Leaving a medical group partnership can have significant legal and financial consequences, making it essential to understand your partnership and employment agreements before giving notice. Physicians must be aware of the economic impact and restrictions on future practice before they leave the partnership.
The first step in leaving a medical group partnership is to review your employment agreement
Although physicians may consider themselves as an “owner” rather than an “employee”, in fact physicians in a medical group partnership are generally both. While a limited liability company (“LLC”) or its professional equivalent, a professional limited liability company (“PLLC”) may have employment provisions in the operating agreement, most practices organized as a corporation have physician employment agreements for the owners.
Physician employment agreements with a private practice are likely to contain several provisions of importance to the physician leaving:
- A covenant not to compete that restricts where the physician may practice after leaving the partnership;
- Compensation after termination (e.g., continuing payment of your accounts receivable);
- Notice requirements; and
- Tail coverage requirements
The next step in leaving a medical group partnership is to review the shareholders agreement, operating agreement, etc.
As an owner, you should have the right to be paid for your ownership interest when you leave. The document providing your rights in this regard will vary depending on the type of medical group partnership: a corporation will have a shareholder’s agreement, while an LLC or PLLC will generally have an operating agreement.
The agreement, however it is styled, should have either a fixed price or a formula for valuing your ownership interest. The agreement should also provide how this will be paid (e.g., in a lump sum, monthly payments over some period of time, etc.)
It is also common for the operating agreement or shareholder’s agreement to contain a covenant not to compete/restrictive covenant. Many times this restrictive covenant is more extensive than that contained in the employment agreement. The reason for this is simple: many state laws prohibiting or limiting restrictive covenants do not apply to sales of a medical group partnership interest.
What are the tax consequences of leaving a medical group partnership?
The tax consequences of leaving a medical group practice are likely to be highly dependent upon your individual tax circumstances, so you should consult your tax advisor before making any firm commitments.
However, generally, you will receive capital gains tax treatment (i.e., more favorable tax rates than ordinary income) on the difference between what you paid for the ownership interest and what the partnership pays you for the interest. Generally, to the extent you continue to receive your accounts receivable after termination, these payments will be treated as ordinary income (i.e., just like your salary while employed).
The bottom line on leaving a medical group partnership
Leaving a medical group partnership where you have been an owner is rarely an easy decision. This article focuses on the legal and tax aspects, but the emotional issues may be just as important.
If you are retiring, I would highly recommend Dike Drummond MD’s excellent book on physician retirement: “Physicians Unchained – Retirement Mastery for Doctors.” Another work cited in Dr. Drummond’s book which I found helpful is “Transitions – Making Sense of Life’s Changes” by William Bridges, Ph.D.
If you are moving on and taking another professional position, of course, you should have your new agreement reviewed by a law firm focusing on physician employment agreements. Might I suggest Physician Agreements Health Law?
If you’re considering a physician employment contract and want experienced legal guidance before signing, you can start your review here. We can also provide a free consultation to talk about how we can help.
