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:
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.
Speak with Suzanne today about how she can help you. You will have the advantage of consulting with an attorney, who has “been in your shoes” and understands the nuances of the dental profession. Suzanne also understands the importance of communication and you will never have to wait long for a response.
Whether you are negotiating an employment contract, purchasing or selling a practice, or are contemplating another profession-related matter:
Call 973-229-0670
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