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Answers are provided by S. Derrin Watson
What's an Entity?
(Posted February 11, 2002)
Question 139: Doctor A is a 100% owner of his corporation. Doctor B buys 50% of the assets of the practice, moves into the office and starts to work. Dr. A still owns 100% of his (now smaller) practice. Dr. B owns 100% of his sole proprietorship (which is basically 50% of Dr A's former corp.) They set up as "Drs. A & B" on the door/biz cards/etc... but no legal entity (corp/partnership/LLP) titled "Drs. A & B" exists. Is this an ASG?
Answer: The question is whether there is a partnership or joint venture between the two of them. If there is, then clearly there is an affiliated service group. If there is not, then just as clearly there isn't an ASG because of lack of common ownership.
A formal legal relationship is certainly one of the hallmarks of a partnership, because one partner has the authority to bind the partnership and each is liable for the debts of the partnership.
Another touchstone, and this is critical for tax purposes, is that there be some sharing of income. In other words, there would be some stream of revenues in which both partners would share to some degree.
Based on what you've said, it doesn't sound like either of those elements exists here, which would lead one to the conclusion that a partnership does not exist as a separate entity.
However, it sounds as though they may be creating a perception in the mind of the public that a partnership exists. Having a single business, letterhead, etc. are certainly indications that there is a partnership. Moreover, it is likely that they are sharing some expenses, such as rent and utilities. You haven't mentioned whether they are sharing employees, but that would bring up another layer of complications. (For more details see Q&A 56 and Chapter 5 of my book, Who's the Employer?.
So, you've presented facts that could be interpretted either way. This is a really important issue, for more than just retirement purposes. If there's a partnership, or even a perception of a partnership, there can be very serious liability issues in the event of malpractice allegations. For this reason, I strongly suggest you have the arrangement reviewed by an business attorney familiar with partnership rules in your state as well as tax issues relating to partnerships. Issues relating to the status of entities are discussed in more detail in Chapter 1 of my book, Who's the Employer?.
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