Building a strong legal foundation for your veterinary practice isn’t just about paperwork—it’s about protecting your future and creating opportunities for growth. Let’s explore the key elements that make up a solid practice structure.
Understanding Entity Structure
Many veterinary practices begin as sole proprietorships, drawn by the simplicity of this business structure. However, this simplicity comes at a significant cost: personal liability. As a sole proprietor, your personal assets are exposed to practice debts, operational liabilities, and business obligations. This means your home, savings, and other personal assets could be at risk if your practice faces legal challenges.
Instead, consider structuring your practice as a corporation or limited liability company (LLC). These entities create a protective barrier between your personal and business assets. They also offer flexibility in bringing on partners and can provide valuable tax benefits, particularly regarding self-employment tax.
The Power of Organizational Documents
Whether you choose an LLC with its operating agreement or a corporation with its shareholders agreement, these documents serve as your practice’s roadmap. They should clearly outline how your practice will handle both day-to-day operations and major events.
Your organizational documents need to address capitalization—who owns what and in what proportions. Consider including both voting and non-voting equity interests, which can provide flexibility in bringing on new partners. Some practices also benefit from phantom equity arrangements, allowing key employees to share in the practice’s success without actual ownership.
Management and control provisions are equally crucial. These sections should detail who has authority over daily operations, including officer appointments and hiring decisions. They should also outline how the practice will handle major decisions, especially regarding potential sale opportunities.
Planning for Change
Transfer restrictions are a vital component of your organizational documents. These provisions outline when and how owners can exit the practice, including specific valuation methods and formulas for determining buyout prices. Well-crafted transfer restrictions protect both the departing owner and the practice itself.
When considering bringing on associate DVMs as partners, your organizational documents should provide a clear framework. This includes eligibility requirements, the structure of initial conversations, and how the transition to ownership will occur. A thoughtful approach to associate ownership can create stability and growth opportunities while providing a clear succession path.
Creating Clarity for the Future
The ultimate goal of your organizational documents is to prevent disputes and dissension by providing clarity. They should define clear exit rights, establish agreed-upon valuation methodologies, and set specific triggering events for various scenarios. Consider including provisions for employee purchase options and tag-along or drag-along rights, which can be valuable in future sale situations.
Remember, these foundations are best established early, but it’s never too late to strengthen your practice’s legal structure. Contact Rupp Pfalzgraf LLC to ensure your practice is built on solid ground.
