In volume 58 and 59 of The Professional Advisory I wrote about non-dentist ownership of dental practices. The primary questions are: What can non-dentists purchase or own? Aside from actually working at a dental practice, how can non-dentists profit from a dental practice? This is Part 3 of the article and will continue to explore answers to these questions.
From a legal perspective the starting point is to understand what only a dentist or a dentistry professional corporation (PC) can own; and that is the professional dental goodwill of a dental practice. That goodwill includes custody and control of all patient records and files (including patient billing records and treatment plans), patient charts, x-rays and models, patient lists, and use of any dental practice names. A dentist or PC are the only ones who can own the goodwill.
The other fundamentals to understand are:
1. a dentist can not engage in any form of fee or income sharing except with other dentists at the practice and with dental hygienists who practice dental hygiene in and at the dentist’s practice;
2. a dentist can only practice dentistry with other dentists. A dentist can not work for non-dentists whether as an associate, employee, partner or otherwise when engaging in the practice of dentistry; and
3. only a dentist can prescribe dental radiographs and only a dentist can be a radiation protection officer. In volume 59, we explored the use of a technical services corporation. Volume 58 described how certain specified family members of a dentist can be non-voting shareholders of the dentist’s PC. Those family members are restricted to a dentist’s spouse, children and parents. Having such family members as non-voting shareholders of your PC is now a common and excellent structure for dentists.
Creating the proper share structure for your PC is a critical step and your tax and legal advisors will assist you in that process. In particular, careful thought needs to be given to the attributes of your family member’s non-voting shares:
• do the shares participate in the profits only (dividends) and/or in the PC’s residual value and growth (equity)
• what priority do the shares have against other classes of PC shares for dividends or distribution when winding up or selling the PC shares
• do the shares have a fixed value
• are there redemption or retraction rights
• how many different classes of non-voting shares should be issued
Generally speaking, for maximum flexibility each family member should have a different class of nonvoting shares.
If family members receive shares that are not redeemable by the PC, it is essential to have a shareholders agreement. Your dental practice is your livelihood. It is critical that you, the dentist, and not your family members have absolute control of the PC and practice at all times.
A properly draft shareholders agreement will ensure you have such control.
Non-voting shares have voting rights under the Business Corporations Act (Ontario) in certain cases. In some circumstances shareholders of each class are entitled to vote separately as a class, whether or not that class of shares carry the right to vote. If, for example, you need to reorganize your PC share structure but your rebellious family member will not agree, then this is serious problem. This can be dealt with in the shareholders agreement by family members giving a power of attorney to the dentist relating specifically to the PC shares.
Consider other events such as death of a family member or divorce or separation from your spouse. Those events are stressful enough. The shareholders agreement should specify what happens to the family member’s shares. For example, the shares might be redeemed by the PC or purchased by the dentist. The shareholders agreement should deal with how those shares are going to be valued and the terms of payment. It may be appropriate for your family members to obtain independent legal advice before signing a shareholders agreement.
The dentist must remain in control of the PC regardless of changing circumstances. A properly drafted shareholders agreement will ensure this. The ideal time to complete the shareholders agreement is at the beginning of the process when the non-voting shares are being issued to family members.
The rules permitting family members to own shares of your PC present significant tax planning opportunities and potentially substantial tax savings for you and your family. However, the laws are complex. Proceed carefully and with the benefit of professional advisors who are very familiar with such structures and who regularly advise dentists on such matters.