Two dentists who practice together as partners employ several associates at three satellite offices. They were considering offering one associate a partnership to incentivize and motivate her to manage and "build" one of the satellites. The Associate did not wish to outlay cash, therefore the three dentists were looking for another way to make it work.

A colleague told them about a "Sweat Equity" arrangement. In this buy-in arrangement, the Associate/New Partner contributes work and effort, instead of cash. Another factor that makes this type of agreement appealing is that it can be done on an as-needed basis, so that a larger buy-in can happen over time.

If the Associate/New Partner chooses to contribute Sweat Equity instead of cash, the Senior Dentists/Partners will give them, for example, an ownership interest of about 10%, either as membership units or shares, with the chance to receive more ownership interest over the next five years. This is a taxable event because the interest the Associate/New Partner receives has value. The Associate/New Partner will pay income tax on the "phantom income" they receive. Additionally, the IRS will treat as a capital gain the sale of the interest by the Senior Dentist/Partner.

The rights of the parties will be protected in a Sweat Equity Agreement, as ambiguous promises and "handshakes" are not enough. Consult with an attorney for writing and review of this Agreement early in the process. Transparency will set realistic expectations and encourage each side to honor their commitment. The Agreement should cover performance, how to measure success, and termination. The rest of the documents are similar to a cash buy-in.

Whether you are Senior Dentist or Associate, Consider:

• How you feel about entering into a legal Partnership with each person, and is a minority Partnership worth it? If you are the Senior Dentist, look at the Associate's leadership skills, expertise, vision and desire for a long term commitment.
• If you are the Associate, performing Due Diligence.
• If you are contributing Sweat Equity, be clear on what your contribution is worth and how it is worded in the Agreement, alongside your salary. Disputes will arise when the value of Sweat Equity is not clearly defined or measurable.
• Whether the practice is an LLC or a corporation, it will have a "Partnership Agreement"; the purpose is to describe how the company should be operated, outlining the Partners' rights and obligations.
• Reviewing your existing Partnership Agreement, to see if it already addresses bringing in a new partner and/or Sweat Equity. Any necessary changes to the existing Partnership Agreement must be made before proceeding.
• Depending on the Partnership Agreement, the Associate/New Partner will be granted certain voting powers. Voting power may enable the Associate/New Partner to: sign for a loan, purchase real estate or enter into a contract on behalf of the practice. The Associate/New Partner may also have a say in day to day operations and employment agreements.
• If any of the partners, including the new partner, will be able to bring in another partner, or sell their portion without the consent of the others.

Finally, if either side is uncomfortable with the proposal, consider cash incentives as a reward for work that results in practice growth instead of a partnership.