Should a Partner Receive a Management Fee?

Based on my 40+ years advising dentists, the answer to this question is critical to the financial health of a dental practice.
In the case of an associate dentist employee who acquires an interest in a practice, it is especially important in the short term to determine a course of action regarding a management fee.

Quite often a new dentist partner does not have management experience. It is not unusual for dentists engaged in clinical, patient care, and practice marketing tasks to not know as much or learn about the financial part of running a practice. A new partner in charge of the business part of the practice may assume that such knowledge is not necessary.

In this writer’s experience, the new partner will probably wait for an invitation to take part in the management aspects of the practice. If the current managing partner has accepted the new partner as part of his or her exit strategy, this hesitation to contribute to management is a bad idea. As soon as a new partner becomes involved with the financial health of the dental practice, including the administrative side, that partner should be able to assume some of the responsibilities of management, lessening the need for the established partner’s input.

If that is not the case, and the managing partner must provide tutorials and guidance about running the business side of the practice, a charge should be established to compensate the managing partner.

Qualifying Activities
A management fee does not pertain to any clerical services that the management partner assumes, which can be performed by less expensive personnel or professional advisors. Bookkeeping services, such as learning how to utilize QuickBooks and payroll administration with a payroll service, are examples of areas where a partner would not be needed. A partner would be needed, however, for considerations regarding insurance coverage, marketing, financial decision-making, and the review of other employees.

Most operating or shareholder agreements have specific duties that are to be performed by each partner or by committee. If each role in the agreement is being adequately performed by various partners, there is no need for fees to partners. Each will be working on behalf of the partnership in an advisory role. My advice to the new and managing partner is that it is never too soon to begin the transfer, with mentoring, of responsibilities. All partners should be involved in leadership for a practice to enjoy financial rewards. No one partner should take all the responsibility.

Payment for Services Performed
While it may be more costly to hire professionals such as dental CPAs and office personnel for management, a partner should be involved so that he or she understands what is occurring. It takes time to learn what these professionals do, but after an internship, the partner can assume and perform some services undertaken by outsiders. The partner should be compensated for time and effort taken for these chores if not shared. Relationships with lenders, health insurance providers, attorneys, and others who assist in maintaining good cash flow, legal opinions, advice about practice management are vital to the partnership and should be facilitated by the partners.

How is the Payment to the Partner Calculated?
There are various formats for compensating the partner involved with management. If necessary, a flat fee between $1,000 and $2,500 can be paid per month, depending on the time expended, responsibilities assumed, and the gross revenue of the practice. Other forms of compensation include percentages of profit or gross revenue. The type of payment can be reviewed with the dental CPA for an objective opinion.

An ideal situation is a sharing of responsibilities by all partners with no fees paid. It may take time, but part of a good arrangement is when all the partners are involved with the clinical and administrative contributions to the practice. Look to the operating agreement or shareholder agreement for guidance. A competent dental CPA should have ensured that such an agreement enumerated the management fee and defined division of administrative services.

About the Author
Bruce Bryen is a certified public accountant with more than 40 years of experience. He is the principal in the firm of RKG Tax and Business Services, LLC, located in Fort Washington, Pennsylvania. Mr. Bryen specializes in retirement planning design, income and estate tax planning, determination of the proper organizational business structure, asset protection, and structuring loan packages for presentation to financial institutions. For more information, please visit www.rkgcpa.com.