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How to… share practice profits fairly

Some basic concepts can help you avoid costly errors when working out who gets what, suggests Jenny Stone

Are you happy that your profit share is calculated correctly? Confusion can arise, especially in calculating new partners’ shares.

Prior allocations

There may be some income to be paid to individual partners before the balance of the profits is divided in profit-sharing ratios. A common example is seniority pay: normally each partner receives his or her individual entitlement. This will be shown as income in the accounts, then deducted from the overall profit and allocated to the partners according to their entitlement.

Some expenses may be treated as personal. For example, if a partner takes maternity leave the partnership may fund part of the cost of locum cover while the partner pays the rest. So the amount not funded by the partnership is allocated to the partner concerned.

Fair shares

After the prior allocations have been calculated, the balance of profits is shared out. Usually the profit-sharing ratios are based on the number of sessions each partner works per week. Sessions spent away from the practice on outside work will also count if the earnings from this work are pooled. The partnership deed should state how the profit shares are calculated. Ratios could vary if partners change the number of sessions they work. Ensure any changes are recorded and taken into account.

Premises costs

If the partners own the premises, the practice will receive income to cover borrowing costs or notional rent reimbursement. If only some  partners own the surgery, prior allocations of the reimbursement income should be paid to the property owners, pro rata to each one’s premises share, before dividing the remainder of the profits.

Mortgage interest should be similarly shared according to the property-owning ratios, unless the property-owning partners have separate mortgages or differing repayment terms. If different repayment methods and periods apply to each partner’s share of a single surgery mortgage, this must be taken into account.

New partners

Sometimes practices miscalculate the profit share of a new partner.  For example, in a four full-time partner practice, profits at parity are shared equally (four 25 per cent shares) but in the new partner’s first six months, their portion may be 90 per cent of a parity share. Assuming the new partner’s share is 22.5 per cent is incorrect. The right way to calculate it is to assume a parity partner receives 100 parts of the profit and the 90 per cent partner receives 90 parts. Total profit consists of 390 parts: 100 for each parity partner plus the new partner’s 90. Parity partners receive 100/390, (25.64 per cent) and the new partner receives 90/390,  23.08 per cent.

Jenny Stone is a partner at north London medical specialist chartered accountants Ramsay Brown & Partners, www.ramsaybrown.co.uk

Calculating a new partner’s share

At a partnership of four full-time GPs, three partners receive parity profit shares. The fourth, a new partner Dr Yellow, is allocated 90 per cent of a parity share for the first six months of the year and a full parity share for the second six months. Dr Green and Dr Blue own the surgery through a joint mortgage.

Allocation of profit for year ended 31 March 2006
  Dr GreenDr BlueDr Red Dr Yellow Total 
Prior Allocation ££ £ £ £ 
Seniority  13,238 1,552256 15,046
Notional rent  11,992 11,992 - -23,984
Mortgage interest (8,991) (8,991) - -(17,982) 
Total prior allocations  16,239 4,553 56,038 50,44321,048

Balance
1 April 2005 to 30 Sept 2005
25.64:25.64:25.64:23.08 

 56,038 56,038 54,341 54,341218,557
1st Oct 2005 to 31st March 2006
Shared equally
25:25:25:25 
 54,341 54,341 110,635 104,784  217,363
Final profit  126,618 114,932  456,968 
Figures in brackets are minus amounts

 

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