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All you need to know about joining a partnership

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You have been offered a partnership with a practice and have been given a copy of their latest accounts, but you don't know what you should be looking at to get an idea of how much you will earn or whether you are required to buy in to the assets of the practice.

How much will I earn?

As a partner you will be entitled to a share of the practices profit, which is often on a ratio basis. You will need to ask the practice whether there will be a rising period to parity. This is the length of time it takes for you to reach the same profit share as the equivalent partner. Although this is becoming less common, 18 months would be acceptable.

To calculate an idea of how much your likely earnings will be you need to find the profit and loss account, this shows the practice income and expenses for a period of time (usually one year). Divide the profit for the year by the number of equivalent full time partners. If the practice owns the surgery then you will need to adjust the profit to deduct the cost rent or notional rent income and add to the profit the mortgage interest.

Not all practice income is shared in the profit sharing ratios, some income is kept personally and prior allocated to the individual partner concerned e.g. PGEA, seniority, income earned outside the practice. The accounts should include a schedule of how the profit has been allocated, from this you will be able to see what income is kept personally. If it is not clear from the accounts ask the practice.

How solvent is the practice?

The balance sheet is a snapshot of the practices assets and liabilities at one point in time. The net assets of the practice, which is the fixed assets plus the current assets less the current liabilities, should be positive. Remove the fixed asset from this, which will give you the working capital of the practice and again this figure should be positive.

Will I need to buy in?

Buying in relates to the contribution to the assets of the practice. So you will certainly have to buy into the fixed assets and working capital of the practice. If the practice owns the surgery then at a later date you may also have the opportunity to buy into the premises.

To get an idea of how much you may need to pay to buy in for the assets and working capital, look at the partner's current accounts on the balance sheet. This shows how much the partners have left in the practice and ideally this should be in proportion to their profit shares.

You can either buy in by raising finance and putting the money into the practice or by underdrawing. If the preferred route is to underdraw you will need to ask the practice what period is acceptable. Underdrawing is where you will take less drawings from the practice than you are entitled to so that you can build up your current account.

Buying into the premises should be dealt with separately. It's possible that the property will be owned in different proportions to the profit sharing ratios. You will be entitled to a share of the cost rent or notional rent income after deduction of the mortgage interest.

What happens about tax?

As a partner in a practice your status will become self employed. If you are employed then you will need to register as self employed with the Inland Revenue within three months of commencing in partnership.

You are taxed on your share of profits from the practice as opposed to your actual drawings taken from the practice.

You will need to ask the practice whether the partners pay their tax personally or through the practice. If the practice pays the tax then your drawings will be adjusted to deduct an amount for tax, which will be saved to pay your tax liabilities.

If you will be responsible for paying your own tax then the practice will pay you your gross drawings. It is advisable to set up a separate savings account and transfer a regular monthly amount of about 30% of your drawings.

What happens about superannuation

Your superannuation contributions are paid based on the income of the practice. The PCT will split the contributions in the profit sharing ratios and these are deducted before the practice receives its income. You will need to ensure that the practice has informed the PCT of the date you became a partner and your profit sharing ratio.

Partnership agreement

The practice should have a partnership agreement in place when you start as a partner. You should have the partnership agreement reviewed by a solicitor who specialises in the affairs of GP's.

You may also wish to ask an accountant who specialises in the medical profession to review the accounts for their opinion of the practice.

June 2003