The importance of Partnership Agreements for Dental Practices

A Partnership Agreement is an essential document when setting up a new dental venture or looking at bowing out of an existing practice.

Commercial lawyer and healthcare specialist John Baddeley from Wake Smith Solicitors looks at key issues around Partnership Agreements.

When dental partners initially go into business, they are motivated and happy to embark on an exciting new venture together. Until they sell the practice, it may be assumed that nothing will go wrong and often start running the practice without a written Partnership Agreement.

However without one, archaic laws come into practice and potential lengthy and costly litigation can occur.

What is a Partnership Agreement?

A partnership comes into being where persons are "carrying on in business in common with a view to profit".

A partnership agreement provides certainty and a clear structure on how a partnership operates and governs the relationship between the partners.

Partnership Agreements may be relevant where there is more than one Principal within the dental practice.  This may not always be the case with a smaller practice, but may be applicable with a larger, privately run practice.

Carefully drafted Partnership Agreements can manage expectations, provide confidence about the future of the business venture and act as a safeguard to protect both the business venture and each partner’s investment.

They can be specifically tailored to your requirements to clearly deal with issues including profit sharing, disputes, or what happens if a partner dies or retires from the practice and how the outgoing partner’s share of the practice should be valued.

A partnership comes into being where persons are "carrying on in business in common with a view to profit".

What are the consequences of not having a Partnership Agreement?

As is often the case, relationships with intending business partners start off well and the parties have the best of intentions of putting in place a Partnership Agreement.

However, once the practice is up and running, the time pressures of running the practice, managing Associates and the needs of patients take over and the parties never formalise a Partnership Agreement.

In time, relationships can sour, a dispute may take place or a partner may want to retire - we are then asked to advise on the position.

Since a partnership is automatically formed once the partnership definition above is satisfied, it is not necessary for there to be a written partnership agreement, but you are then governed by the Partnership Act 1890 (Partnership Act).

The provisions of the Partnership Act are not particularly suited to modern day working practices with it being more than 100 years old.

For example, if a partner carries out an act, which in the reasonable opinion of the other partners is likely to have a seriously detrimental effect on the practice, the partners may under their written dental partnership agreement give notice to expel this partner. Without a written dental partnership agreement, the Principals would have no right to expel the partner and unless an agreement could be reached would have to instead dissolve the partnership.

Some of the more important provisions which may be implied by the Partnership Act where there is no written Partnership Agreement is as follows:

Profit Sharing Arrangement - in the absence of a specific provision to the contrary, section 24 of the Partnership Act provides that profits and losses are to be divided equally.

This can be problematic where, for instance, there is a part-time Principal and it is intended that the part-time Principal receives a pro-rata share of the profits or where there is a "sleeping partner" who has contributed more working capital for the practice and, as such, may want to receive a higher profit share.

Dissolution and Retirement - section 26 of the Partnership Act provides that any partner can dissolve the entire partnership by notice to the other partners with immediate effect at any time.

The effect of dissolution is that the practice stops operating, the assets of the practice must be realised, its liabilities must be paid and any surplus returned to the partners. In addition, this will clearly impact any NHS contract held by the practice. Instead, it may be more appropriate for the practice to include provisions for an orderly retirement of an individual Principal by giving a reasonable length of notice to the other partners.

There can also be the option for the continuing Principal(s) to buy out the outgoing partner's interest. There should then be detailed provisions of how to value the outgoing partner's share together with clauses dealing with the outgoing partner's and continuing partners' obligations to each other; for example, should an outgoing partner be subject to restrictive covenants not to compete with the practice or approach patients for a given length of time?

Notice provisions also allow time for the continuing Principal(s) to raise the money to buy out the outgoing partner as well as giving time to contact patients and suppliers to preserve continuing business relationships.

Death - the Partnership Act provides that if any partner dies the entire partnership is dissolved and the partnership's assets must be realised and liabilities paid.

If this is not the intended result then there will need to be an express provision that, upon the death of any Principal, the partnership continues as regards the remaining partners.

Expulsion - in the absence of an express provision to the contrary section 24 of the Partnership Act provides that the partners cannot expel a partner.

Often this is not ideal; if a Principal commits a serious breach of duty, if a Principal is convicted of a criminal offence or if a Principal ceases to belong to the General Dental Council, then the other Principals may want to have the ability to remove the offending Principal from the Practice.

Every Principal in the practice is an agent of the others. This means that any Principal may enter contracts or dispose of property of the practice in the ordinary course of business, therefore, binding all of the Principals.

It is therefore vital that such matters are considered in detail and dealt with in a formal dental partnership agreement to prevent any one Principal leading the others and indeed the practice into financial difficulty.

Wake Smith’s specialist healthcare team can discuss the requirements of your practice and draft a dental Partnership Agreement specifically tailored to your needs and requirements.

Our specialist healthcare legal team provides expert guidance to those working in the dentistry sector from entering into Partnership Agreements and practice succession planning to acquiring a new practice and dealing with regulatory requirements.

For further advice please contact John Baddeley on john.baddeley@wake-smith.com or on 0114 224 2025.

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