Practitioners should carefully consider the type of ownership they use for their practice.
More and more specialists in general practice are choosing to form partnerships where they share patients, finances, premises and staff. Normally, it is assumed that the ownership shares in these partnerships are equally divided between the participating doctors, but this is not always the case.
PLO's requirements for distribution of ownership shares
The PLO's rules do not set any requirements for how ownership shares in medical practices should be distributed. However, according to a blocking rule in the PLO bylaws, only up to half of the physician capacities and shared practice licenses associated with a practice can be occupied by partner physicians and/or employed specialists. A partner physician is a physician who owns less than his or her proportionate share of the practice. For example, a medical practice with 3 physician capacities can distribute ownership as follows:
- doctor 1 owns 45%.
- doctor 2 owner 45
- doctor 3 owns 10%.
This distribution meets the requirements of the PLO's bylaws on the escrow rule.
Limited partnerships
Most general practice partnerships are set up as general partnerships because this form provides a flexible framework for collaboration. In a partnership, the owners are free to agree on how income and expenses in the practice are distributed according to a certain key. If the owners work equally but have different ownership shares, as in the example above, profit distribution should not only be based on ownership shares. It's also important to take into account the distribution of working hours when distributing profits. The two doctors with a 45% ownership share each have invested more in the practice than the doctor with a 10% ownership share. Therefore, the owners should consider adjusting the profit distribution so that the partner doctor with the smaller ownership share gets a smaller share of the profit, even though the workload is divided equally between the three doctors. This can be adjusted in different ways, for example by calculating a return on capital that is distributed based on the ownership shares, while the remaining profit is distributed based on the workload in the practice.
Limited liability company
If the partnership is run as a company, the participating doctors are employed by the limited liability company and receive a salary from the practice company, which is taxable as A-income. The profits made must be distributed among the doctors according to their ownership shares and paid out as dividends. According to the Companies Act, there is no possibility to distribute the profit in any other way.
In the case of the three doctors, the profits will be divided between the owners according to a 45/45/10 ownership share and paid out as dividends. If the doctors work equally and want to be compensated equally, equalize between them by paying them a taxable A-income salary from the practice.
Under certain circumstances, this structure may be less advantageous from a tax perspective than running a practice in a partnership, where remuneration is through profit sharing, which can be freely distributed.
The pros and cons of being a co-owner of a practice.
As a practice owner, you gain membership of PLO, which, among other things, gives the practice the advantage that PLO's Administration Committee steps in with financial compensation if a practice owner falls ill or goes on maternity leave.
The reimbursement to the practice is not dependent on the absentee's ownership share, but is calculated based on the previous year's service fees and on-call earnings, which are divided by the number of doctors in the practice. Therefore, sick leave for a practice owner with an ownership share of only 10% gives the practice the same reimbursement amount as sick leave for a practice owner with a 90% ownership share. This does not take into account how much revenue the absent doctor would have expected to have generated had the illness not occurred.
But co-ownership also means that each partner is personally and jointly and severally liable for the debts of the partnership. The liability is equal for all practice owners, regardless of their ownership share. In practice, however, this is rarely a problem as medical practices are usually able to meet their financial obligations. However, it is important to have agreed in the partnership contract how to be internally liable if a practice owner needs to pay the joint debt.
The partnership contract
When ownership shares in a company are unequally distributed, it's important to consider how decisions are made beyond the distribution of working hours and profits. Should owners with a small stake have the same influence, even if they don't have equal shares?
When it comes to the exit provisions, consider whether the practice should be split up and if so, how medical capacities and other resources should be allocated. Is it acceptable to terminate a doctor with a small ownership stake if the collaboration doesn't work out? And how should the sale process be conducted?
The partnership contract should ensure a good balance between the practice owners and take into account the composition of the ownership. Regardless of how ownership is distributed, the partnership contract is of great importance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.