Questions about having two LLC / practices etc

[nyu04]

Okay folks.  Here is my situation and I could really use any help/general insights and/or guidance.

My current setup:  I have my own LLC and my own orthodontic practice.  I also have a satellite practice but it is a shared space arrangement with another office.  Since I didn't build the office and they provide me with the majority of my new starts, they take about 20% of my collections (which has been working out fine) and I am paid as a 1099.  I deposit the monthly checks from this satellite into my main quickbook account with my LLC and it has been pretty smooth.

My dilemma:  I am interested in opening another office in another area (away from my other offices) that I know will do well.  Problem is - I am already stretched pretty thin and there is another orthodontist about my age (he is actually a semi-competitor to my main office) that is interested in opening up an office in the SAME area.  Long story short - we ended up meeting to talk about this and got along so well that we decided to open up this expansion together as partners.  If we get along with this new start up, we will merge our other practices together into a group practice 2-3 years down the line.  We will have a separation agreement / buy out clause for this partnership/start up as well just in case we can't get along.

Now the Twist:  The building we would love to open is owned by a popular local general dentistry corporate chain.  They have offered us to either lease the building out right with no ties OR they can take a 10% ownership (with a 3 year separation agreement after in case we don't like the arrangement, me and my future partner can buy them out with a pre-determined ratio/value - this part is being negotiated now but may be the deal breaker of their stake).  In turn, they will provide us with 100% referral of ALL their general dentistry offices along with book keeping, HR, marketing, collections, billings etc.  Between me and the other guy, we can handle all that it BUT it would be very taxing and having 100% of their referrals would be HUGE for a new start up practice plus it would be nice to be more hands off (as I am already spending a lot of time doing my own HR/401k admin/quickbooks etc in my own practice).  We shall see what happens with this depending on if the clause for the 3 year buy out of their 10% is favorable to us.

 

My questions:

 

1. Other orthodontist has his own LLC and I have mine.  If we were going to partner 45/45/10 (with corporate chain) - should we structure the move as - my LLC 45%, his LLC 45%, Local Corp 10% OR me and him start a NEW LLC and do it 90/10?

2. The reason why I am asking is because:

a.  What set up would allow me and him to get another 401k?  We won't own 80% of the new business if we structure it 45/45/10 ... right?

b.  If we did 45/45/10 - wouldn't it be an accounting nightmare? "oh hey, I bought some pens for the office - you owe me 45%/10%"??

c.  Is there a distinct tax/simplicity advantage in 45/45/10 or 90/10 set up?  Especially if me and future partner split ways on this start up and I buy him out?

3. Are there any other issues I should be thinking about?  I have many that I am contemplating but don't think they are critical at the moment.  For example, conflict of interest as partners in new start up.  Both of our offices will be losing about 5-10% of our patient base to this new office but it's a leap of faith for both of us since we plan to merge our offices if this start up works out.  He already said he doesn't mind me buying him out in case it doesn't work out since I live closer to this new start up.

Lastly, I know some will disagree with doing any partnership as I have heard tons of horror stories myself.  However, I have been in solo practice for the last 9 years and I am tired of the solo practitioner set up (maybe I will regret it later when I have a partner).  I strongly feel that 1+1 in our case may equal 3 when we combine our strengths and complement our weaknesses but who really knows.

 

Okay - whew, sorry for such a long rambling post.  Hope this makes sense and thanks in advance for all the insights/advice!

[gsastow]

nyu04, I am a healthcare attorney in the New York metro area who has practiced for over 20 years helping healthcare providers.  I have significant experience in working with dentists (and other healthcare providers) structuring practices.  The description of what you are currently doing and what you contemplate doing raises many issues that need to be considered from several perspectives including business, legal and regulatory angles.  To answer some of your direct questions, in setting up a new practice with a new partner, it would typically be advisable to establish a new entity such as a PLLC or PC.  Merging in your other practices can always be done at a later date should the new partnership arrangement work well.  In the short term, however, it is a good idea to shield your existing practice from any liabilities that may arise from the new practice, whether from a professional service provided or from your partner, in addition to addressing some of the concerns you have identified such at 401k plans etc.  With respect to entering into a partnership, it is critical to have a well thought out and drafted agreement between you and your partner.  If the relationship works, great!  If it does not, in order to avoid the "horror story," you would turn to the partnership agreement and follow the pre-agreed to mechanism for resolving the problem or separating.  While having an agreement in place cannot guaranty a smooth resolution of all partnership issues that may arise, it typically goes a long way to avoid a very problematic separation.  Given the varied and significant issues that you raise, it is critical for you to seek the advice of counsel who has experience in this area of business and the law.

[jfoxcpacfp]

I agree with gsastow - absolutely do not expose your current practice to the new practice. The partnership and operating agreements are key to a successful practice - or wind-down, if that should be the result. Some partnerships actually work out - it's the horror stories we all hear about. You improve your chances of success if the temperament of both partners is easy-going (not anal) and each have assigned duties and willing to stay out of the other's business. It is almost always harder to divorce a partner than a spouse.

As for structure, you could set up a 401k in your new business if you own < 80%. I am probably most concerned about the potential 10% owner at this point - you don't know enough to start planning yet. Just know that they won't be referring 100% of a lucrative business and handling all of the HR and accounting just to be nice.

Re: the "accounting nightmare" of you owning separate businesses, one way this works is to have a joint operating account that you each pay into each month for a predetermined amount to cover predetermined "joint" expenses. The bookkeeper is in charge and for expenses over XX dollars, both partners must agree. Separately, you would each purchase equipment, supplies, etc. for your own businesses, hire your own assistants, etc. This could preclude you from another 401k, however, as you would be 100% owner of your own LLC. Otherwise, all payroll would need to be run through a separate LLC that you and Partner own.

Tentatively, I would recommend you go into partnership with the other orthodontist if you get that far. (Tentative, because there is so much unknown.) I am concerned about the amount of DIY (your own QuickBooks?) you are handling with 2 successful businesses. This is something you should be able to afford to pay a bookkeeper or CPA to handle and I'm not sure if the carrot being offered by the corp dentist group could be a bigger influence than warranted. I'm having a little trouble wrapping my mind around that 10% offer.

Yes, there are many other areas you should be thinking about. Complicated stuff that will require much deeper advice than you can get on a free forum. Might want to set up a consult with gsastow.

[nyu04]

Thank you for your insights and I agree with many of your points.  I'll be in contact, gsatow. thanks.

[nyu04]

jfoxcpacfp wrote:

I agree with gsastow – absolutely do not expose your current practice to the new practice. The partnership and operating agreements are key to a successful practice – or wind-down, if that should be the result. Some partnerships actually work out – it’s the horror stories we all hear about. You improve your chances of success if the temperament of both partners is easy-going (not anal) and each have assigned duties and willing to stay out of the other’s business. It is almost always harder to divorce a partner than a spouse.

As for structure, you could set up a 401k in your new business if you own < 80%. I am probably most concerned about the potential 10% owner at this point – you don’t know enough to start planning yet. Just know that they won’t be referring 100% of a lucrative business and handling all of the HR and accounting just to be nice.

Re: the “accounting nightmare” of you owning separate businesses, one way this works is to have a joint operating account that you each pay into each month for a predetermined amount to cover predetermined “joint” expenses. The bookkeeper is in charge and for expenses over XX dollars, both partners must agree. Separately, you would each purchase equipment, supplies, etc. for your own businesses, hire your own assistants, etc. This could preclude you from another 401k, however, as you would be 100% owner of your own LLC. Otherwise, all payroll would need to be run through a separate LLC that you and Partner own.

Tentatively, I would recommend you go into partnership with the other orthodontist if you get that far. (Tentative, because there is so much unknown.) I am concerned about the amount of DIY (your own QuickBooks?) you are handling with 2 successful businesses. This is something you should be able to afford to pay a bookkeeper or CPA to handle and I’m not sure if the carrot being offered by the corp dentist group could be a bigger influence than warranted. I’m having a little trouble wrapping my mind around that 10% offer.

Yes, there are many other areas you should be thinking about. Complicated stuff that will require much deeper advice than you can get on a free forum. Might want to set up a consult with gsastow.

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Jfox,

thank you!  Me and potential partner are not 100% set on bringing the dental corporation in as 10% but we are having a meeting soon so we shall see.  In terms of the DIY - sorry, I should have clarified.  I take the end of the day deposit and enter into quickbooks and enter numbers for payroll.  I have a CPA that does monthly reconciliations and all taxes.  No book keeper yet but eh - it's pretty manageable so far.

We will most likely form a new LLC/PLLC and fuse funds into a joint account.  We will need to get a good partnership agreement in place first. Since we will only own 50% of the business, we should be able to start another 401k in that LLC even though I already have a 401k in my practice?  That would be so cool!

Again, thanks for your contributions on my post and forum in general.  Really appreciate it.