When establishing a dermatology practice, it’s crucial to understand the various equity and partnership types in order to structure a successful and sound business.
Equity Models
Equal Ownership: In this model, all partners have an equal ownership stake in the dermatology practice. For example, if there are two partners, each would hold a 50% ownership stake. This model promotes a sense of equality and shared decision-making among partners. It can create challenges, however, if productivity differs or if decision making deadlock occurs.
Proportional Ownership: Partners’ ownership shares are determined based on their respective contributions to the dermatology practice, such as financial investment, patient base or expertise. This model rewards partners in proportion to their individual contributions. For instance:
- Partner A contributes 60% of the initial capital investment, while Partner B contributes 40%. As a result, Partner A may hold a 60% ownership stake, and Partner B may have a 40% ownership stake. Future need for capital may result in changing the percentage ownership, unless the money is booked as a loan subject to priority payment off of the top.
- Partner A brings an established patient base and expertise, contributing 70% to the practice, while Partner B contributes 30% and does not yet know how to manage the practice. In this case, Partner A may hold a 70% ownership stake, and Partner B may have a 30% ownership stake. Partner B might vest in additional ownership and decision making power over time.
Minority/Majority Ownership: In this scenario, one or more partners hold a majority stake, granting them control over significant decision-making processes. Minority partners have a lesser ownership stake but still share in the profits and responsibilities of the dermatology practice. Minority partners might have a say in major decisions, however, such as selling the business. For example:
- Partner A holds a 51 0 70% ownership stake, while Partner B holds a 30% – 49% ownership stake, making Partner A the majority owner. The majority owner may need to take on more of the financial risk, such as guaranteeing leases or debt obligations.
Vesting
Vesting Schedule: A vesting schedule outlines a timeline for partners to earn their equity over a specified period, typically tied to their continued service or achievement of predetermined milestones or the payment of additional buy-in over time. Even with the buy-in, the partner should be making more than they did as an employee. This might be accomplished by spreading the buy-in out or tying it to revenues of the practice. They might also have a minimum guaranteed compensation with the rest going to buy-in. This model ensures that partners’ equity aligns with their ongoing commitment to the dermatology practice and serves as a carrot for them to stay in order to buy out other partners. For instance:
- Partner A earns a 25% equity stake after one year of service and an additional 5% each subsequent year, reaching a total of 50% after six years of service.
- Partner B joins the practice with a 10% equity stake and earns an additional 5% each year, reaching a total of 50% after eight years of service.
Partnership Types
General Partnership
A general partnership involves two or more partners who jointly own and manage the dermatology practice. Each partner is personally liable for the practice’s debts and obligations. Depending on state law, all general partners might be automatically equally liable for debts, which may not be ideal.
Limited Partnership
A limited partnership consists of general partners who have management authority and the obligation to capitalize the business needs, as well as limited partners who contribute earnings but do not have to contribute capital or be liable for any debts. Under this model, limited partners’ trade-off is they have no management control.
Limited Liability Partnership (LLP)
An LLP combines elements of both general and limited partnerships. It offers limited liability protection to all partners while allowing them to actively participate in management and decision-making.
Professional Corporation (PC)
A PC is a legal entity formed by licensed professionals, such as dermatologists, to provide services while enjoying limited liability protection with respect to their personal assets and each other’s malpractice. Each professional is a shareholder, and a board of directors typically manages the practice. Depending on Federal tax classification, funds might need to be apportioned in part with pre-tax K1 payments and in part with W-2 payroll subject to tax deductions. Minority shareholders have rights based on many years of case law or state law, which may not be ideal for those who wish to control and not risk a lawsuit. Many solos employ this model for cost efficiency.
Professional Limited Liability Company (PLLC)
A PLLC is a flexible business structure that provides limited liability protection to its members (which is what they are called, instead of “shareholders”) in the same manner as PCs while offering flexible options for ownership and management. It also allows almost all rights, liabilities and protections to be established by contract, which can be ideal to avoid the many years of corporate case law relating to the protection of minority owners in a PC. Also, while in many states PCs can only be owned by individuals, members can be individuals or entities. This has the added benefit of allowing differing ownership at the member level (each member can be owned by different people and entities) and the ability of members to run their own expenses through their separate member entity so tax write-off decisions are insulated from the other members.
Please note that these are simplified examples, and actual equity allocations and partnership structures may vary based on specific circumstances, tax, negotiations and legal requirements. It is important to consult with a healthcare attorney experienced in practice formation and knowledgeable accountants to determine the most suitable equity structure and partnership type that aligns with your practice’s goals, each owner’s rights and obligations, and risk tolerance. Properly structuring your practice from the outset ensures a strong legal foundation and sets the stage for a successful partnership in the dynamic field of dermatology.
