November 2024 Legal Intelligencer \ Law.com Article by Lamb McErlane attorneys Vasilios J. Kalogredis, Esq. and Sonal Parekh, Esq.

Private practices in the healthcare industry, including those owned by physicians, dentists, and other health care professionals, operate in a unique and highly regulated environment. In such an environment, the relationship among partners is one of the foundations of practice’s success. At the core of this arrangement are the governing documents setting forth the terms by which the relationship among the owners is set forth. For the purposes of this article, the owners of the business entity will be called partners. However, the type of entity involved will dictate what the owners are actually called (such as shareholders of a corporation or members of an LLC). Partnership agreement is the term used in this article, although technically in an LLC the document would be an Operating Agreement and, in a corporation, Employment Agreement, Shareholders’ Agreement and Bylaws would generally be the governing documents. A partnership agreement serves as a critical foundation for the successful ownership, governance, operation and longevity of a practice (“Practice”), delineating the rights, responsibilities, financial interests and expectations of co-owners.

Comprehensive partnership agreement documentation should address the following.

1. Responsibilities and Authorities. Partners’ roles should be clearly defined, such as managing finances, overseeing compliance, clinical responsibilities, or supervising personnel. Clarity in duties fosters accountability and minimizes conflict.
2. Decision-Making Processes. Partnership agreements establish how major decisions—such as expanding the Practice, purchasing equipment, or hiring leadership—are made. Decisions may require a simple majority, supermajority, or unanimous consent, depending on their significance and how that group wishes to handle things, in a way that prevents gridlock and ensures transparency. The agreement should establish the process to guide and facilitate major decisions such as merging the Practice with another entity, acquiring other medical practices, adding or subtracting partners, or selling the Practice or substantially all of its assets.
3. Profit and Loss Division. The partnership agreement generally describes how and how often profit distributions to the partners should be made. For example, the agreement may set thresholds on minimum cash reserves and maximum indebtedness that the Practice must achieve before declaring profits available for distribution. Profit and loss allocation provisions ensure clarity regarding how earnings are shared among partners, often taking into consideration equity ownership percentages or contributions to the Practice. Equal, productivity-based, and combination approaches are among the possibilities. These terms may also address temporary adjustments for partners on leave or with reduced workloads.
4. Capital Contributions and Equity. Agreements specify whether partners must make initial and ongoing capital contributions to fund operations, purchase equipment, or expand the Practice. They may also detail consequences for partners who fail to meet these obligations, as well as procedures for adjusting equity ownership.
5. Tax Treatment. The tax structure of the Practice—e.g., partnership, LLC, C corporation, or S corporation—affects income distribution and liability. Partnership agreements should align with the chosen structure.
6. Indemnification. Terms regarding indemnification protect individual partners from personal liability arising from the actions of the practice or other partners, enhancing financial security and reducing risk exposure, which is crucial in a high-stakes, regulated industry like healthcare.
7. Entrance and Exit of Partners. Partnership agreements outline the process for admitting new partners or facilitating the exit of existing ones. This includes buy-in requirements for new partners, valuation of ownership stakes, and buy-out mechanisms for departing partners, whether voluntary or due to retirement, disability, or death. These procedures are imperative to ensure smooth transitions and minimize financial disruption. Problems arise when there is vagueness or no clear documentation at all.
8. Dispute Resolution. Including mediation or arbitration clauses can help to avoid costly litigation and keep conflicts from escalating.
9. Death or Disability of a Partner. The partnership agreement should outline procedures for redistributing responsibilities, equity, and decision-making authority if a partner becomes disabled or dies. These terms help ensure the practice can continue operating smoothly under unforeseen circumstances.

 These ongoing challenges only highlight the importance of having, and regularly updating the terms of, partnership agreements. Attorneys should advise their private practice clients to revisit and update their partnership agreements every 3-5 years or even more often during times of significant events, such as major financial changes, market shifts, regulatory changes, partner exits, or practice transactions. It should be a living document, to be reviewed periodically and changed when merited. During such times, partners should reevaluate profit distributions to ensure they are equitable to all partners, especially during financial downturns. This ensures partners are not faced at a later point with an unequitable distribution on a partner’s decision to retire. They may consider merging with larger practices or affiliating with health systems to alleviate financial pressures and provide stability, while having access better resources and preserving patient care. Partners should conduct operational audits and analyses to reduce costs, streamline workflows, and enhance productivity, as well as consider exploring alternative revenue streams, such as expanding into ancillary services.

The consequences of a poorly drafted or outdated partnership agreement can be severe, including financial losses, partner disputes, and even the dissolution of the practice. With the right legal guidance, however, these risks can be mitigated, enabling partners to focus on providing exceptional care to their patients.

Attorneys advising health care private practices play a pivotal role in guiding clients through the complexities of partnership agreements. By understanding the unique challenges these practices face and tailoring solutions to their clients’ needs, lawyers can help address potential pitfalls, protect the interests of their clients, provide proactive solutions to ensure compliance with evolving laws and industry trends, and ensure the continued success of their practices. A robust partnership agreement that is thorough and reflects the current realities is not merely a legal document; it is a strategic tool that fosters collaboration, mitigates risk, and positions health care practices for long-term growth in a challenging industry.

If you have any questions or if we may be of further assistance regarding the drafting, revising, or negotiating of a partnership agreement, or other health law matters, please feel free to contact Bill Kalogredis, Esq. or Sonal Parekh, Esq.

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for 50 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402. 

Sonal Parekh, Esq., is an associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers, and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.

 *This alert is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic, any health care matter, or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.