Dental Partnership Dissolutions: A Multitude of Operational, Legal, and Tax Issues to Consider

     In our article titled Laying the Legal Foundation for a Successful Dental Practice Partnership, we discussed the importance of making sure the necessary legal foundation is set before jumping into a dental practice partnership. Business partnerships are often compared to a marriage, and for good reason. A successful dental practice partnership and a successful marriage share many common characteristics, such as good communication, common goals, a shared vision for the future, and similar financial values. But, just as with marriage, circumstances often arise in a dental partnership that lead to insurmountable disputes. Other times, partners simply move in different directions over the course of the partnership and decide to end the relationship amicably. Regardless of the reason that partners decide to end their relationship, as with a marriage dissolution, a partnership dissolution can be very complex and requires the partners to agree on a number of important issues. That is why it is imperative to engage legal counsel to negotiate and prepare a comprehensive dissolution agreement.

     While at first blush, one might think that dissolving a dental partnership is as easy as filing articles of dissolution and then parting ways, there is actually a whole slew of issues—both from an operational and legal standpoint—that must be considered before dissolving and winding down the practice. This article addresses only a few of the operational issues that the partners will need to address in the dissolution agreement.

Operational Issues to Address in the Partnership Dissolution Agreement   

     Separation of Assets

   One of the most important issues that partners will need to negotiate and address in the partnership dissolution agreement is the separation of practice assets and liabilities. For instance, since in most situations it would not be practical or cost efficient to simply liquidate the partnership’s assets in a fire sale and distribute the proceeds in accordance with the partnership agreement, the partners will need to reach an agreement on how the partnership’s equipment, inventory, and furniture will be divided. Furthermore, before agreeing on how to divide the partnership’s physical assets, it may be necessary to first have a third-party vendor take inventory of, and to value, those assets.

     The partners will also have to decide how the partnership’s patients will be assigned. In most cases, there is no dispute as to which doctor brought in and routinely treated a particular patient. In those cases, the treating doctor generally receives the patient records for the patients he has treated. But, what about patients who were typically scheduled with the first available doctor? Or what about patients who are treated by an associate dentist? Those patients create a more complicated issue that the partners need to work through before dissolving the partnership.

     A related issue that the partners must address prior to dissolution is how the electronic files, data, and other patient information will be transferred. Will one of the doctors retain the partnership’s existing computers, server, and practice management software, while the other partner is required to purchase new hardware and software licenses? How will the IT costs associated with dividing the patient records be divided between the partners? Will the doctor who is retaining the partnership’s operating system share in the cost of purchasing the other doctor’s system?

     Employee Considerations

    Human capital (i.e., the business’s employees) is arguably the most important factor to running a successful dental practice. Thus, it is critical that partners who are dissolving their practice fully consider how they will transition the partnership’s staff. While a well-drafted dissolution agreement will require that the partnership terminate all partnership employees, it will also identify the employees that each partner will have the right to subsequently hire to work at the partner’s new practice. This is a term that often causes tension between partners and can stall negotiations. Other times, there is a clear delineation between the employees who primarily work with each doctor, and the decision is easy.

     Real Estate Considerations

    If the partnership is party to a lease agreement for the dental practice office, the partners will need to involve the landlord in the dissolution discussion and will need to decide which partner gets to remain at the practice location. The partners may need to obtain the landlord’s consent to assign the lease agreement, and the partner who is leaving the space will certainly want to try and negotiate a release of liability under the lease. The situation gets even more complex if the partnership owns the dental practice office. Will the partnership sell the real estate and distribute the proceeds to the partners? Will one of the doctors purchase the real estate from the partnership and remain in the space? If so, how will the parties determine the purchase price? These are all considerations that the partners must work through as part of having legal counsel prepare a comprehensive dissolution agreement.

     Separation of Partnership Liabilities

   A comprehensive partnership dissolution agreement will not only address the division of partnership assets, but it will also address the division of partnership liabilities. Documenting the partners’ agreement as to how certain partnership debts will be divided upon dissolving the partnership is only one piece of the puzzle. The partners must also work hand-in-hand with the partnership’s lender to make it aware of the partners’ intentions, and to refinance or restructure the debt in a way that is acceptable to the lender. Furthermore, are there sufficient funds in the partnership’s bank account to cover outstanding accounts payable to vendors, or will the partnership have to pay those vendor accounts using cash that is collected from partnership receivables? These are just a few examples of the questions that arise regarding partnership liabilities. To avoid a dispute that may lead to costly litigation, the dental attorneys at Nardone Limited strongly advise their dental clients to address these questions in a written partnership dissolution agreement.

Contact Nardone Limited

    The dental attorneys at Nardone Limited have vast experience guiding dentists through both amicable and hostile partnership dissolutions. If you are considering dissolving a dental practice partnership or would like more information regarding your dental practice partnership, contact Nardone Limited.