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Compensation/Expensing Structures When Buying into a California Medical Corporation
California law permits healing arts practitioners to create corporations intended for the unique needs of doctors, nurses, psychologists, veterinarians, etc. See the Moscone-Knox Professional Corporation Act, Cal. Corp. Code, §§ 13400-13410.
As a practical matter, medical corporations often function like partnerships with respect to how income/compensation and costs/expenses are allocated and structured. Thus, if you are planning to buy into or become part of a California medical corporation, it is important to conduct your due diligence with respect to these compensation and expensing structures. A good San Diego corporate attorney can help. In this article, we discuss some of the variations on these structures and how those are important in making the decision to join or not to join a medical corporation.
San Diego Corporate Law: Conducting Due Diligence
Any purchase/sale contract will have clauses and provisions allowing for a potential buyer to conduct what is called “due diligence.” Conducting due diligence generally has four components:
- Reviewing relevant contracts and documentations,
- Confirming financial information,
- Checking various tangible aspects of the deal like inventory and equipment, and
- Obtaining various applicable approvals like financing, tax clearances, and others.
Documentation might include the office lease and the buy-sell agreement among the owners of the medical practice.
In general, any purchase/sale agreement will allow the buyer to say “no” to the deal if the due diligence uncovers problems. Maybe, for example, the office lease expires in two months and the landlord is not going to renew. That might be a large enough red flag for the buyer to say no, at least for now.
In this respect, medical practice compensation/expensing structures can be important enough for a buyer to either say no to the deal or request modifications from the existing owners.
San Diego Corporate Law: Common Compensation/Expensing Structures
A common compensation/expensing structure is one that takes a partnership as its model – each partner is compensated directly from and for the clients/business that he or she brings in. From the revenue, administrative costs are deducted based on some formula. Here, the periodic — say, bi-weekly — compensation payments can fluctuate significantly. This is the least complex compensation/expensing structure.
Another common compensation structure is “pooling,” where payments/salary are basically the same from period to period and extra compensation is provided through some sort of bonus payment system based on revenues or sales or other measure of productivity. Here again, costs and expenses are largely shared equally. A pooling arrangement has significant advantages for cash flow and keeping reserves for “down periods.”
More complex compensation/expensing structures involve the expensing side of the equation. If expenses are shared and equal, such might lead to friction among the owners if one or more of the owners is using more of the corporate resources than other owners. With medical practices, these use-inequality issues might arise with respect to physician assistants, record-keeping, billing and coding, legal resources, use of/need for equipment that is leased, etc.
The most commonly used solutions to this problem is to divide expenses into two categories – equal-use expenses and variable-use expense. The first category is shared equally. Examples here might include utilities and office space rental costs. By contrast, the second category of expenses is differentially allocated internally. In this way, an individual owner’s compensation is a function of two sets of expense deductions.
As can be seen, these are important issues to research during due diligence as you are contemplating buying into a medical practice.
Contact San Diego Corporate Law
If you are considering buying into a medical practice or selling your medical practice, contact attorney Michael Leonard of San Diego Corporate Law. Mr. Leonard has many years of experience handling all aspects of the sale or purchase of businesses in California. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. To schedule a consultation, contact Mr. Leonard via email or call at (858) 483-9200. We proudly provide legal services to business owners in San Diego and the surrounding communities.
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