Partnerships are formal legal entities, and it is a good idea to have a document that governs the relationship between the partners. In a limited liability company (“LLC”) or corporation, this document is commonly referred to as a “Shareholders Agreement” or “Members’ Agreement.” In a partnership, this document is simply a “Partnership Agreement.”
In some states, including California, veterinary practices are limited to certain entity types. California, for example, only allows veterinarians to create professional corporations (“PC”), rather than LLCs. If you do not want to build a PC for your veterinary practice in California, then a partnership is really your only other option if you are going to have more than one owner.
Regardless of what kind of agreement you have, there are a few items that you should address as part of your partnership agreement. These items must all be addressed before you start making financial commitments. Once any capital is contributed to a business relationship, it can be very difficult to get it back.
How costs and profits are split is rarely overlooked in a partnership agreement. It is often one of the first things addressed in these types of arrangements. However, there are some nuances that you should consider including, but not limited to, the ownership division does not need to be 50/50.
Some partnerships start out at a 50/50 split, but if you know that one partner is not going to want to work as many days or has other aspirations, for example, that type of arrangement might not make sense.
While you may have a great relationship with your partner when you create the partnership, things can change. You may not want to work with this person for a variety of reasons down the road.
Perhaps your values or philosophy do not align as well as you thought they did, or maybe your partner is not pulling their weight in the partnership. Whatever the reason, you need a method to get out of the agreement if it comes to that down the road.
Although no one likes to think their partnership is going to fail or their relationship with their partner is going to deteriorate, you need to be realistic at the outset of your relationship. Agreeing on how to manage a “break up” now (while you are still getting along) is one of the best ways to save time and money when the partnership needs to dissolve years down the road.
One option to split the value of a partnership if partners no longer work together is sometimes referred to as a “you cut, I choose” policy. In that type of agreement, the partner that wants out of the practice sets the price. Then, the other partner decides if they want to buy out their partner at that price or if they want to leave and be paid for their share. This process provides an easy way for both partners to get what they want in a relatively quick and straightforward way.
If there are several partners involved, you likely need to create a method to value shares and allow several people the option to buy those shares.
You might also want to consider including requirements regarding buy-outs that specifically set out a timeframe for notice. These are usually in the range of six to 12 months, but they can be whatever timeframe works for an orderly transition within the partnership.
Even if you get along great with your partners, you need to address some “inevitable” situations in your agreement.
If your partner gets divorced, how will his or her partnership ownership be addressed in the divorce? You might want to include a provision that the partner’s spouse cannot take ownership of the partnership or the partnership itself cannot be split as part of the divorce.
If one partner passes away, you need to address how that situation will be handled. Do your partner’s heirs automatically receive a portion of the partnership? Will there be a required payout as part of the estate process? Do you require a partnership life insurance policy to pay out the value of the ownership stake?
What will happen to the partnership if one partner is suddenly disabled? In some cases, you might want to include a provision where their ownership rights are automatically paid out to that partner (or their loved ones) in the event of an incapacitating disability.
Some partnership agreements will “carry” a partner for a short time when he or she becomes disabled. That period can be any length of time that makes sense for the partnership—from a few months to a year.
You also need a specific method to resolve potential disputes about disability. For example, it might make sense to require a doctor to tell the partnership when someone is unfit to practice veterinary medicine before any of the disability or incapacity terms would apply.
Partners rarely want ownership interest passed along to other people because of a divorce, death, or incapacity. To avoid that undesirable situation, you need to do some planning at the outset of the relationship.
Daily operations should be addressed as part of your partnership agreement. If you have several partners, for example, it might make sense to assign management duties to one partner or a committee of partners.
Your partnership agreement should specifically set out how your practice will be governed. Does it make sense to have a specific manager who has that role all the time? Or should everyone participate in management decisions? Are there specific “big” decisions that you need to address with the partnership as a whole?
You can also hire an office manager or administrator to help you with the books, human resources, and daily activities of the practice. This person can be empowered to make day-to-day operating decisions while the partnership can address “big picture” issues.
The governance for your practice will vary based on how involved you and your partners want to be. If, for example, you want to focus on client services and avoid the time and effort of “running” a business, having an office manager is going to make a lot of sense. However, if one or more of your partners want to take on the role of running the office on a daily basis, you might want to ensure there is a method for them to do that as part of your partnership agreement.
There will be situations where you and your partners simply disagree about an action. You need a method to solve disputes when voting is “tied.” This is especially important when there are just two partners with equal voting rights. Sometimes bringing in a “tie-breaker” such as the office administrator or third-party mediator can be a good way to address these conflicts.
You should also include specific provisions about when and how new partners can be added. For example, you could set out necessary qualifications (such as educational components and being licensed in the state in which you practice) and what kind of vote is required to add a new partner.
You might also want to include specific information and operations for buy-ins, including a valuation process. Some partnerships require unanimous agreement before adding a new partner, but that is not always the case.
Partnership agreements are an important part of a good partnership relationship. Having a solid foundation will allow your veterinary practice partnership to grow and thrive years into the future.
Dental & Medical Counsel can help you create a partnership agreement that addresses the unique needs of your veterinary partnership. Learn more about our services and schedule a complimentary consultation with attorney Ali Oromchian by contacting us.
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