Salary Structure

[TB12]

Hello,

I am looking to solicit some input on salary structure in an emerging partnership.  I am assisting my wife as she transitions from a W2 employee into a partnership role in a growing podiatric practice.  The sole proprietor LLC is transitioning into a partnership, with my wife becoming the 2^nd owner.

Of the many discussion points ongoing between us and the current owner in managing the transition is how they will pay themselves.  My wife currently receives a modest base salary and a quarterly bonus that is based on a percentage of her received reimbursement.  The current owner takes an ‘owners draw’ as needed to maintain her lifestyle.  We are suggesting for both doctors to use the base salary & quarterly profit bonus structure upon establishing the partnership (either LLC or S Corp, still being determined).

We would love to hear how others in a similar situation structure the salary of the ownership members.  How do you all pay yourselves?

Thanks in advance!

[Molar Mechanic]

I strongly encourage using a transition specialist.  A good one will set her up for a successful partnership.   They will have a contract that can certainly be tweaked, but will address the problems they've seen break up successful businesses.  A partnership, especially with two partners, is absolutely a second marriage, and a written plan goes a very long way.  They can also help create a structure that will maximize money retained by both of you while minimizing tax liability from the sale of the partnership.  My deal had a lot of things I wouldn't have thought of.  Thing like part of the cost being a "mentorship fee" that I was able to immediately write off, rather than depreciating and various weighting of the assets of the business to benefit us in the long term.

Some brokers will try to "win" the deal, which may not be wrong in a practice sale, but in a partnership, a fair deal up front sets the stage for a successful long term deal, while starting a partnership with hurt feelings and distrust can lead to ruin.

Our personal deal created a partnership, with no assets, but many employees that runs the practice.  The assets are split evenly among two separate LLCs, one mine, the other my partners.  Monthly, the profits of the practice are distributed to the individual LLC, where I can draw for personal expense as I need.  My wife and kids are also paid directly from my LLC, and that is where items like my malpractice, CE, travel, cars, etc are paid from.

There is a third entity, co-owned by my partner and I equally that owns our office condo.  We pay rent, it pays the mortgage, and we split a draw at the end of the year.

[jfoxcpacfp]

Bumping back up hoping someone will contribute a reply. The compensation structures for owners in partnerships/s-corps are almost as varied as the number of entities. Think of this as a marriage - one in which you should always have a pre-up - and take appropriate precautions. That means getting experienced, professional advice and not sharing an attorney and CPA, for starters.

[adventure]

TB12 wrote:

The current owner takes an ‘owners draw’ as needed to maintain her lifestyle.  We are suggesting for both doctors to use the base salary & quarterly profit bonus structure upon establishing the partnership (either LLC or S Corp, still being determined).

Click to expand...

Sounds like a good CPA can help with LLC v s corp. (or some time with a spreadsheet).

Do you also get an 'owners draw'? Or should the current owner happily transition away from a free checkbook to a structure (salary and bonus)?

[TB12]

Thanks for the replies so far.  We have our CPA, financial adviser (fee-only Fiduciary) and lawyer involved in the process so far to help ensure we have our bases covered.

We understand that salary structure varies greatly from practice to practice, we were hoping that some folks to post their current structure, purely from the point to collect potential options.  The current owner also desires a structured approach away from her current "owner's draw" process.

[VagabondMD]

Our practice started with three rads in the early 70’s. They always split everything equally. Over the years, when rads were added, there was a partnership track (read lower salary), for 1-2 years (depending on experience and market conditions), and then the new person was typically allowed into the partnership. There was once a buy-in and buy-out to the accounts receivable, but we did away with this 10 years ago.

We have a monthly salary and pay out the excess as a “bonus” at the end of the calendar year and at the end of the fiscal year. There are a few roles within the group, now 13, that pay small additional stipends, and these tend to change over time such that everyone, especially the younger partners, gets the opportunity/responsibility to do them.

Our imaging center LLC is a separate corporation, and while new partners are offered ownership interest, it’s not required. Here, again, everyone is an equal and shares the distributions and now rare cash calls equally.