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Profit sharing clauses in partnership deeds

Fair profit-sharing clauses in partnership agreements are crucial for GP partners, says Lynne Abbess.

Unless there is a clear, written agreement to the contrary, the Partnership Act 1890 presumes that all partners will share profits equally and regardless of their individual contributions to earning them.

For this reason, specifying the basis of profit sharing in your partnership agreement is essential. However, this may not always be straightforward.

Life was simpler in the days when GP partners devoted the whole of their working lives to their partnership on a full-time basis.

While there might have been occasions when a partner worked fewer hours (for example, due to extended sick leave) generally the other partners provided cover without requiring a pro rata adjustment of the profits.

Be flexible

These days, many GPs have a 'portfolio' lifestyle. It is quite common for partners to keep sessions free for work outside the practice, and to not want to share the income from it.

But reaching agreement on apportioning the annual profits is more complex if this is decided using the 'eat what you kill' principle. It may cause problems because:

  • The extent of an individual partner's contribution may not be easy to calculate as it may extend beyond clinical sessions into management/administration time.
  • If partners are too rigid over 'eat what you kill' profit-sharing there is a risk this could be interpreted by HMRC or in a partnership dispute as not practising in partnership at all.

Set out basic rules

Where partners are willing to be flexible, the best approach is, at minimum, to set out in the partnership agreement the governing principles of retaining income from sources outside the practice.

However, it is essential to record in writing any variation to the profit share percentages. If this is not done in a revised partnership agreement, at the very least, the variation(s) should be recorded in the minutes of a partnership meeting which every partner initials. Hopefully this will stop disputes arising over partners' levels of commitment.

There are no rigid rules over the period to parity - the point when a partner gets an equal share of profits pro rata to their commitment. Three years used to be the accepted norm, but the length of the period to parity is nowadays more fluid and may be less. It is not uncommon for a new partner in some areas (where prospective partners are few on the ground) to be offered an equal profit share from day one.

Whatever the period you agree, it should be clearly recorded in the partnership agreement.

  • Lynne Abbess heads the Professional Services Group at healthcare solicitors Hempsons, www.hempsons.co.uk

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