states, the entire contract may be seen as void. Most states do honor this clause. Define terms explicitly. Specify a limiting radius (usually 25 miles) for a specific period of time after termination (usually 1 year) in which the employee shall not practice the medical specialty of the employer. Include a temporary restraining order or permanent injunction to prevent such a breach. The employee pays the costs of such action.

 5) Confidential and trade secret information: This is especially important for the young doctor coming out of training and joining an established practice. There is information and knowledge particular to the practice that the employer has gained over the years and which plays an integral role in the success of the operation. This know-how, along with design information and advertising expertise, is subject matter about which new graduates have limited knowledge. Existing practices teach and share this information in the hopes of promoting the new doctor so as to increase their productivity. This is a valid exercise as long as the new doctor intends to stay. If he or she defects, however, the employer must protect against the likelihood that the doctor who he has trained will wind up in proximity to the practice and be a competitor. Remember: Some people buy their practices or earn them over time; others steal them. Justifiable reliance on the word of a new associate should always be protected with a watertight contract. This concept is especially true if there are patents, copyrightable information, or existing inventions that the employee could steal and use for his or her benefit and to the detriment of the practice.

 6) Nonsolicitation of patients: There is a fine art to endearing oneself to the employer’s patients in a way that the patients will follow the employee upon defection. Hiding behind AMA standards of care, claiming to be responsible for the welfare of the patient, and having a “duty” to inform the patient of the defection are becoming the forte of many young doctors as they plot their departure. The problem can be compounded if the doctor has retained the help of an attorney who has done the same thing upon leaving a law firm. Solicitation comes in many flavors, so know the menu! Protection should be for the term of employment and for 1 year after termination.

 7) Nonsolicitation of employees: Employ­ees are a valuable asset of the practice. Since the new doctor is not directly responsible for the overhead, it is easy to win over employees and persuade them to leave at the time of the defection. This can be a setback to the successful operation of the business. Protection should be for the time of employment and for 1 year after termination.

 8) Relationship between parties: Empha­size the employer/employee relationship, in which the employee has no interest in the financial records, assets, cash, accounts receivable, or patient files of the practice.

 9) Terms of employment: The duration should be specified. Both parties can end the relationship at any time, with or without cause.

10) Effect of merger, consolidation, or sale: The rights and obligations of the employee are not assignable, while the employer may assign the contract.

11) Compensation and benefits of employee: Combinations of base salary and performance-related incentives are common. The contract should outline vacation time, health and dental insurance, and medical malpractice insurance.

12) Arbitration of controversies: This is a beneficial route for problems. Arbi­tration is less expensive than litigation, and more expeditious for problem-solving.

There are other options available for professional association. A space-sharing agreement can be arranged, with the new associate setting up his or her own professional corporation and earning what he or she brings in. Appropriate overhead expenses are allotted to the new physician as deemed appropriate.

Another scenario is to have the new physician join or ‘“buy in” to the practice. Subsequently, a new partnership is created. Prior to this occurring, a formal financial evaluation is required. Several formulas exist for practice valuation. A common formula is to value the practice via 1 year’s gross income. Once a buy-in is completed, the new entity should be incorporated.

Incorporating the Partnership

There are three common business entities established in medical practices:

1) Limited Liability Company (LLC): LLCs are created and regulated under the laws of each individual state. An LLC has the limited-liability characteristics of a corporation, but it is generally treated as a partnership for federal tax purposes. Federal taxation of LLCs is governed by Subchapter K of the Internal Revenue Code.

Unlike general partners, whose personal assets are at risk for claims against the partnership, LLC members are generally only at risk for their investment in the LLC. An LLC is nevertheless allowed pass-through taxation, avoiding double tax on income that is present in corporations. Combining the benefits of partnership and corporate characteristics has increased the popularity of LLCs.

An LLC offers limited liability protection for all members, whereas the general partner in a limited partnership has unlimited liability. An LLC member who participates in management is generally not exposed to personal liability, unlike a limited partner in a limited partnership.

Contribution of appreciated property to an LLC as a partnership is tax-free, regardless of how much control the contributing partner has.

Liquidation of an LLC as a partnership is generally a tax-free event. LLCs also have disadvantages. An LLC must have at least two members, in contrast to an S corporation, which can have a single shareholder. State laws may limit the life of an LLC. Earnings are subject to self-employment taxes. If 50% of the the capital is sold within a 12-month period, the LLC will terminate for federal tax purposes. If more than 35% of losses can be allocated to nonmanagers, the LLC may lose its ability to use the cash method of accounting. LLCs cannot take advantage of incentive stock options or engage in tax-free reorganizations. There is also a lack of uniformity in LLC statutes. Businesses that operate in more than one state may not receive consistent treatment. Conversion of an existing business to an LLC could result in tax recognition on appreciated assets.

An LLC is created by filing the Articles of Organization with the Secretary of State (similar to corporation and limited partnership formations). The operating agreement should detail the nature of the management and limitations on duration and transferability of membership interests. Converting an existing partnership to an LLC is a tax-free event as long as the conversion does not result in a shift of partnership liabilities among the members.

2) S Corporation: An eligible domestic corporation can elect to be taxed as an S corporation. An S corporation does not pay tax at the corporate level. S corporation profits and losses pass through directly to shareholders. This avoids the C corporation double tax and allows shareholders to deduct corporate losses on their individual tax returns.

For tax purposes, S corporations are treated in a similar manner to partnerships. Many rules governing S corporations are intended to make sure that S corporation shareholders are subject to the same tax treatment as partners.

An S corporation election can be useful in the early years of a corporation’s existence, since losses are passed through to shareholders.

3) C Corporation: While profits in a C corporation are, as mentioned previously, taxed at both a corporate and personal level, this arrangement has the advantage that any dividends that shareholders earn are taxed at the same level as long-term capital gains (5%–15%). Another consideration is that in a C corporation, capital losses are allowed only to the extent of capital gains, and are carried back 3 years and forward 5 years, rather than being passed on to shareholders in the year that they are incurred.  

What Happens if the Partnership Goes Bad?

As in any relationship, hard work, commitment, give-and-take, and compromise are always required. Many reasons lead to breakups. Hold on: It is going to be a long ride. Retain a great—not just good—attorney. Make a list of what is really important, and then leave the ego problems at the door. always take the high road. Stay classy in your demeanor and behavior. Remember: You got yourself into this; don’t blame others for the consequences.

In summary, a well-thought-out business plan and a smartly executed partnership can be successful ingredients in a long and rewarding medical career. Spend the time to do it right. Get help where you need it from a business point of view. Many educational seminars are available to doctors that highlight medical business issues. I have learned a great deal from these seminars, and I would recommend them to anyone in cosmetic practice.

W. Greg Chernoff, MD, FRCS(C), is a board-certified aesthetic, facial, plastic, and reconstructive surgeon. His laser research has been instrumental in developing and refining accepted laser techniques now utilized by physicians worldwide. He has authored numerous scientific papers and medical laser textbook chapters, and he has given more than 300 lectures to physicians around the world. He can be reached at [email protected].