Professional Limited Liability companies are becoming increasingly popular as a corporate structure for dental practices due to their tax advantages and liability protection. Do you know the benefits of using the underlying Operating Agreement of the PLLC to help structure and organize the ownership and management of a dental practice?

Particularly for practices with more than one owner, the PLLC offers greater flexibility in practice operations and profit distribution. Unlike the S Corporation (also known as a Professional Corporation or PC, which is commonly used for dental practices), where profits are distributed according to the shares owned, an Operating Agreement of a PLLC allows for the distribution of earnings according to any percentage the owners decide is equitable for their participation in the practice.

For instance, if the owners decide that the management of the practice by one partner should result in a fairer distribution of profits to that partner than to the non-managing partner, the Operating Agreement can allocate a percentage of the profits’ distribution differently from the actual monetary capital contributed to the practice.

Defining the practice’s management duties in the Operating Agreement is particularly important for maintaining efficiency and preventing discord among the owners when allocating roles among partners. Suppose the particular specialties of one of the partners are handling the accounting and monetary aspects of the practice, and the other partner is more skilled at the hiring, firing, and management of employees. In that case, those duties can be explicitly defined in the Operating Agreement to improve the practice’s operations.

The division of decision-making responsibilities, duties, and powers among the partners can also be defined in the Operating Agreement. The partners can decide who makes the minor day-to-day decisions of the practice and whether each partner has an equal say in making those decisions. Areas such as marketing, ordering supplies, and entering minor contracts, as well as other day-to-day decision-making, should be allocated based on each party’s skills and preferences. Alternatively, they can decide that either partner can make those decisions without input from the other.

It is essential that the partners define in the Operating Agreement who has the power to make significant decisions involving the practice. Major marketing decisions, decisions on hiring new employees or associates to expand the business, looking for new locations for the business, borrowing money, and many other aspects of operating the practice might be required to be made by the owner with the most financial contribution to the practice, or perhaps by the assigned manager of the practice even if he or she has less of a financial stake in the practice.

Two issues that frequently arise with a PLLC when a new partner joins an existing practice are the allocation of accounts receivable based on the patient to whom
the service was provided and how new patients are distributed to generate new goodwill and patients for the new partner.

These issues must be addressed in the Operating Agreement to resolve past accounts and promote future growth, benefiting both partners.

The “limited liability” aspect of a PLLC is designed to prevent any liability for actions against the PLLC to attach beyond the financial contribution of the owners. Also, any personal malpractice in the practice can only be attributable to the individual responsible and not to the other members.  This must be made clear in the Operating Agreement.

Operating Agreements should be comprehensive documents to address all these issues and must necessarily be written by attorneys familiar with both drafting these Agreements and the actual logistics of running a dental practice. But the Operating Agreement is one of the reasons the entity has popularity among multiple parties.

Brian Hatch
Hatch Legal Group
8 North Main Street, Suite 403
Attleboro, MA 02703
HatchLegalGroup.com
brianhatch@hatchlawoffices.com
508-222-6400