PART 2 OF 4: Financial Terms

How the practice divides money among its owners.

If governance terms decide who controls the practice, the financial terms decide who gets what. Compensation and income division are among the most sensitive and most disputed provisions in any partnership agreement, because they translate the owners' work and ownership into money. This part tours the financial terms.

Income division

The agreement should define how the practice's income is divided among the owners. Approaches range from equal splits to formulas based on production, ownership percentage, or a combination. Whatever the method, it should be explicit, because an unclear or contested income-division provision is one of the fastest ways to fracture a partnership.

Compensation and draws

Beyond the division of profit, the agreement should address how and when owners are paid:

• Regular compensation or draws during the year.
• How and when profit is distributed.
• The treatment of retained earnings for the practice's needs.
• How compensation accounts for differences in production or effort.

Expenses and overhead

The agreement should address how the practice's expenses and overhead are allocated among the owners, particularly where owners have different practice patterns or generate different costs. A fair and clear allocation of shared and individual expenses prevents resentment over who is carrying whom.

Compliance in compensation

In a healthcare practice, compensation arrangements must respect the rules that govern how providers can be paid, particularly where referrals among owners are involved. The financial terms should reward productivity and ownership without running afoul of fraud-and-abuse rules, so the compensation design and the compliance constraints are considered together.

Revisiting the financial terms

Financial terms that fit the practice at formation may not fit it later, as owners' contributions and the practice's economics change. A good agreement either accounts for change or provides a mechanism to revisit the financial terms, so they can evolve without a crisis.

How West Coast Health Law Can Help

We draft the income-division, compensation, and expense terms of healthcare partnership agreements to be clear, fair, and compliant with the rules on provider compensation.

West Coast Health Law offers a FREE consultation which you may schedule by clicking the button on our website.

This article is provided for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Laws change and every agreement is different; consult a qualified attorney about your specific situation.