Beyond Flying Solo: A Guide to Options in Structuring the Practice By Clifford Stromberg and Julie Mathews Schuetze of the Law Firm of Hogan & Hartson, Washington, D.C. Edited by Judy E. Hall, Ph.D., Originally published in June 1997

If you are like most psychologists, you have expended enormous effort in acquiring your training and professional skills - but relatively little time pondering the legal and business structure of your practice. Often, the business context of practice "just happens". But in an increasingly volatile healthcare market, many psychologists ask what are their options, and what are the legal and business implications of choosing different structures for their practice. This Update provides an outline. It is not intended to enable you to be your own lawyer; rather, it is intended to help you be prepared to make the most of professional advice and formulate your thinking about your options.

Forms of Business Organizations

The options for organizing a psychologist's practice can be divided into two basic types -- non-ownership and ownership -- although some practice structures combine features of each. "Non-ownership" forms (e.g., contracts) provide for a looser, less "formal" affiliation with more flexibility for each practitioner, while "ownership" forms (e.g., corporations) link practitioners on a more integrated basis with a centralized management structure. However, there are many ways in which to adjust those forms so that they function almost as hybrids.

Non-Ownership "Affiliations"

Sole Proprietors Sharing Space. Often, individual psychologists affiliate with each other to share office space and services (secretarial, billing). This practice structure incorporates both ownership and non-ownership characteristics. In this common scenario, each psychologist "owns" his/her practice and operates as a sole proprietor (described below). (The sharing option also is available to psychologists who practice through sole stockholder professional corporations or sole member limited liability companies.) The psychologists do not share profits with, or assume liabilities for, other psychologists in the expense-sharing group. This option does not require each psychologist to fully integrate his or her practice with other psychologists, but allows each practitioner to take advantage of lower costs that result from sharing common operational expenses. At the same time, each psychologist has the ability to manage and control his or her own practice and to terminate the arrangement relatively easily.

A key element of a successful "space-sharing" arrangement is a written expense sharing agreement. This agreement should clearly define each psychologist's responsibility for the costs that the group will share - as well as the kinds of costs that will not be shared. In life, the unexpected in fact happens with jarring regularity. It is common for psychologists to share bookkeeping and billing services, but not to share expenses of preparing personal tax returns. But what if a large and unexpected billing problem causes a tax audit? Clarity in defining obligations is helpful.

The agreement should also define the methodology for allocating costs. Costs could be allocated based on actual usage (e.g., for photocopies or other supplies) or divided equally among the group members (e.g., the cost of leasing the photocopy machine). There are, of course, good and bad features in each method. Equal or formula-based sharing works best if the relative consumption of the resources is predictable. For example, dividing office rental costs in half is fair if both Dr. Smith and Dr. Jones have equal sized offices and work thirty five hours per week. Dividing rent 2S%-7S% may be fair if Dr. Jones only works ten hours per week and Dr. Smith works thirty five hours and sometimes has her psychological assistant use Dr. Jones' unused office. But dividing billing costs in half is not fair if Dr. Smith's practice generates four times as many bills as Dr. Jones'.

Psychologists may wish to rely on their mutual sense of "fairness" in allocating costs. ("The parties will agree on a fair percentage or they will terminate the relationship") or agree to refer the decision to an accountant or other "expert."

Less obvious is the fact that the "office sharing" agreement should address issues beyond expenses - such as the psychologists' authority to do certain things (i.e., decorating or ordering furniture, firing the accountant) and their responsibilities (such as for supervision of staff). They should assume that very little "just happens" unless the parties establish clear expectations from the start.

Psychologists who opt to practice as sole proprietors and share office expenses should be careful not to operate too much like a partnership or else they will risk being treated for legal and tax purposes as a partnership. As discussed below, it is relatively easy to be deemed a partnership, without doing more than two psychologists deciding to practice together to earn a profit. Thus, the expense-sharing sole proprietors should not refer to each other as "partners" in advertising or through casual conversation or correspondence with patients or payors. (Each sole proprietor should sign his/her own managed care contracts and other documents). Likewise, stationery should not indicate that the group is a partnership or that the psychologists are partners. Such actions could cause the group to be treated as a partnership and also could raise liability, ethics and other issues. Sole proprietor psychologists who share expenses should not share profits in fact or enter into a written profit-sharing agreement. Profit­sharing among psychologists is more suitable for other types of business organizations, such as partnerships or professional corporations.

Employment and Independent Contractor Relationships. Psychologists also have the option to practice as employees of, or independent contractors to, a psychology practice. Practicing psychology as an employee or independent contractor (without "ownership") allows the psychologist to focus on clinical practice without worrying as much about management of the practice.

To complicate matters, there is no litmus test used for all purposes (liability, taxes, etc.) to define who is an employee versus who is an independent contractor. Although non­lawyers may find it surprising, in fact, it is quite possible for someone to be treated as an independent contractor for tax purposes, but an employee for liability purposes, and either for "anti-fraud and abuse" purposes. The Internal Revenue Service has adopted a specific "20 factor test" that enumerates criteria to evaluate whether a worker is an employee or independent contractor. For anti-fraud and abuse law purposes, reference often is made to "bona fide employment relationships" without further explanation. The important point is for the psychologist to (1) consult with advisors to determine what status is best for him/her and then (2) explicitly to arrange his/her legal relationships so as to preserve that status.

A common misunderstanding is that the terminology used to describe a relationship (e.g., a written agreement stating that the psychologist is an independent contractor) will surely govern how the relationship will be treated legally. This is simply incorrect. Nomenclature will be secondary, and the actual operating relationship will be determinative.

A critical factor in determining whether an employment relationship exists is the degree of supervision and control over the psychologist exercised by the individual or entity for whom the psychologist provides services. Direct supervision customarily indicates an employment relationship, while in­dependence and discretion bespeak an independent contractor arrangement. Many factors typically suggest an employment relationship, such as paying the psychologist a "salary," providing the psychologist with office space, billing on the psychologist's behalf, requiring the psychologist to work a full work week, and providing the psychologist with insurance, support staff, and supplies. In contrast, an independent contractor tends to furnish his/her own office space, purchase-necessary supplies and insurance, conduct his/her own billing, and provide services to a client on a part-time basis so that he/she is free to serve others as well. Generally, employees are paid on a predetermined basis --- although they can receive a bonus based on productivity and financial results. Generally, an independent contractor is paid on a "piece work" or percentage of revenue basis, although this can be reduced to an hourly wage. In any event, it is important clearly to structure a relationship as either an employee or an independent con­tractor, to avoid unintended legal consequences. continued

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