The Dental Lawyer | Entities as Liability Shields

One issue that consistently surprises me is the number of dental practices which are run as sole proprietorships and without the liability shield of an entity.  (To be clear by “entity” I am talking about corporations, limited liability companies, limited partnerships, and other legally created business forms).  Entities provide a liability shield by protecting the owner’s personal assets from lawsuits.  What this means is that if Smith Dental Arts, P.C. signs a lease with Goliath National Landlord and then fails to meet its obligations under the lease, if Goliath sues the dental practice, only those assets which belong to the professional corporation are subject to any adverse judgment against the practice.  In that same situation if Dr. Smith had been practicing without being incorporated the landlord would be able to go after the personal assets of the doctor; meaning the doctors home, vehicles, and personal bank accounts. The value of forming an entity is that any obligations on the part of the practice stay separate and distinct from that of the personal assets of the person who owns the practice.    

The main limiting factor which dental and other medical professionals have to deal with when forming an entity is malpractice.  Malpractice is always personal, meaning that if Dr. Smith is sued for malpractice his personal assets are always at stake (this underscores the need for every dentist to have malpractice insurance, even if it’s not a legal requirement in your state).  Forming an entity will not limit the ability of a plaintiff to reach a dentist’s personal assets like it would for the contractor looking to recover on a breach or an individual who fell and injured himself on the practice’s property.  Another limiting factor is the “personal guaranty.”   Any contract or agreement entered into with a personal guaranty obligates the person offering the guaranty to satisfy agreement.  In other words, that person’s personal assets can subject to an adverse judgment.  

Despite the restraints on the liability shield, the advantages of entity formation are still palpable. The doctor’s personal assets will be protected from any business dealings of the practice or any torts committed by the practice (outside of malpractice).  In addition there are tax benefits to forming an entity which will be discussed in a subsequent post. It is noteworthy that if there is any anticipation that the practice will be sold at some point, the entity formed should NOT be a C-corporation (again, more on this later).

The types of entities which can operate as dental practices vary from state-to-state. In New York P.C.’s (taxed either as S-Corps or C-Corps) and P.L.L.C.’s are the primary entities which can run as dental practices.  There are some additional entities which can also operate as a dental practices.  Check with an attorney in your state before forming and entity, and avoid the compulsion to try to do it yourself. 

The Lawer Blog | Depreciating Business Property

In an earlier blog post I mentioned that the optimum moment in which a practice should update its technology (assuming that the practice has not continually updated technology over its life span) is about 7 years prior to a potential sale.  Part of the reason why 7 years is suggested is so the doctor buying the new dental equipment can fully benefit from the depreciation deductions associated with the purchase of said equipment.  This point requires further explanation.

The Internal Revenue Code (relevant sections are 167, 168, 179, with a host of other publications and regulations) allows for businesses to take depreciation deductions on most business equipment purchased for use in the business. Generally, most tangible items which are used in the business, but not which are sold to customers or patients, are deductible.  For dental practices this means computers, lighting fixtures, digital x-ray sensors, furniture, chairs, vehicles, and operatory equipment all create depreciation deductions.  Inventories and land do not create deductions as the property creating the deductions must be used in a trade or business or be "property held for the production income".  However, the amount deductible in a given year is subject to calculation, and in part explains why 7 years prior to a sale is the ideal time to purchase new equipment.

There are two main methods used to determine the amount of a depreciation deduction in a given year: the “Straight Line Method” and “Double Declining Balance Method."  The Double Declining method is usually preferred because it allows the business to deduct greater amounts in a shorter time than the Straight Line Method; this translates to more deductions more quickly, which has obvious appeal.

Both methods adhere to certain rules and concepts promulgated by IRS publications which need to be understood before an explanation of each of the methods.  First, every piece of property has a "useful life" as determined by the treasury.  The useful lives are listed in Publication 946 and its exhibits and amendments.  For dentists, the useful life of a property is a fiction, and merely translates into the amount of years in which the property may be deducted. Thus an panoramic x-ray may have a "useful life" of 7 years under the regulations, but in reality the machine will probably work for 30 years.  The vast majority of equipment used in a dental office is depreciable over a period of 7 years, with the remainder usually depreciable over 5 years.  There are rare exceptions to this rule, but to recover the full value of depreciation deductions, the owner of the equipment should seek to own the equipment for the full useful life of the equipment.  The next important concept is tax basis, the purposes of depreciation deductions it's fair to say that the tax basis is the cost of the property to the business (provided an even-handed business transaction).  The basis is reduced every time a depreciation deduction is taken.  Finally, to understand two types of depreciation you must understand the "6 month convention". The 6 month convention, which is required under the tax code, requires a deduction to be taken at 50% of its normal amount 6 months into the first year of the property's use by the business, and again 6 months after the end of the useful life.  The effect is that a 5 year property will actually be deductible in 6 periods, a 7 year property in 8 periods.  This point is better illustrated by example.

The Double Declining Balance Method builds on the concepts of the Straight Line Method and was designed so business could more quickly recapture the depreciation, or in other words, so they could get deductions more quickly.  Using the same $500,000 example here is what the Double Declining Balance Method looks like:

 The above examples clearly show the utility of a Double Declining Balance Depreciation. By the end of year two, the Double Declining Balance method had provided $260,000 in deductions, where as the straight line method had provided only $150,000 in deductions.  As noted above, it's important to keep in mind that most dental equipment is depreciable over a 7 year period.  The numbers used in the examples above assume a 5 year period.  Also, the examples above use a lofty $500,000 piece of property, and in the dental world even the fanciest big ticket items are usually less than $100,000.  There are other depreciation rules to consider, and the rules are always changing so make sure you talk to a qualified accountant or attorney ( like those at Dental Transitions) before preparing your taxes.

The Dental Lawyer | Antitrust Laws, Fee Schedule Disclosures and Non-Disclosure Agreements.

I didn’t intended for my first substantive posting to be about the antitrust issues surrounding the sharing of fee schedules, but as it happens, I was researching the issue, and I will share what I have learned. I should mention, that an excellent resource which gives a great foundation on anti-trust issues in dentistry is the Antitrust Laws in Dentistry: A primer of “Dos, Don’ts and How to’s” for Dentists and Dental Societies, Published by the American Dental Association written by Mark Rubin et. al., Associate General Counsel to the American Dental Association. This publication was incredibly useful at guiding my research and in framing this blog post. It is available here http://www.indental.org/uploads/antitrust_booklet.pdf if you are looking for a more in depth, but still easily comprehendible, discussion of some of the topics I have covered today.

The purpose for my research came about as a result of an article I’m writing about succession planning in dentistry. One piece of advice I give in the article is to put together an agreement with another practitioner whereby another dentist agrees to both, (1) taking custody of patient records and, (2) treating patients in accordance with the transferor’s fee schedule. (A blog posting discussing succession planning in larger detail is forthcoming). When I was discussing this tip with a dentist his reaction was that federal antitrust laws prevented dentists from disclosing fee schedules to one another. This caught me off guard, as I was certain that for the purposes of succession planning, which in dentistry largely amounts to ensuring ongoing patient care, the disclosure of fee schedules would be permissible.

The general purpose of Federal Antitrust laws are to ensure market competition and in doing so protect consumers from the evils which stem from a market controlled by cartels and monopolies. The legal standard for determining if a certain behavior is violative of federal antitrust laws, (specifically the Sherman Antitrust Act) is whether or not there is a “concerted action” which produces an “unreasonable restraint on competition”.

More or less, a “concerted action” is any action, formal or not, which taken by more than one party which results in the “unreasonable restraint on trade.” It is noteworthy that even a discussion among colleagues over cocktails may be a concerted action if discussion results several practitioners adjusting their fee schedules in a way which essentially fixes prices for a certain procedure or procedures. Obviously a formal agreement whereby prices are set at certain levels would also be a violation.

To determine if there is an unreasonable restraint on trade the courts employ a balancing test which weighs competitive and anti-competitive market forces which result from the concerted action. Generally the court will conduct an in-depth analysis to determine if the concerted action truly created conditions unfavorable for competition. There are also some actions which are recognized by the courts to create conditions unfavorable to competition (see price fixing), and those actions are analyzed more strictly against the accused, with certain presumptions made in favor of the accuser (usually the Federal Trade Commission, sometimes the Department of Justice). In cases of egregious price fixing, the government may prosecute antitrust cases both criminally and civilly. For most cases, the government’s remedy is civil damages and injunctive relief, or in other words, they take your money and force you to change your impermissible behavior.

Since it is relatively easy for dentists to fall into antitrust traps, and because the consequences are so severe, most simply do not discuss their fee schedules with outsiders or other practitioners. Still, the legal standards derived from federal antitrust law do not provide an absolute bar against disclosing fee schedules. So long as the result is not a restraint of trade, fee schedules can be discussed and disclosed.

Succession and estate planning are perfect examples of when and how fee schedules may be disclosed without violating federal antitrust law. If the purpose of the disclosure is to make sure that another dentist will honor a fee schedule in the event of the death or disability of another dentist, that disclosure is permissible. To fully protect one’s self, I would recommend a Non-Disclosure Agreement (NDA) which includes terms whereby the dentist receiving the fee schedule agrees not to, (1) disclose the transferor’s fee schedule and, (2) change their fee schedule based on the receipt of the fee schedule.

A few things are worth mentioning here. First, NDA’s can be put together inexpensively, and the type needed here should only take about an hour of an attorney’s time, so don’t let an attorney charge you too much for this. Second, if you’re paying for succession planning on a flat fee basis, the NDA should be part of the “package” and you should not be charged additionally for it. Finally, many protections can be built into any NDA, but the type needed here is basic and should not be allowed to devolve into and endless pit of negotiation and counterproposal…just get a agreement in place and make sure you’re dealing with a straight shooter.

It is also worth mentioning the state antitrust laws do exist and may be relevant, so your decision to disclose or not disclose your fee schedule should also take state law into consideration.

The bottom line is that there are ways to disclose a fee schedule but such a disclosures must be made carefully, with proper intentions, and without impermissible results.

Information I post in this blog is not intended to be legal advice and should not be relied on. Nothing contained in this blog shall create an attorney client relationship. If you’re a dentist and you have legal questions you should contact licensed attorney in your state.

The Dental Lawyer | Updating Technology and Practice Sales

Depending on the buyer, an office’s technology, or the lack thereof, can be a major draw or stumbling block in selling a practice. It is not an across the board rule that newer technology will make a practice more marketable. Generally practices with the newest technology run higher overhead, which reduces profitability and can make a practice less appealing to a buyer. On the other hand, the efficient purchase and incorporation of technology into the practice can increase profitability. The perfect example of this is the incorporation of a velscope (or similar oral cancer screening light) into the practice. After the purchase the doctor should make oral cancer screenings a mandatory portion of every visit (or every exam). The charge for the screening can be modest, say $15 per screening, and the equipment will pay for itself in short order. With one purchase, the practice has (1) increased its overall profitability, (2) protected itself from malpractice lawsuits which might come as a result of not spotting oral cancer, (3) increased the overall technology of the office, and (4) given itself a depreciation deduction. There are many other items of technology which can similarly be incorporated into a practice to boost the bottom line. Buyer beware, however, as purchase of every brand-new gizmo for your practice will more likely than not hurt rather than help your practice.

As alluded to above, when it comes to technology, the buyer matters. For the younger less experienced buyer newer technology is a key attraction. Generally these younger doctors want the technology they came out of dental school using. For a practice which has continuously updated its technology throughout the course of its life, technology is usually not an issue. For older buyers newer technology is rarely a sticking point. Dentists with existing practices who are seeking a satellite office or new location generally just want functional equipment and strong bottom line; having the newest technology is usually not a concern. These buyers, unfortunately, are less plentiful in the marketplace, and if one is seriously looking to prepare their practice for sale updating technology throughout the life of the practice important.

One important point not to be overlooked is that updating technology is something that should be done over the lifetime of the practice and not in the years immediately preceding a potential sale. Adding new technology should be done with the goal of improving patient care, efficiency, and profitability. Dumping money into new gadgets just for the hope of attracting a buyer accomplishes none of these goals, and will create a bloated expense report. For a practice that has not invested in technology throughout the course of its life the time to make such an investment would about 7 years prior to any potential sale. The hope here is that updated technology will increase profitability in the years which any potential buyer would consider relevant while also gaining the greatest possible depreciation deductions on business property. This will in a sense help the new technology pay for itself. Updating technology in the years immediately preceding a potential sale will have negative effects towards profitability due to the expense of purchasing the property without the time the realize the benefits of the new equipment. This later option also offers the purchaser inadequate time to recapture the depreciation on the new technology.

 One final point on technology. Not everything needs to be updated for a practice to be marketable to the younger buyer. In my opinion digital x-rays are a type of benchmark. If a practice has digital x-rays they are going to have a computer, and probably multiple computers, in the office. This raises the likely possibility that the practice is running some practice management software which probably can produce financial and demographic reports about the practice. Also with computers there is a good chance that the practice may incorporate intra-oral cameras and a variety of other digital dental diagnostic tools. The point is that digital radiography a point from which other items of technology flow . It certainly goes without saying that this isn’t always true, but as I said, for me it’s a benchmark. The bottom line is that if you want to taken seriously as regards the technology, digital radiography is the starting point. It is certainly worth mentioning however, that practice management software in many regards is fundamentally more important than any other technological improvement within a dental office. Attempting to sell an office without practice management software is difficult, and there is no way around it.  This software is another type of benchmark, and similar to digital radiography in that other technical improvements come after its incorporation.

The Dental Lawyer | Exclusive and Non-Exclusive Listing Agreements

I was contacted last week by a dentist who wanted me to broker the sale of their dental practice. To maintain confidentiality, I can’t really divulge too many details about the practice or the specific situation, but suffice it to say that the dentist in question got wind of my services and understood that I was offering more for less as compared to some competitors. At the time I was contacted, a “letter of intent” to purchase had already been drafted by an attorney and delivered to the selling dentist. We had a short conversation about the practice and the buyer (an associate which the seller had placed himself). Then the seller dropped a bomb: he had already signed a listing agreement with a different practice broker. At that point I agreed to look at the both the letter of intent and listing agreement, with the knowledge that had an Exclusive Listing Agreement been signed I would not be able to broker the transaction. Fortunately for me, as both a trained broker and licensed attorney, I could still help this individual on the legal side of the transaction.

In the world of dental practice brokering listing agreements generally come in two forms, Exclusive Listing Agreements, and Non-Exclusive Listing Agreements. In many ways this is similar to real estate sales. The Exclusive Listing Agreement is the most common agreement I’ve come across when dealing with dental practice brokers and it’s no secret why. While each broker’s agreement will vary slightly, an Exclusive Listing Agreement entitles the broker to his/her commission so long as the practice is sold while the agreement is in force. Many Exclusive Listing Agreements provide that the broker will receive a commission even after the term of the agreement has expired if the buyer was introduced to the seller through the broker. Most Exclusive Listing Agreements oblige the broker in only a very minimal way, thus making these agreements difficult to circumnavigate on traditional breach of contract grounds. Obviously, brokers like these agreements because they get paid even if someone else finds a buyer.

A personal note: while I see the appeal for the broker to have an Exclusive Listing Agreement, I liken these types of agreements to tenured teachers and professors, in that, "they" are getting paid regardless of how good a job "they" do. A dentist who is signing an agreement should always bring the agreement to an attorney (hopefully the attorney who will also represent the dentist in the sale) and carve out exceptions in the exclusive agreement for certain common situations, such as where the seller identifies the buyer through his own efforts, or where the sale price is below a certain threshold.

The other type of agreement in practice sales world is a Non-Exclusive Listing Agreement, which in reality is a Modified Exclusive Listing Agreement or a “Limited Listing Agreement.” These types of agreements make the brokers commission conditional i.e. the broker will have to do certain things to earn the commission. Commonly if the buyer is identified through the efforts of the seller alone the broker’s commission will be reduced or, depending on the terms of the agreement, not be owed at all. This type of agreement might also make a commission contingent upon the sale price meeting a certain level. Because of the risks involved most brokers will almost always prefer an Exclusive Listing Agreement.

As an independent contractor of Henry Schein Professional Practice Transitions, I am accommodating to the request of a Non-Exclusive Listing Agreement, however there must be some give and take. For example, because of the security provided by an Exclusive Listing Agreement, most practice brokers will “eat” the cost of marketing the practice when they type of agreement is in place. On the other hand, if a broker is willing to sign a Non-Exclusive Listing Agreement the broker will likely look for some money upfront for marketing costs, an expense which would be sacrificed if the seller were to enter into a deal without the broker (and still within the terms of the listing agreement). Because the broker may not receive a commission on a Limited or Non-Exclusive Listing Agreement, many brokers will request some type of accommodation in exchange for entering into these types of agreements.

Depending on the market and the individual practice both types of agreements have their utility. Of crucial importance to any dentist entering into a listing agreement is a clear understanding of the agreement's terms. An attorney’s review of a listing agreement should be short and very inexpensive…but could be extremely valuable to the seller. Also, most terms to the listing agreement are negotiable and an attorney should quickly be able to point out a few areas where the agreement could be modified and save seller a significant amount of money.

One final note. In my opinion, when selling a dental practice, a broker is sometimes necessary and always helpful; an attorney is always necessary (and if you listen to some brokers, only sometimes helpful). My point is this...if you are selling your dental practice, you are going to need an attorney, so best hire one early (hopefully on a flat fee) and use them as much as possible.

Information I post in this blog is not intended to be legal advice and should not be relied on. Nothing contained in this blog shall create an attorney client relationship. If you’re a dentist and you have legal questions you should contact licensed attorney in your state.

The Dental Lawyer | About the Author

At the time of the writing of this blog, I am a 27 year old attorney practicing law in New York. I am based in Albany, NY but because of the nature of my practice I take cases from across New York State. I graduated from the Albany Law School, cum laude, in 2010 with concentrations in Tax Law and Estate Planning. After and during law school I worked for a local law firm, but decided to leave to pursue my own endeavors.

I am also a Practice Transition Consultant with Henry Schein Professional Practice Transitions (PPT). Henry Schein is the United State’s largest supplier of equipment and supplies to medical, dental, and veterinary offices, and PPT is a subsidiary of Henry Schein focused on the needs of dentists and dental specialists who are considering buying or selling a dental practice. PPT also focuses on as other specialized needs of dentists like retirement and estate planning. As a Practice Transition Consultant I am a sort of independent contractor for PPT.

In addition, I am also President of Dental Transitions of Upstate New York, LLC. Initially I formed Dental Transitions of Upstate New York, LLC as a vehicle to hold my contract with PPT and to separate my practice brokering business from my legal practice. Soon, however, it became incumbent upon me that in addition to offering legal and practice brokering services to dentists, there is also a market for other non-legal services required by dentists and dental specialists. Dental Transitions of Upstate New York, LLC has become the entity through which I’ll offer some of these other services, such as Practice Management Consulting, Business Financial Consulting, Accounting Service, and Associate Placement Services.

In short my goal went from developing a legal practice that would be one stop shop for the needs dentist, to just developing a one stop shop for all the needs of dentists.

Dental Lawyer Blog | New Beginnings

The dental lawyer blog is meant to be chronicle of my development of two businesses: (1) a law practice devoted to the needs of dentists, and (2) a non-legal consulting firm which specializes in the business needs of dentists. Because of the rules pertaining to the practice of law, these businesses must be separate and distinct.

Aside from making public my struggles as a young idealistic attorney, this blog hopefully will also serve as an open source for dentists and lawyers seeking information relating to the dental field. I would caution, as I probably will on every posting, that the information I post in this blog is not intended to be legal advice and should not be relied on. Nothing contained in this blog shall create an attorney client relationship. If you’re a dentist and you have legal questions you should consult licensed attorney. If you’re a lawyer with dental questions, just remember that flossing really does make a difference (though in all seriousness I am very open to inquiries from colleagues including those about the nuances of the dental industry and specific legal problems the dentists and dental specialists run into).