Partnerships Versus Cost Sharing

John McMillan
January 22, 2008
Written by John McMillan
Dec. 16, 2011 – I routinely receive inquiries from chiropractors who are planning to open a new practice, or purchase a new practice together, with the intention of operating as a “partnership”. Most readers have heard the terms “partnership” and “cost-sharing”, but some may not appreciate that there are significant differences between the two – potentially costly differences that are preventable.

THE PERILS OF PARTNERSHIPS
The term “partnership” is defined under partnership legislation in most provinces as: “The relation that subsists between persons carrying on a business in common with a view to profit. (1)

If these essential elements are satisfied, there is a strong possibility that you are operating as a partnership. This is not reliant upon whether you have entered into any written agreement. It is a question of fact.

Group practices – two or more chiropractors - are certainly not uncommon and can have many advantages, including volume purchasing, shared resources and the benefits of professional interaction. However, organizing a group practice as a partnership may also bring disadvantages disadvantages that can be eliminated with proper planning and professional advice.

LEGAL CONSIDERATIONS
First, you must consider that all partners in a partnership are “jointly and severally liable” for all of the debts and obligations of the partnership, which includes trade creditor liabilities, personal injury and, yes, even professional liability. While sufficient insurance coverage may address the issue of joint and several professional liability, it is far more desirable not to be named in a claim in the first place.

Consider, as well, that all partners are agents of the partnership and may enter into binding legal contracts on behalf of the partnership, even without the knowledge of the other partners. This, of course, could become the source of tension in the case of the errant partner who binds the partnership to a major commitment not desired by other partners.

While a written partnership agreement could contain mechanisms to counteract or compensate for the above risks through indemnities and consensus requirements, it does not change how the partnership is treated at law in terms of its liabilities. The only thing a partnership agreement can do is provide for recourse and compensation as between partners, after the damage is done.

TAX CONSIDERATIONS
Partnerships also have disadvantages from a tax perspective. First, the capital cost allowance - depreciation on assets - is set for the partnership assets and cannot vary from one partner to another.

Secondly, while partnerships between incorporated chiropractors enjoy a preferred tax rate - which varies by province - on the initial $400,000 of partnership profits in each tax year, this small business deduction must be shared by the (incorporated) partners. By contrast, in a cost-sharing arrangement between two or more separate practices, those chiropractors - who elect to incorporate -would each enjoy a small business deduction on the initial $400,000 of practice income. Larger group practices, and practices with expected growth, should pay particular attention to this point.ii

PRACTICAL CONSIDERATIONS
It is equally important to consider the practical disadvantages of partnerships. Partnerships often end on a sour note, often due to differences in practice philosophies or other disagreements arising from such things as equitable patient rotation, hours of work, management, human resources and major purchases.

Consider the challenges that may arise when one partner wishes to sell his or her partnership interest, which is often the result of a falling out between partners. It is not uncommon for prospective purchasers to move cautiously, wary of the disadvantages associated with purchasing a partnership interest. As a result, offers may be fewer, later and lower than desired.

COST-SHARING – THE BETTER WAY
Through cost-sharing arrangements, the economic advantages of partnerships can be attained while avoiding many of the disadvantages.

The most important distinction between cost -sharing and partnerships is, as the name suggests, the sharing of costs as opposed to the sharing of profits. Accordingly, the participating chiropractors must order their affairs in a manner that legitimately satisfies this requirement.

Otherwise, you may be at risk of being found by the Canada Revenue Agency to be operating as a partnership - which can have significant tax consequences - or treated by creditors or malpractice claimants as if you were partners and thus risking joint liability.

HAVE A WRITTEN AGREEMENT
A written cost-sharing agreement is critical and should cover a number of essential terms. It is also advisable for the agreement to expressly provide that the parties are operating as sole practitioners and not as a partnership. This must also be supported by the facts.

It is also important to check with the college in your province, as there may be guidelines - and even application requirements - for office sharing arrangements. (2)

When drafting a cost-sharing agreement, the terms, and the conditions, that should be considered, with the help of legal counsel, include: separate and distinct practices, shared and exclusive assets, shared and exclusive areas, and shared and exclusive costs.

THE FLOW OF FUNDS
One of the most important features of a cost-sharing arrangement that distinguishes it from a partnership is how the income and expenses are administered. The revenues of each chiropractor must be kept separate from one another. From these revenues, each chiropractor could then contribute their share of the operating costs to a joint account, from which the costs would be paid. This would go a long way toward satisfying the requirement of sharing costs - as opposed to sharing profits.

HUMAN RESOURCES
Many group arrangements do not have a need for more than one office manager. It is common to designate one chiropractor as the employer. The designated employer chiropractor could then be credited for wages and deductions in the cost sharing formula. Indemnities could also provide that all chiropractors would be responsible for a portion of any amounts payable to employees - or former employees - for any reason whatsoever.

JOINT DECISIONS
While separate and distinct practices are operating, there will still be some unavoidable joint decisions, such as the replacement of aging shared equipment, leasehold improvements to shared areas and human resource matters. These matters should be provided for in the cost-sharing agreement, along with decision-making mechanisms.

CONTINGENCY PLANNING
It is also important to address certain contingencies such as the death, disability, loss of practice privileges or breach of the agreement, which may trigger a buyout of one chiropractor by the other(s). Also consider indemnities and insurance to minimize exposure arising from unforeseen events.

LIABILITY ISSUES
While cost-sharing agreements can go a long way toward insulating chiropractors from one another with respect to potential liabilities, there are still certain unavoidable threats. For example, all chiropractors under a cost-sharing arrangement can be found liable under the Occupiers Liability Act in the event of personal injury within the premises. Be sure to arrange for sufficient insurance coverage for the premises for fire, theft and personal injury, naming all of the cost-sharing chiropractors as insured parties. You may also find that the chiropractic college in your province requires this.

MULTIDISCIPLINE ARRANGEMENTS
While multidiscipline arrangements are beyond the scope of this article, there is one point that should be mentioned. Be very careful if you are considering an arrangement with members of other regulated health professions such as physiotherapy and/or massage therapy. The chiropractic college in your province may prohibit any arrangement that amounts to “fee sharing.”. An example of an arrangement that may offend your college would be massage therapists paying chiropractors a percentage of their billings.

OTHER MATTERS
There are myriad other points that are addressed in cost-sharing agreements, including, for example, dispute resolution, termination and buy/sell provisions. If you are already involved in a partnership, it is possible to restructure your arrangement, but it is critical that you do so with the assistance of experienced legal and accounting professionals. Call your advisors.

(1) Except Quebec, where the Civil Code provides: “A contract of partnership is a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share any resulting pecuniary profits.” Consult with legal counsel in your province.

(2) For example, Appendix “E” of the Professional Conduct Handbook for the British Columbia College of Chiropractors contains Guidelines (and a required application) for Office Sharing

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