Most practices involve some form of co-ownership, and the frequency of co-owned practices is increasing as practices become larger.
The owners may be the GPs themselves, or trusts or companies controlled by the GPs. The practices may be set up as partnerships, associateships, companies or trusts (unit trusts or hybrid trusts). With so many variables in the ownership equation the number of possible outcomes is almost unlimited.
The range is demonstrated in this matrix:
The co-ownership agreement will be a partnership agreement, an associateship agreement, a shareholders’ agreement or a unitholders’ agreement depending on the form of ownership.
Hybrids are possible. For example, in a three GP partnership one partner may be an individual, one partner may be a trust and one partner may be a company. The position is complicated further if there is a service entity. The service entity may be a service partnership, a service company or a service trust, and the partners, shareholders or unitholders may be individuals, spouses, trusts or a company. The complications compound further again if there is a property entity.
Some practices are quite complex and medical practice structure advice is highly recommended. One of the most complex structures we have seen involved four GPs in an associateship, with a service company and a property trust, with a mix of individuals, trusts, spouses and companies owning each entity.
There are no legal restrictions on the type of co-ownership structure. The ATO’s public rulings and similar public statements need to be observed: the main message here is personal services income must be ultimately derived by the GP who generated it. Practices receiving tax free grants, such as super-clinics and similarly large practices, may find they have to use a company structure, and have no choice: no company means no grant.
Co-owned practices need co-ownership agreements.
A co-ownership agreement is a legally binding agreement controlling the practice owners’ relationship. It is in writing, and may vary from a simple 2 page letter, to a 50 page legal masterpiece, bound nicely and signed and witnessed by all concerned.
Co-ownership agreements protect minority interests, and create rights and entitlements that may not otherwise be in place. The agreement reduces the scope for dispute in the practice by setting out processes for dealing with potentially contentious matters. The co-ownership agreement can be varied by consent, so the owners are not locked into the agreement: if they can think of something better there is no reason why they cannot do it. The co-ownership agreement provides a fall back document for guidance while other options are not apparent.
Partners will be surprised to hear they are deemed to a partnership agreement if they do not have a separate written agreement. The various state Partnership Acts provide a statutory agreement that applies to any partnership that does not have a written agreement. The deemed contract provides for equal profit share: this may be completely inappropriate and against the wishes of the partners. But if there is no written partnership agreement then the law says profits are distributed equally.
Whatever its form, an effective co-ownership agreement will include rules for
- profit share arrangements;
- cash distributions (cash being different to profit);
- decision making processes, including tie-breaker clauses;
- employment of staff and the engagement of other individuals;
- expulsion for inappropriate behaviour or poor performance;
- hours spent in the practice;
- absence from the practice due to leave or illness;
- restrictive covenants on leaving the practice;
- the process for an owner leaving the practice;
- the process for a new owner joining the practice;
- mediation and possibly arbitration processes;
- capital expenditure provisions; and
- owners’ meetings and decision making.
The precise form of the co-ownership agreement depends on the precise form of the practice’s ownership. The options are set out in the attached table:
|Legal structure||Type of co-ownership agreement|
|Unit Trust or Hybrid Trust||Unit-holders’ agreement|
Some practices will need more than one agreement. For example, in a four-owner practice where the individuals are partners and use a unit trust as a service trust, the individuals will need a partnership agreement and the unit-holders will need a unit-holders’ agreement.
Features of a co-ownership agreement
The following table describes the main clauses in a co-ownership agreement:
|The parties||The parties will differ in each case and will usually be the GP or their companies or trusts.
If a party is not the GP consider whether the GP should be asked to guarantee the performance of the party, or be a second party to the contract.
Each party or guarantor should sign the agreement.
|Recitals or Preamble||These clauses briefly describe the history of the matter and include background materials to help explain the document.|
|Nature of the relationship||This clause confirms that the relationship is one of associate or partnership, as the case may be. It may go on to exclude other types of arrangements (e.g. “…This is a partnership and is not an associateship…”)|
|Profit share rules||These clauses include a technical description of how profit and cash are to be distributed to the owners. It’s a good idea to include a worked example based on a real month, so that everyone knows exactly what the arrangements are.
Common combinations include:
· equal profit share;
· profit share equal to billings less an equal share of costs; and
· profit equal to the individual’s billings as a percentage of the individuals’ billings times total profit.
|Decision making processes||These are rules for meetings and decision making, for example, on a 50% majority, or perhaps a 75% majority for serious decisions. Smaller decisions may be delegated to an individual GP for expediency’s sake.
Consider who will sign cheques.
Consider if a “managing partner” or a management committee is needed.
|Employment of staff||Smaller practices will tend to have a 100% rule for hiring or firing decisions, so that any one GP can block a decision. Larger practices may need a smaller % to make the process more efficient.|
|Expulsion of owners||These rules include requirements to maintain professional standards/qualifications/licences, and subjective criteria regarding professional deportment and presentation.|
|Hours spent in the practice||It’s a good idea to include minimum hours, and even a proposed roster (perhaps in a schedule) so that all are aware of what is expected.
Some practices will have a cap on maximum hours.
|Absence from practice due to recreational leave||We recommend a minimum of four weeks. Many practices will have six weeks. Some will have more. Some practices forfeit unused weeks (intended as an incentive to take a break and freshen up!). Some practices will allow for longer leave, with the individual taking the longer leave subsidising costs while absent from the practice. Some practices allow older partners to take more leave.
Timing of leave? Who gets school holidays? Does unused leave lapse or accumulate?
Can unused leave be sold?
|Sabbatical leave||Quite common to allow, say, one month after five years of continuous service|
|Sick leave, parental leave||Varies between practices. We counsel generosity, but often observe stinginess.|
|Does a sick/injured/disabled GP have to leave after a period of absence?|
|Process for leaving the practice not on retirement or death||Normally a notice period of between one and six months (may be reduced by consent, and often is).
Need to set out what payments will be made, if any, to a departing partner.
Often includes a process for offering the ex-owner’s interest to the remaining owners, or for the remaining owners to OK the buyer (ie their new co-owner).
|Process for leaving the practice on retirement or death||Consider whether there should be a compulsory retirement age (and whether the retiree can continue at the practice in a difference capacity).
Consider whether a small amount of life insurance is needed to cover payments to a deceased owner’s estate on premature death, for goodwill.
|Process for expelling an owner||Needed in case of serious professional misconduct and possibly serious personal misconduct or financial malfeasance (e.g. bankruptcy)|
|Restrictive covenant||These are enforceable, provided they are reasonable and in the public interest. What is reasonable differs from practice to practice. More likely to be reasonable when goodwill is greater. What geographic area? How many years?|
|Process for a new owner joining the practice||Consider whether a trial period or a “view” period is appropriate. Consider what majority decision is needed. Consider what payment, if any, a new owner should make. Consider whether a new owner should assume a % responsibility for liabilities, and what form the contract should take.|
|Mediation and arbitration processes||Should be mandatory. Should include a mandatory preliminary process involving face-to-face meetings to settle matters of concern. If external mediation is necessary it is likely someone should be leaving. Alternative dispute resolution processes are encouraged over court based processes.|
|Capital expenditure||We suggest a majority is needed for any costs exceeding, say, $5,000 in a year.|
|Amendment||Normally the agreement can be amended by a further deed, if all owners or the required percentage of owners agree in writing to do so.|
|Other details||Which bank? Which account? Which accountant? Which accounting system? What about owners’ personal deductible costs? How formal should decision making processes be? Professional indemnity insurance? Other insurances? Monthly accounts Employment of a practice manager?|
Ending co-ownership agreements
It is often said that practices partnerships are like marriages. We do not agree. Marriages are forever and are intensely personal (or should be) while practices are by their nature not forever and are not intensely personal (or at least should not be).
Don’t be too emotional about the practice. It’s just a practice.
It was not meant to last forever, and was only going to work while it suited all concerned. It is not “until death do us part”. Its more like “until something better comes along”. That something could be anything: retirement, travel, seachange, etc. There should be no trauma in ending a co-ownership agreement.
This does not mean co-owners should go into a practice flippantly, without a sense of purpose, or with the right attitude to co-owners. Obviously levity and gravity are essential: practices are real and important. But never lose perspective. They are not marriages and are not meant to last forever.
Normally a deed of termination will be prepared by a solicitor to record the formal end of the co-ownership relationship. In some cases, typically cases where there is no tension or stress, this deed can be skipped and the end of the co-ownership relationship can be recorded in simple minutes. For example, the partners would meet on say 30 June and discuss business including their decision to end the partnership as at 30 June, and authorise the chairperson to do all things necessary to give effect to this decision including signing documents on the former partners’ behalf.
The common law defines a partnership as “a combination of persons carrying on a business with a view to profit. Each of the states’ Partnership Acts defines “partnership” in similar terms. For example, the NSW PARTNERSHIP ACT defines a partnership as “the relationship which exists between persons carrying on a business in common with a view to profit”.
It follows that a medical partnership involves two or more GPs combining in a business to provide medical services to patients for a profit. Each partner is both the principal and agent of each other partner, and has the authority to bind the other partners in respect of the partnership’s business.
Each partner has a duty of trust, confidence and utmost good faith to each other partner: this is the highest duty imposed by the law. It means each partner must put the interests of the other partners ahead of his or her own interests.
A partnership is not a separate legal entity. Each partner deals with patients on both their own account, and the account of their partners. Each partner is equally responsible for the actions of the other partners. This responsibility is joint and several, which means a patient who complains about the actions of a partner may take action against any one or all of the Individuals in the partnership.
Each GP partner is responsible for the actions of each other GP partner.
Up to fifty Individuals can be partners in a medical practice partnership (compared to only 20 in a non-professional partnership). But normally there are only three or four. We do not know of any medical partnerships even getting close to fifty partners.
Partnerships are not a separate taxable entity for tax purposes. A tax return has to be lodged, and this return will show the share of net partnership income derived by each partner, who will include that amount in their own tax return.
The Partnership Act deems partners to have adopted a standard partnership agreement if they do not have a written agreement. This standard partnership agreement may not be the agreement the partners would choose for themselves. This is a very good reason to have a written partnership agreement that reflects the preferences of the Individuals who own the practice and not the preferences of a statutory draftsman.
Most partnership agreements will provide rules concerning the following matters:
- procedures for sharing profits and losses;
- procedures for admitting new partners (normally all partners must agree);
- procedures for partners to retire;
- procedures for changing the profit share proportions (normally all partners must agree);
- procedures for changing the partnership agreement;
- procedures for ending the partnership;
- procedures for the death or serious illness of a partner;
- procedures for owning business names and similar assets;
- restrictive covenants;
- bankruptcy of a partner;
- practice management and borrowings;
- dispute resolution and valuation procedures;
- interest on partners’ capital and current accounts.
The concept of an “associateship” is not defined at law. Associateships are strange legal relationships that are only encountered in the health profession context, principally medicine and dentistry, but sometimes in allied health professions too.
The NSW AMA defines an associateship as follows:
“An Associateship exists where there are two or more medical individuals sharing expenses such as those associated with the premises, staff and equipment. The medical practice of each GP remains autonomous, in that individuals keep their own patients and do not share their income with each other.”
The Queensland AMA defines an associateship as follows:
“An associateship is an industry specific term for a business relationship where two or more individuals operate their medical practices from a single site and agree to share the costs of their practices, for example, staff, rent, utilities etc.”
Associates run their own practices, derive their own fees and pay their own costs. These costs include a management fee, probably between 40% and 45% of billings, payable to a service entity that is beneficially owned by the associateships, via their family trusts.
Unlike partners, associates are not joint and severally liable for each others’ negligent acts or omissions, and normally are only liable for their own individual negligent acts or omissions. (We say “normally” because litigation is a complex area and it is possible for individuals who believe they were not joint and severally liable for each other’s negligent acts or omissions, to in effect be so liable. For example, doctors might be deemed to be associates because they have both seen the same patient or even because the court believes they are partners even though they believed they are not.)
Both associateships and partnerships are easy to set up, although complex capital gains issues can arise where one wishes to vary a partnership.
Associates run their own practices and do not combine with other GPs in a business.
Associates share the cost of services and facilities, such as rent, receptionists, telephones and so on, and co-operate professionally. But they do not run a business together. Associates do not owe each other a legal duty of trust, confidence and utmost good faith. Associates are not jointly and severally liable for each other’s actions, whether with patients or otherwise.
Most associates regulate their relationship with a written agreement. These agreements tend to look like partnership agreements except the word “associate” is used in lieu of the word “partner”. The matters discussed are essentially the same as those listed at (i) to (xiii) above. There is normally a provision saying the GPs are not partners, are not jointly and severally responsible for each other and can’t bind each other in any way.
Most associate agreements mimic partnership agreements, with the nomenclature changed to avoid creating a partnership. The associates then act as if they are partners. As a result it is often hard to see what the real difference is between an associateship and a partnership.
Partnerships and associates compared
|Bank account||Shared bank account||Separate individual bank accounts (not strictly needed)|
|Profit sharing||Share profit, rather than costs.||Keep income and only share costs|
|Loss sharing||Share losses||No loss sharing|
|Fiduciary relationship||Yes. Partners owe each other a duty of utmost good faith||No|
|Joint and severally liable||Yes||No, but take great care here|
|Documents||Partnership agreement needed||Associateship agreement needed|
|Can they sell their practice?||No. Can only sell their fractional interest in the partnerships assets, which include the practice||Yes|
|Do they individually own goodwill?||No. They only own a fractional share of the goodwill||Yes|
|Right of access to partnership accounts and||Yes||No. There is no correlating right unless specifically created by contract records|
|Notice at reception||Not needed||Explanatory notice needed at reception|
|Stationery||Group stationery may be used||Group stationery should state that the individuals are not partners and run separate practices|
|Right of indemnity||Yes||correlating right unless specifically created by contract|
|Partner’s liability||Unlimited||No correlating concept|
|Joint and several liability||Yes||No correlating concept|
|Liable for debts by the practice||Yes||No (except incurred by the associate personally)|
|Consumer protection laws||Low risk (ACCC takes the view that a legal partnership comprised of individuals is not subject to competition laws)||High risk. Associates cannot cooperate on prices and may breach collective bargaining rules and other ACCC competition laws|
|Business name||Yes. Possible||Yes. Possible|
|Tax returns||Partnership tax return required.||No tax return required. Associates lodge their own returns|
|Assignment||Must be in writing||May be oral. But normally in writing.|
Is it a partnership or an associateship?
GPs are sometimes concerned that the structure set up as an associateship is in fact a partnership, and that they may unwillingly and possibly unwittingly be jointly and severally liable for each others’ negligent acts or omissions.
Our practice has an association with McMasters’ a leading provider of financial and legal services to the medical profession. McMasters report that, over the years they have briefed Counsel (senior barristers) as to whether a particular practice was a partnership or an associateship. Each time they were concerned that a practice that called itself an associateship was in truth a partnership, with the consequences that the GPs were jointly and severally liable for each others’ negligent acts or omissions. In each case Counsel advised these concerns are unfounded. The determining factor for Counsel seemed to be how the GPs actually see themselves, and what their intention was at the time the practice started and whether this has changed since.
Nevertheless, we think it is a good idea for the practice’s patient paperwork and signage to make it clear that the GPs are associates and not partners. For example, if the paperwork includes a footer showing the names of each GP, add in a sentence like “The GPs are not partners and each GP runs their own practice” and to make sure the correct names are used, for example, if Dr Smith owns her interest through a company the correct name is “Dr Smith Medical Pty Ltd” not “Dr Sahara Smith”. Its also a good idea to have a sign at reception and on the website saying something like:
“The GPs are associates and are not partners. They run their own medical practices and are not jointly and severally liable for each other’s patient consultations and procedures.”
Income tax returns
A partnership lodges a tax return each year but normally does not pay tax itself. Instead each partner includes a share of net partnership income (or loss) in the partner’s own taxable income computation. The amount of tax paid depends on the partner’s overall tax profile.
A partnership is required to pay GST as if it is a separate entity.
An associateship does not lodge a tax return. Instead each associate lodges their own tax return, showing gross income, including their medical practice income, as assessable income, and claiming deductions including their share of practice costs.
Is the ATO concerned about whether a practice is an associateship or a partnership?
Occasionally concerns are raised as to whether the ATO will treat a particular practice as an associateship or a partnership.
We do not share these concerns. In practical terms there is little difference between associateships and partnerships. We are not aware of the ATO ever questioning the status of a particular practice as an associateship or a partnership. It has no influence on the amount of tax paid and therefore is of no real interest to the ATO.
Profit sharing arrangements
GPs invent an infinite number of ways to share profits. These can be complex and sometimes a High Court judge, or even a spreadsheet expert, is needed to understand how each way works (although somehow the GPs never miss a cent!).
Despite the complexity and diversity, two basic concepts can be identified. These are:
- fixed profit sharing, ie, each GP gets a fixed percentage of profit. If there are two GPs they get half each, and so on; and at the other end of the spectrum
- variable cost sharing, ie, each GP keeps his own fees and pays a share of This may be a fixed percentage (e.g. 50% if there are two GPs) or a variable percentage, calculated by taking each GP’s gross fees as a % of all fees and multiplying this % by total costs.
A simple example shows how each method works. Assume Dr Smith bills $450,000, and Dr Jones bills $550,000. Costs are $300,000, and net profit is $700,000.
|Fixed profit sharing||Variable cost sharing|
|Billings: Dr Smith||$450,000 (45%)||$450,000 (45%)|
|Billings: Dr Jones||$550,000 (55%)||$550,000 (55%)|
|Dr Smith’s profit share||$350,000||$315,000|
|Dr Jones’ profit share||$350,000||$385,000|
Most practices use a blend of these two concepts. Complicating factors include:
- How to treat income other than patient fees?
- How to treat management fees from non-owner GPs and other practitioners?
- How to treat practice nurse income?
- How to treat costs that are more connected to a particular GP?
- How to treat after-hours income?
- How to treat expensive equipment used more by one GP?
- How to treat costs when total sessions are not equal?
Whatever method, formula or spreadsheet is used the agreement should specify how profit share works and provide a diagram and a worked example of a profit share computation in an appendix. Technical accounting terms mean little to most GPs, in the same way a technical medical explanation means little to most accountants. A diagram plus a worked example of a sample month, showing how a given profit will be allocated to the owners is worth 100 pages of words.
Which is better, associateship or partnership?
There is no easy answer to this question. It depends on the circumstances of each case and the GPs’ preferences. Of course, in many cases the die is cast, and it can be hard to change. Certainly, advice should be sought before changing from one to the other.
Names are not important: it’s how the practice runs.
GPs who call themselves associates, may be partners if they hold out they are in business together. Associates should take care with signage, stationery, accounts, banking and advertising, to avoid creating an impression of partnership.
Some GPs believe partners can be jointly and severally liable for non-partnership matters such as a property investment loan. This is not right. The partners are only jointly and severally liable for partnership matters. This is a basic common law principle and is reinforced by the Partnership Act of each state. Partners are not liable for each other’s private debts or other non-partnership matters.
Can partners shield themselves from joint and several liability?
We are often asked whether a company can shield a partner from joint and several liability?
The answer is yes, it can. It can shield a GP from the negligent act or omission of other GPs with whom the GP works, ie the other partners, but not from his or her own negligent act or omission – the GP will always be personally liable for that.
This applies to companies acting as the trustees of trusts, as well as acting on their own account.
Take an example of a four GP partnership, with each GP using a company to own their interest in the partnership. If one GP is negligent that GP and his or her company may be the object of a legal action. The other partners, ie the companies, may be joined to the action under the doctrine of joint and several liability. But the GPs are not personally partners, and therefore normally cannot be personally joined to the action.
This assumes that the other GPs were not personally involved in the negligent act or omission. We qualify our comments by using the word “normally”. Litigation is a strange beast and unexpected things happen. Who can say for sure what a court will decide, or what insurers may agree to?
But, assuming normality, using companies as partners has reduced patient litigation risk by up to 75%, all things being equal, compared to the position where the individual GPs are the partners.
We are constantly reminding GPs that professional indemnity insurance is effective and no GP has lost his or her home, or other significant assets, in a patient litigation. So keep a sensible perspective. Nevertheless, it makes sense to take simple steps to reduce risk wherever possible, and using a company to own your interest in a partnership cannot hurt, ie there is no significant disadvantage, and is usually recommended.
The capital gains tax rules contain special provisions known as “rollovers” which allow a GP to transfer an interest in a partnership to a 100% owned company without triggering a taxable capital gain. The transfer will usually be recorded by a deed of transfer, or a deed of assignment of an interest in a partnership.