Legal structures for creating a practice federation

Solicitor Justin Cumberlege explains the options for practices wanting to federate.

Creating a federation is a partnership of organisations (Picture: iStock)
Creating a federation is a partnership of organisations (Picture: iStock)

Legal structures are there to serve, not to restrict, and so they are not a starting a point when you are considering the creation of a federation.

Throughout the process keep asking yourself: Why are we creating a federation? The answer will shape and refine your vision as to what you expect to achieve in the long term and your mission will identify the issues the federation will address.  

Unless these are well thought out, have long-term goals, as well as more immediate ones, the federation will struggle after a short time unless it undergoes a big change.

If you cannot agree the vision, mission and goals, you are trying to form a federation with the wrong people.  

The importance of culture

Culture is so much part of success, and where there is a divergence of culture within an organisation, it becomes dysfunctional and can fail. It is not hard to see the parallels with a partnership of individuals.  

Creating a federation is a partnership of organisations, each of which has its own culture – the way it does things. The federation will, as it develops, create its own culture, but it will be formed out of the consensus of the different practices coming together.  So your neighbouring practices will not necessarily be the right people with whom to form the federation.

Legal considerations

Thinking about the legal structure often gives good guidance as to what you want to achieve. For example will you be a for-profit or a not-for-profit organisation? If it is to be a not-for-profit organisation what does that mean? 

I challenge any organisation to end the year having spent exactly what it earned, and always having cash in the bank when it is needed. So to succeed you have to work on the basis that you will produce a surplus, and then you need to decide where that surplus is going to go. 

Can you forever re-invest in the organisation, or do you need to decide that it is paid out at some point. If so, to whom? The answer to those questions will go a long way to dictating your culture. 

Profit has become an emotive word, but we would not survive if we cannot make money to pay for our own needs, so if you are going to be committing your own time to building up a successful federation you may want to consider how you are rewarded and whether some of that reward should be yours. 

If so, you will need to have a legal structure that allows the paying out of surpluses.

Organisational structures

The journey you want to think through as the idea of a federation takes shape, in organisational structure terms, is:

Loose association: Getting together with like-minded people to share issues and discuss possible solutions. There is no obligation, and therefore no commitment, which might mean that the association does not last, but the association helps to overcome particular circumstances.

Contractual commitment: This is when the participants agree to sign a contract that they will do certain things for the benefit of all the participants. For example the federation wins a contract to provide a diabetes service and employs a diabetes nurse. That person has to be employed by one practice with a contract from all the participants to contribute to the costs. This structure can become clumsy as the organisation grows.

Incorporate: You decide to form a separate legal entity, such as a company (which may be a social enterprise company) of which all the members are participants. That company is able to enter into contracts, employ people, and acquire assets (such as buildings) all in its own right.

Merger: All the practices decide to come together as one entity, either as a large partnership or as a newly created company. This is a big step to take, and going back is very difficult and expensive if it does not work. However, potentially, it is the most powerful option.

Forming a company

If you decide to form a company you will need to agree who the members will be. These are the people who will own the company (the shareholders if there is a share capital).Who will the directors be? These are the people who will run the company and take the day-to-day decisions.

Membership will determine votes and control and how profits are distributed or re-invested, and who will pay for losses (which will be limited in the case of a company). 

What is decided on membership and voting rights will have a big impact. Will it be by patient list size, by number of partners or clinicians, or does each practice gets one vote?

Similarly how will you decide on directors? Will they all be selected from the members of the company, or will some come from outside, like a paid chief executive?

There is a lot to think about and discuss with your proposed participants, but as you work through the options and their advantages and drawbacks, the type of organisation you want to be will emerge.

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