Canadian Chiropractor

Features Business Management
Partnerships Versus Cost Sharing


January 22, 2008
By John McMillan

Topics

webpartnershipI 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.

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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