Congratulations on your recent graduation. Having spent several years preparing yourself for your successful career as a dentist, you are undoubtedly ready to unleash your newly acquired skills. However, there are other facets of the practice of dentistry, many of which have little or nothing to do with teeth and gums.
To ensure complete success in your professional career, surround yourself with a number of experienced professionals. From the beginning, you will have legal, accounting and tax issues to consider. The decisions you make — or fail to make — will have very different results.
This article provides a brief explanation of the main issues that dentists will typically encounter — many find them within the first five years of graduation.
Associate agreements
If you decide not to start or purchase your own practice from the beginning, you will likely enter into some form of associate arrangement with an existing practice. This often involves receiving a written associate agreement from the principal dentist(s). At first blush, these agreements may appear to be “standard” (and you may even be told that), but there may be some rather onerous provisions that over time can cause discomfort.
The first issue to consider is whether it is the intention of the parties for you (the associate) to be an independent contractor or an employee. From the employer’s perspective, there are many benefits in your being characterized as an independent contractor, including possible insulation from a claim for wrongful dismissal. (This is available to employees.) The employer would also not be responsible for termination payments or employer deductions such as employment insurance and CPP. From your perspective, carefully consider the implications of this arrangement to you. As an independent contractor, you must remit your own CPP and taxes and you would possibly lose any available recourse or entitlement if the agreement is terminated without cause. There are also benefits to being an independent contractor, which should be discussed with your lawyer and accountant.
Another point to be clear about is which party owns the charts for patients treated by you. Associate agreements often provide that all charts, including those relating to patients brought in by the associate, are the sole property of the principal dentist. It is important to understand the implications of this arrangement, as well as your rights and obligations after termination of your associate agreement with respect to patients treated by you.
Restrictive covenants must also be considered. Often an associate agreement will contain non-solicitation and non-competition covenants, which are inserted to protect the goodwill of the principal’s practice. These provisions can be rather onerous and should be reviewed by legal counsel, as the law relating to restrictive covenants has and continues to evolve in the courts.
Incorporation
For some time now, dentists have been permitted to incorporate their businesses. This opened the possibility of tax deferrals on income retained in the corporation. As of January 1, 2006, family members of dentists are permitted to own non-voting shares in the dentist’s professional corporation, which can result in tax savings through income splitting strategies.
This might suggest that incorporation of a professional corporation is advisable for the long established dentist with one or more practice locations. But this is not a strict rule.
There are scenarios where incorporation early in your career is advantageous — even while you are still an associate. Income splitting with a spouse who has little or no income is one example. Also explore incorporation when you are purchasing or starting a practice. This is particularly important if you are planning to use borrowed funds and/or if you will be continuing any associate arrangements while you build your new practice. There are tax strategies that should be explored under these circumstances.
To determine the benefits of incorporation, you should seek the advice of a qualified accountant and lawyer with specific experience in dealing with health professionals.
Practice start-ups
If you are considering setting up your own practice from scratch, there are a myriad of legal and accounting issues to consider including premises leases, equipment leases, employees, bank loans and so on. When starting your own practice, you are becoming a business owner. Like any other business owner, you should retain legal and accounting professionals from the start.
Practice purchases
It is not uncommon for dentists to purchase an existing practice within the first five years of graduation — sometimes immediately. In approaching a contemplated purchase, there are a number of issues to consider before preparing and presenting an offer — too many issues to give any meaningful treatment here. It is sufficient to say that proper legal representation (and accounting advice) is critical from the very beginning.
Your lawyer’s role in representing you as the purchaser is to ensure you are getting what you bargained for free and clear. He or she should ensure you have the ability to protect what you have purchased, particularly the goodwill (charts, practice name, telephone numbers etc.) of the practice. Towards these ends, your lawyer would conduct proper due diligence, draft a comprehensive agreement and ensure that there are enforceable and reasonable restrictive covenants given by the seller of the practice.
Other significant questions that should be reviewed by legal (and accounting) advisors include the question of asset versus share sales (which can have significant tax implications), due diligence (searches by your lawyer of various public records for registered security interests, judgements or bankruptcy filings relating to the selling dentist) and an accountant’s review of the financial statements and records of the practice.
Also, is the premises’ lease acceptable? How many years are left in the current term? Are there any renewal rights? Can the lease be assigned? These are a few significant points that should be determined early in the process.
Additionally, a properly drafted agreement will contain a myriad of representations, warranties and covenants by the selling dentist for your protection.
Practice buy-ins and transitions
The potential for a buy-in arrangement can arise very early in your career. While it may be flattering to be offered an immediate or eventual interest in a practice, it is suggested that you discuss the pros and cons of such an arrangement with your advisors before agreeing to anything — even if only in principle. This is particularly important when a partnership arrangement is proposed.
Commercial leasing
Whether you are purchasing a practice, starting a practice from scratch or entering into some form of transition, the commercial lease is a key element.
There is a broadly held perception that all leases are “standard”. Leases vary considerably. If there is any similarity among them, it is that they initially invariably favour the landlord.
Leases include many provisions beyond the basic essential terms (rent, location, square footage, term). There are often many time bombs and land mines buried in the document that can, if undetected, have significant adverse consequences to you (and the value of your practice). For example, many leases include the notorious “demolition clause.” This gives the landlord the right, usually on short notice and without compensation to the tenant, to terminate the lease in the event he or she wishes to demolish or redevelop the property. This can cause a dentist considerable financial costs for relocation and duplication of leasehold improvements. He or she also faces losing patients who may not want the inconvenience of a new location.
A few other points to consider with t
he help of your advisors include the right to exclusivity (if desired), renewal options, assignment rights and the scope and definition of “additional rent.”
Call before you sign
It is critical that you consult with your lawyer before you sign any document. This author has too often been approached by a dentist who has signed a document that was purported to be “just a formality” or “non-binding,” only to find out that they had actually entered into binding legal relations. At that point your lawyer’s ability to protect you can be severely diminished. As a result, your initial consultation may be used only to advise you of the awkward position you have placed yourself in.
John McMillan, LL.B. of McMillan Law Professional Corporation is a Toronto corporate / commercial lawyer serving dental professionals. He can be reached at 416 364 4771 or johnmcmillan@bellnet.ca.
