NEWS ON HAVING THE RIGHT LEGAL ENTITY FOR YOUR PRACTICE M. McHarg, B.App.Sc., M.B.A.* The complexities of modern veterinary practice are a far cry from the comparative peace of smaller professional practices of the pre World War I1 era. Current trends in the formation of professional legal entities reflect the evolving and changing social environment of the post World War I1 period. In short, the mission of many professional oragnisations has changed. Members of the veterinary profession have broadened their horizons to become concerned with community health and well-being in addition to their prime function of treating ill or potentially ill animals. The ever evolving scope and focus of professional effort is reflected in changes in the organisations providing the service. The most significant change is that of scale. Many larger organisations have come into existence. Grouping arrangements such as partnerships and associations are now quite common. There are even a few practices which are organised and managed more along the lines of a company than a partnership or association. Yet many of these decisions are taken without an appreciation of the alternate solutions and the implications of a particular choice. What legal entity should your practice have? Should it he: * sole trader * partnership * association company? Choosing the right legal entity for your practice is a key policy decision which is largely determined by the function of the practice. For effective performance and career satisfaction, it is vitally important that you make the correct decision. This requires a clear understanding of what you are capable of and what you are trying to achieve. Structure Follows Strategy Your practice exists for a specific purpose. YOUwill not be able t o decide which legal entity the practice should take until this purpose or mission has been identified. Exi3ting Practice
For an existing practice, you need to analyse the history of the practice and the manner in which it has developed. You need to create a fact base by taking stock of how the practice operates a t present and the external influences which affect it. In this way, you can provide realistic answers to the questions: ‘What are we doing at present?’ ‘Why are we doing it?’ ‘What benefit does it confer to our clients and the community?’ ‘What results does it create for the practice?’ ‘Where are we heading?’ N e w Practice For a new organisation, the key steps are as follows: Asse.ss coniniunity needs and priorities - You need Mr M. McHarg is director, consulting services, in Practice Management Consultants Pty Ltd, a Victorian based firm of management consultants specialising in solving the business problems of professional groups. He is also managing director of the Practice Management Advisory Service, an AVA service to members.
to analyse the existing situation within the practice’s catchment area concerning * the level of demand for veterinary services, whether caring, protective, or educational and promotional, and then * the level of service resources available * the level of service utilisation the .source and utilisation of funds for veterinary services. Out of this analysis, you can identify the prospects for growth within the region. Determine the broad scope of the veterinary practice -Your analysis should enable you t o determine: * client origin and patient type * the mix of services which could be provided by the new practice the referral base (if you are considering a regional veterinary hospital) * the competitive situations within the private sector and between private and public sectors This data enables you to plan the broad scope of the services to be offered, now and in the future. Establish veterinary, technical and administrative resortrce requirements - From the beginning, the veterinary practice should be designed and developed for those who will use it - clients, patients, veterinarians, allied veterinary workers and administrative staff. Having determined the scope of the practice, you can then determine the people required to staff it. Develop a conceptual model of functional relutionships - By drawing together information from the first three steps, you can develop a conceptual model of * systems of patient management, mix of services * space needs, now and in the future financial realities of service goals * referral relationships and overall utilisation rate (for a regional hospital) the institutional relationships between public and private sectors. The first thing to remember is that the structure of any professional organisation, with the exception of the solo practitioner, founded as it is on the mission and purpose of the organisers, does not just evolve in an ad hoc way. In a random situation, the only phenomena which evolve are disorder in your way of doing business, friction amongst the involved parties and declining standards of service and poor performance. Take the most common case where a change in the size of the practice can lead to unexpected changes in its effectiveness. While a practitioner continues to practice b y himself, he can remain highly effective because: The client/patient combination coming into his office usually brings all the knowledge of the animal that is needed by the veterinarian to define the problem. * During the time he is with the patient, the practitioner can, as a rule, devote himself to the patient. He can keep interruptions to a minimum. The practitioner has a clearly defined contribution to make. What is important, and what is not, is determined by the illness or injury suffered by the animal brought in by the client. The patient’s problem establishes the practitioner’s priorities. The goal, the objective, is given. It is to restore the animal to health or at least to make it more comfortable. Airstraliun Veferinarv Journal, Vol. 53, January, 1977
As a result, solo practitioners have never had to concentrate on their capacity to organise themselves and their work - but few of them have trouble being effective. They are effective because they have control of the information sources needed, they basically have control over the utilisation of their time and they need fulfil only a simple set of priorities so that their professional actions meet their objectives. Let us say that the same practitioner finds that his work load has grown so much that he cannot meet his obligations t o the community without pressures of work endangering his health and family life. While he wants to finance the expansion of the practice facilities to meet community demand, he cannot raise all of the investment capital by himself. This is a common problem and one which many of you will have experienced in vour own orofessional careers. so our veterinarian decides to solve all his immediate problems by taking on ‘an assistant with a view t o partnership.’ He advertises for an assistant. expands the facilities in part, and together he and his assistant with a view. set to work. And immediately they run into unexpected problems. They had not realixd that, by forming a de fact0 partnership, they were forming an organisation, which brings problems of its own. Our veterinarian finds that even although his legal in that he is still the sole status remains owner of the practice, he is now a member of a group and he has to learn to be effective in the group situation. The major barriers to his being effective are as follows:
And you can build that strategy only after an analysis
of ‘the answers to the following questions: Where are we now?’ ‘What have we got going for us?’ ’What d o we want the practice to be?’ What is an appropriate legal entity for the group can only be determined in the light of this strategy. Many of the difficulties experienced by our veterinary surgeon expanding his practice could have been avoided if he had chosen to act as if it were a partnership before the legal partnership entity was actually created. Size Follows Strategy As the example shows. there is one fundamental question which must be answered correctly as part of the planning process. The question that you need to
the actual or proposed practice the right size in terms of its mission?’
Many veterinarians feel that the analysis previously described is far too formal to apply to their own particular practice. And, for the practitioner who Wants to remain a ‘one man band’, this is correct. But a great many veterinarians either work in a group practice or W N ~like ~ to be a member Of a group. For these practitioners, the answer to the question about size is
A ‘wrong size’ Practice is generally a poor performer economicaljY and is often unmanageable. There may be elements of ‘being the wrong size’ in your practice. $ ~ $ i ~ w & ~ h ~ ~ ? ~ ~ ~Changes a ~ in ~ size are not continuous. TO change from one size to another usually requires an evolutionary leap is heavily biased towards treating him as an employee and a genuine transformation in both entity and plan of rather than as a prospective partner. H~ confers with To take an example from the medical his colleaDe on technical matters of course, but the oreanisation. - a multispecialty group medical field in North America profit performance and financial health of the practice providing comprehensive primary and secondary are not disclosed and the assistant has no authority practice care services could not be achieved within the framework over staff or office procedures. of a partnership. Instead. the members of the practice Although the workload is being shared, it cannot be would need to consider forming some kind of combinashared equally because the assistant lacks experience tion between practice and an association. in certain types of work and certain procedures. nusWe will look aat corporate the differences between these entities our principal finds that he is unable to utilise his time shortly; it’s enough to say for now that this changeover as effectively as when he was on his own because not take place without (for the medical profession) clients still expect him to take care of their acould totally new approach to organisation. Why is this so? animals during periods when he is not rostered for The most accurate way in which you can judge the duty. Because our veterinarian is the leader of a group, now appropriate structure for your practice is to ask yourmore of his time belongs to others. More staff mean this the simplest that will do the job?’ more questions, more interruptions and more time coThe simpler the structure, the less that can go wrong. ordinating the work of other people- The easing Of What makes any plan of organisation good are the his professional workload to be more than which it does not create. On the other hand, counterbalanced by an increasing administrative load. problems Our practitioner9sdifficulties in making the transforma- if the Structure is too simple for the job YOU want to do, tion from solo practice to the group situation sours his ~ ~ h wi ~ l $ $ ~ $~ n ~ ~~ ~ n t ~o w ~ ~ , & the of the strategy of your practice before t ~ i , ~ h ~ e , ; you ~ ~fundamentals $ , ~ ~ ~ begin to consider the matter of its legal entity. his workload, the reality is that he seems to be missing out on all fronts. He is experiencing those symptoms of disorder, friction and poor performance referred to Srrutegic A1fer”uri”es previously. YOU might like to consider your strategic planning in terms of the following alternatives: But effectiveness in the group situation can be learned Expansion -Doing more of what you are doing now, readily, and most of the problems experienced by our veterinarian could have been prevented by a small i.e., expanding. By providing a more comprehensive amount of anticipative planning. Our veterinarian is service or greater coverage you could find more clients ineffective because now he is working as a member of within your traditional catchment area. An alternative a group, but this group has not been consciously struc- means of expanding is to open another practice in a tured. neighbouring community. When two or more veterinarians are working together Greater productivify und eflectiiwzess -Doing what -whether in a principal-employee relationship or in a you are doing now, only doing it better. In other words, partnership the structure or the practice should be you improve the management process within the practice developed around a consciously determined strategy. so that all members of it become more effective. Less
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Auaruliun Vererinorv Jorrrnal, Vol. 5 3 , January, 1977
effort is frustrated, work is more satisfying and the financial returns are higher. Contraction - Doing less of what you are doing now. You slough some activities in order to conserve scarce resources - usually professional personpower resources. These decisions can be made by looking at the various facets of your operation and asking yourself whether they are generating a return commensurate with the effort. Diversificarion - Doing something different, i.e. diversifying. Although this is your least likely alternative it should periodically be taken into account. The field of veterinary practice is diversifying into areas such as: * prevention and health education secondary care and hospital services * emergency serviccs retailing of veterinary pharmaceuticals and dietary animal foods * pasture management, herd management. To take two very simple examples: if your strategy is expansion, this may involve merger with or acquisition of another practice, as well as find;ng new clients within your existing catchment area. If shrinkage is the appropriate strategy, you might need to retrench from a branch operation and sell assets, or reduce the degree of coverage available frcni the practice.
a network of consulting practices. We believe that the sole trader form of practice is unsatisfactory for all but the smallest groups. Growth in size creates a larger demand for proper hospital services and facilities and a higher level of capital investment. In many of our urban communities, a veterinary hospital can only be developed away from the existing clinic. This restriction means an additional investment in land and buildings, and frequently it becomes necessary to share these investments. Jf the so’o practitioner retires, becomes incapacitated or dies, the organisation which he has created may cease operations and much of his investment can be dissipated. Most importantly perhaps, few competent professionals would be content to remain long in such a situation as employees tied to the practice by a master-servant relationship. In order to consolidate the professional expertise of the practice, probably the practitioner would need to establish some form of group practicepartnership, association or corporale practice.
Sole Traders A ‘sole trader’ is a self employed individual who conducts his own practice and is responsible t o no one but himself for the organisation, administration and financing of the practice. At first sight, it seems that a ‘sole trader’ is not an example of group practice at all. However, there are many solo practitioners who, when faced with a growing practice, will employ professional staff rather than alter the legal entity of the practice. In this way, the sole trader retains ownership of all property and is sole authority for determining policy and making all the major decisions. The organisation remains simple and the management completely centralised. The employerpractitioner might choose to grant an associate status to the employees, whereby they are paid a minimum salary, plus a percentage of the fees generated by them. Despite all this, the sole proprietor must eventually reach a point of deciding whether such a form of organisation is the right one for the size of the practice and the objectives that he wishes t o pursue. Some well known examples exist of sole proprietors who control
Partnerdrip Partnership is an association of persons for an object which is either directly or indirectly associated with the economic gain of its members. Each partner is an agent of the other partners and his acts will bind the other partners in dealing with third parties that are related to the conduct of the partnership business. All partners must be of one mind for a successful partnership. If mutual respect is lost, then the group will not survive in a form which can benefit either the principals or their clients. It is necessary to formalire a partnership agreement covering: The ritrnie of tlrc pnrinerslrip -There is no need to register as a business name any practice name consisting only of the proper names of the members of the practice. Howevcr, if you register a name for the whole practice, you need to register the names of the partners theniselves. Nurniul plure of busine.ss - This should be set out in the agreement. Capital ucrounts - Set out clearly the precise terms of payment of respective shares of the capital in the practice. Include such details, no matter how involved they might be, because this is an area of potential problems. Goodwill - Goodwill can be important in acquisition or merger of practices or in assessing payment for an interest in an existing partnership. Valuation methods differ and give rise to different answers. The agreement itself should set out the method of valuation decided on, as this will solve problems in any determination of the partnership. Ownership of ussets - Make sure that the agreement specifies clearly the ownership of the equipment, library and records. The question of ownership of real estate may also arise. For instance, the practice might be carried on from premises owned by one of the partners. In that case, he should give a lease of the premi..ces to the partnership and some provision pertaining t o this lease should be incorporated into the agreement. Division of income -Division of income is a simple matter when the partners are equal in every respect. Difficulties may arise in practices where there are junior partners, so make sure that all variations from equal sharing of income are stated quite clearly in the agreement. Note that the partnership as such does not pay income taxes although it is required to fill out an information file. All net income is taxed in the hands of the individual partners.
Austruliun Veterinary Journal, Vol. 5 3 , January, 1977
Forms of Legal Entity There is one decision facing your practice which tests your awareness of all the factors involved in strategy planning. That question is. ‘Which legal entity suits the practice best?’ Or, for many practitioners, the question is, ’Which legal entity and organisation should we change to so that we can perform better?’ There are four principal types of business organisation to which your practice might belong. They are sole traders, partnerships, associations and companies. In their various ways, these can all be examples of group practice. Organisation becomes critical, above all, wheil a small ‘cottage industry’ style practice grows into a group practice and a very simple form of business into a more complicated one. A handy definition of group practice is, ‘The application of veterinary services by a number of practitioners working in systematic association, with the joint use of equipment and technical personnel and with centralised administration and financial organisation.’
Provision for leisurr, leave or ubserice t/ir014gli illness This should be covered in the agreement so that no one has any doubt about what will happen in any particular situation. Tarniirmtiorr of partnership - Remember that on the death of a partner his share of the business will pass to his estate. The remaining partners will then need to negotiate wi.h the trusters of the estate in order to purcha5e the shsre of the deceased partner. Therefore make precise provisions in the partnership agreement to cover termination of the partnership, whether through retirement cr admission of partners. Some agreements provide that the partners will carry life insurance on each other’s life so that, in the event of death, payment can be made read‘ly to the deceased partner’s estate. Exlrtsiori clarr~r- An exclusion clause is one which imposes reasonab!e limitations of time and space on the right of a partn r to wcrk as a veterinarian outside the existing partnership. Settlement of partnership dispirtes - Make provisions so that disputes between partners can be settled hy arbitration rather than litigation. The agreement might merely follow the provisions of the Arbitration Act in your Stale, or you might appoint the State president of the AVA -or his nominee - as arbitrator. Appointment of p r o f e s h n a l consrrlicmts -The agreement should leave scope for consultation with advisers from time to time.
Sound management and legal advice are needed when drawing up an association agreement. It is important to avoid any inference being drawn that a partnership exists. It must be clear to any member of the association that he is not a partner of the other members. For instance, each practitioner would need his own indiv dual lctterhead and account forms. Ideally, the best way for an association to operate would be as an incorporated company with articles of association setting out in some detail the basis of the operation.
The A.ssocia:iori The association is a raridly growing form of group practice organisation in which the associates may delegate a smaller group of their members to operate an enterprix which they all own topether. Such an arrangement has the advantages of the more efficient policy making and management functions of a company structure and more democratic form of a partnership. Unlike a partnership, the association is not dissolved by the death or withdrawal of individual associates. Nor does the act of an associate bind all his fellows, since authority and responsibility may be centralised in the agreement governing the group. The most likely association pattern is an agreement to share expenses. The practitioners agree to share certain space, staff and equipment, but otherwise conduct separate practices. One of the greatest frustrations amongst small animal practitioners in the metropolitan areas is their lack of access to good standard hospital es which are properly staffed and maintained. An association would enable these practitioners to retain their individual consulting practices while investing in a centrally located regional hospital providing them with out of hours coverage and emergency care as well as the normal range of hospital services. An administrative centre attached to the hospital would also give each associate the opportunity to off load much routine clerical drudgery such as payroll, processing of accounts and keeping cash books up to date. For the practitioner who wants to work ‘smarter and not harder’, regional development of this type increases productivity and work satisfaction. reduces practice overheads, gives coverage at nights, weekends and holiday periods and provides a higher income from professional effort.
The lricorporated Company Because only individuals (practising alone or in partnership) can be registered as a ve,erinary surgeon, the corporate form of practice is not used in Australia. At piesent, the only effective use of companv style organisation is an arrangement by which the management service company services any or all of the following: veterinary consulting and hospital facilities; management zervices in the form of accounts processing, management of veterinary supplies, management accounting and the employment of staff; ancillary services, such as the boarding of animals. In such cases, the families of practitioners are often the directors and shareholders in the companies. There is. however, no convincing argument against allowing incorporation of a professional practice and it is to be hoped that this development will occur in the near future. A limited company involves: Limited liahiliry - A shareholder in a company limited by shares knows that the maximum amount of his liabi1i.y to that company is the unpaid portion of the nominal value of his shares. Perpctiiul succession - An incorporated company is a leqal entity distinct from its members and can exist in perpetuiiy unlike a partnership which changes with each change in membership. Limitation uf members - The number of members in a proprietary company must be at least 2 and cannot exceed SO. Borrowing power - A proprietary company is prohibited from inviting members of the public to subscribe 10 shares or debentures or to deposit money with the come any Property - All the assets owned by the company are the property of the company and not of its members. Transfer of shares - A proprietary company, by definition, restricts the right of members to transfer shares. Withdruwul of ccrpitul - Share capital may be withdrawn from the company only by special resolution and statutory approval. Liubility und professional negligence - The limited liability company, while i t does not make the individual veterinary practitioner any less liable for damage caused by his negligence. c!early differentiates between his professional obligations and his personal life. In this respect, the corporate practice is a better form of organisation for doing business than the partnership, because the liability of each member is limited to his shares.
Arrstrirliirn Vererirrary Journal, Vol. 53. January, 1977