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Emergency Medicine News:
doi: 10.1097/01.EEM.0000264646.07312.8a
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Defining Partnership: Limited Liability Groups

Katz, Barbara

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Ms. Katz is the president of the Katz Company, an emergency medicine consulting firm dedicated to providing expert physician recruitment services and training emergency medicine residents in effective job searching.

Part 3 in a Series

A limited liability group refers to any group in which one physician (or a minority of the physicians) in the group owns the bulk of the contract and all the other physicians work for him. In some cases, actual shares or portions of ownership may be available to physicians working in the group, but they will not equal those of the primary partners.

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With lesser ownership, however, comes lesser responsibility. Last month in the equal equity ownership portion of this series, I discussed owning the candy store and all the responsibility that implies. In the case of the limited liability group, physicians either own a small portion of the candy store or work to earn a portion of the candy store's profits with little or no repercussions from any of its potential losses. The amount of democracy and generosity with profits actually depends on the majority shareholders.

Many of these majority shareholders began the groups with their own money, often mortgaging their homes to get them off the ground. Obviously, they feel entitled to the lion's share of the profits because they took all the risks. But recruiting new physicians can be significantly more difficult for these owners if they are not willing to provide a vote along with a piece of the action. Incoming physicians may respect the sacrifices made by the founding partners, but they feel their contributions should be rewarded as well. These groups come in all sizes, from one- to two-site groups to larger regional groups. What any interviewing physician must know before signing on the dotted line is the exact formula employed for earning a limited liability partnership in this kind of group as well as any potential for future ownership.

There is a large presence of limited liability groups in the marketplace, but as it turns out, few were willing to be identified for this piece. In many cases, these groups were started by one or two physicians taking a substantial loan to get the group off the ground and that loan is still being paid off. A physician being brought into the group who is subsequently made an limited liability partner may well inherit a portion of the responsibility for that loan along with the partnership. Once again, it depends on how those primary partners define partnership. For a true limited liability partnership, a new physician must:

▪ Be given a percentage of the actual profits above and beyond any incentive, performance-based income, though it will not be an equal percentage.

▪ Have limited responsibility, equal to the percentage of profits provided, for any unexpected overhead expenses or malpractice settlements not covered by insurance.

▪ Be given a defined voice in governing the group.

▪ Have limited responsibility, equal to the percentage of profits provided, for working extra shifts as required.

▪ Be given full disclosure of group assets and liabilities (access to open books).

Rao Kilaru, MD, the president and principal partner of Prairie Emergency Services at Provena St. Joseph's Medical Center in Joliet, IL, describes his limited liability group as a subchapter S corporation that distributes all the money at the end of the year, creating less incentive for physicians to purchase partnership with a buy-in. He also pointed out that medical practices other than ED groups require buy-in and commitment even though there is no expectation of partnership, particularly in a well established practice.

Few groups guarantee invitation to partnership verbally or in an employment contract. Partnership, no matter what form it takes, is nearly always a potential based on the performance of the physician and the structure, stability, and financial condition of the group. The time frame for invitation to limited liability partnership depends on the group. I have seen everything from two years to seven years. Some groups allow new physicians to earn partnership through sweat equity, which entails working for a period of time at a lower income with the monetary difference considered the buy-in.

Many physicians feel this method is no longer viable because of the risk of working for years at lower income levels and never actually being invited to partnership because the group could lose the contract, or because family issues could necessitate relocation. In short, it is a leap of faith that is becoming less and less practical. An actual buy-in once limited liability partnership is actually offered makes more sense to most physicians. Buy-ins are usually based on the accounts receivable of the group and the percentage of ownership being offered. The liabilities assumed by a new partner also should not exceed the percentage of profits. Most groups allow a new physician partner to pay off the buy-in over time, often without interest, so that it doesn't seriously affect income levels.

Another important factor to be considered with a limited liability partnership is the opportunity to become a primary partner. In many cases, when primary partners reach retirement age, they sell their shares or partnership portions to other physicians in the group. There have been cases of partners passing away and leaving their primary ownership to spouses and/or children who attempt to sell them back to the group at nearly extortive levels. Partnership agreements need to include specific arrangements for the death, disability, and retirement of any partner, either principal or limited liability.

Limited liability partnership could be the answer for physicians who:

▪ Want some group involvement beyond clinical duties but not at the level required of an equal owner.

▪ Would like a voice in running the ED but not a direct position of authority.

▪ Want to reap a portion of the profits but are happy with a smaller piece.

▪ Are willing to shoulder a small level of responsibility and liability but not the lion's share.

As usual, the most important factor for any job seeker who is interviewing with a group potentially offering a limited liability partnership is full disclosure. Read the small print and make certain you understand all the details. If, on the other hand, you are more interested in reaping some rewards from your hard work but don't want the responsibility of group administration or governance, perhaps a non-equity partnership is the thing for you. I'll discuss that next month.

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Physician Requirements for a Limited Liability Partnership

▪ Be given a percentage, though not an equal one, of the profits over performance-based income.

▪ Have limited responsibility equal to the profit percentage for unexpected overhead expenses or uncovered malpractice settlements.

▪ Be given a defined voice in governing the group.

▪ Have limited responsibility equal to the profit percentage for working extra shifts.

▪ Be given full disclosure of group assets and liabilities.

© 2007 Lippincott Williams & Wilkins, Inc.

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