Legal considerations for practice ownership: Part 1

Unfortunately, a crash course on what you should know when buying your practice as a new dentist is not on the syllabus for most dental schools. Dentists graduate with a vast knowledge of the mechanics of the human mouth, but find that when it comes down to taking that first step into owning a practice they have very little on which to base their life-changing choices.

Joseph D. Jordan, JD. Image courtesy of Jordan Law Group.

A successful practice starts with a successful foundation that involves brokers, other dentists, lawyers, certified public accountants (CPA), banks, insurance agents, dental supply reps, and many other partners.

How are you to know where to start without reinventing the wheel? Past experience is a great teacher, but with no past experience, the new buyer is reliant on their advisors for help. Although the following is by no means an exhaustive list of the "dos" and "don'ts" in a practice purchase, it will at least give first-time practice owners a guide to the legal considerations in a practice purchase.

Let's assume that you have located a practice you are interested in and are starting the purchase process. Where do you go from there?

Practice due diligence

Due diligence is the act of reviewing and verifying the practice information. It should be an interactive process between you and your advisors.

Do: Request a list from your advisors of all the information that you will need to make an informed decision about the practice. You will be required to sign a confidentiality agreement, so expect to see one.

Don't: Rely on the seller or the seller's advisors' information packet solely to make a decision.

Do: Request a walk-through and a chart audit. It is a great time to get into the practice and see how the seller does dentistry.

Don't: Request to do a "working interview." Because of the confidentiality of a practice sale, meeting the staff and patients before purchasing the practice is a risky proposition.

Business entity formation

It is generally advisable to structure a professional entity (incorporation or limited liability company [LLC]) through which the existing practice will be purchased. As a new buyer, you should rely on your CPA and attorney for this step.

Do: Contact your state board. Some state boards require approval of an entity name and also the filing of additional documents before and after formation. Failing to do so may jeopardize the entity's legal status.

Don't: Use an online service and attempt to do it yourself. Although tempting because of the (usually) low initial cost, using online services can fail to properly notify you of specific requirements when forming a professional entity in your state. Some states require a licensed attorney to sign off on the filing.

Do: Contact your CPA to understand the entity structure that is right for you. Each state offers a variation on professional entities, each with their own tax ramifications. Your CPA will suggest a preferred structure and explain the tax benefits with each.

Don't: Buy into an existing entity. If acquiring 100% of an existing practice, avoid buying stock in the seller's existing entity. Structuring a transition as an asset sale and forming your own entity are advantageous from a tax standpoint, and you will avoid assuming the seller's liabilities.

The conclusion of this series on November 11 will cover contract negotiations, closing on the practice, and running with ownership.

Joseph D. Jordan, JD, has been a dental exclusive attorney for 11 years and is the owner and founder of Jordan Law Group. He offers services to the dental industry in the areas of dental practice acquisitions, associateship planning and placement, and lease review and negotiations.

Disclaimer: Nothing contained in this column is intended as legal advice. There are variations in laws among the states. This column scratches the surface on many legal issues that could call for a chapter unto themselves.

The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.