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When practice business entities go wild
Keep business paperwork on a short leash, or you may find your LLC or corporation is out of your control


DVM360 MAGAZINE


Neglecting a corporation

Here's our scenario for corporate troubles because of paperwork procrastination:

Multidoctor Veterinary Hospital PC (that's professional corporation) was a veterinary business set up by a pair of boarded internists shortly after they completed their residencies. Their lawyer filed the PC paperwork, and each doctor received a stock certificate for 25 shares.

Over the years, every time a new doctor came into the practice, the PC would issue him or her 10 shares from the supply of blank stock certificates. Eventually, there were 10 shareholders.

Then the newer doctors decided they wanted to make some major decisions about pension plans and purchasing some expensive equipment. They also wanted to consider cutting back compensation for the two practice founders (whom they believed had recently been "slacking.")

The founding two doctors would have none of that! One was "president" and the other was "vice president" of the PC. They said they simply wouldn't allow it.

Too bad nobody ever completed the corporate bylaws or any shareholder agreement indicating how corporate decisions would be made. No paperwork existed telling how PC officers would actually be elected or how long their terms would last.

In fact, legally, Multidoctor PC had no president and no vice president, nor did they have a secretary or treasurer for that matter. The practice just had two aging veterinarians who believed they had the authority to decide stuff. When the founding shareholders called their respective attorneys, each was asked to fax over a copy of the corporate bylaws. There were none—so a meeting of all shareholders was arranged.

As one might imagine, decisions ended up being made that the original two owners did not embrace. When the younger vets pooled their total of 80 shares, much of what the founders wanted to see become policy didn't. They were outvoted on many of the issues over which they thought they had control due to their imaginary "officer" status.

Ignoring a general partnership

General partnerships are generally such a poor way to set up a veterinary practice that I am only going to address one area of their maintenance. In a partnership arrangement, it is critical to remember that a person's life changes over time and each partner's intentions may change as well.

While the liability traps associated with general partnership cannot be avoided regardless of how carefully the partnership paperwork is maintained, another huge set of problems can be sidestepped with good planning and appropriate documentation. These are the issues and disagreements associated with each partner's exit strategy.

Even in the most functional and amicable partnerships, there comes a time when one or more of the partners wants—or needs—to cash out and depart the partnership either to work part time or to move onto retirement or other pursuits. If the partnership agreement that was in force at the outset of the partnership has never been revisited, this can present a fertile area for disagreement between the departing partner and the remaining partners.

For example, consider these questions: To whom may the departing partner sell his interest in the practice? Does he owe the other partners a right of first refusal to purchase that interest? If so, what price would be appropriate?

If the partner who is "easing back" from his day-to-day role in the practice wants to continue to be an owner, is that permitted? Can he continue to have a role in decisions about profit distribution? Will he still have a say in hiring, firing and employee compensation?

Do you want any of that to happen to you? It's natural to duck paperwork, but don't neglect the crucial documents that represent your standing in your veterinary practice.

Dr. Allen is president of the Associates in Veterinary Law P.C., which provides legal and consulting services to veterinarians. Call (607) 754-1510 or email
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Source: DVM360 MAGAZINE,
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