One of the more common issues in a dental asset purchase agreement transition is determining the after-sale status of the selling dentist or existing associates.

As you are about to see, dental practice sale associate agreements are not just simple paperwork. Failing to select the agreement type that aligns with the actual business circumstances may expose the business to worker misclassification risk, leading to audits and penalties.

Scenario: Recently, we represented a buyer who bought his first dental practice in Missouri. The seller was going to stay on and do some post-closing clinical work to help our client transition the practice. The question then became whether the seller should remain an employee or become an independent contractor.

We will discuss when to opt for W-2 employment vs. 1099 for associate dentists and the pros and cons of each choice.

The Core Debate: W-2 vs. 1099 for Associate Dentist

After the transition, the dilemma is choosing between an employee vs. independent contractor for a dentist. The option you choose will primarily depend on the length of the transition and the level of control the buyer requires.

However, the choice isn't entirely free and will depend on the specific business circumstance.

The independent contractor agreements must meet the standards set by the DOL 2024 Final Rule and the upcoming changes.

The Department of Labor applies a "totality of the circumstances test" to determine whether an independent contractor is truly independent.

Labeling a contract as "1099" is largely meaningless if the dentist is economically and functionally dependent on the buyer.

Let's break this down through two scenarios:

Scenario 1: The Short-Term Transition (1099)

Private sales are usually followed by an arrangement in which the selling dentist stays 30-90 days. This allows them to introduce patients to the new owner and complete procedures that require their personal involvement.

In this situation, the seller is usually hired as an independent contractor. This allows the buyer to avoid payroll taxes and benefit costs for that temporary period.

But this type of arrangement carries risks.

Even if it is a short-term situation, if the new owner dictates the seller's hours, provides materials, and exerts significant influence over their practice, this can still constitute a misclassified employment agreement, leading to regulatory scrutiny.

Scenario 2: The Long-Term Associate (W-2)

In situations when the seller plans to work for a longer period post-sale, which is common in DSO acquisitions, the post-closing deal dental associate contract should almost always be a standard W-2 Employee arrangement.

When the associate dentist works as a W-2 Employee, the buyer has full control over scheduling, staff management, materials, and everything else.

But because there is no dispute over who is in charge of the business, the buyer must also assume responsibility for the benefits and handle the tax obligations.

Best Practices for Transition

Choosing dental practice sale associate agreements that do not align with the actual working relationship and conditions is one of the fastest ways to trigger an audit.

To prevent that, buyers should talk to an experienced dental practice transition lawyer to audit the business's existing 1099 associates. If they are integral to the business, they might need to be converted to W-2 Employees at the sale closing.

Sellers, on the other hand, should clean up the agreements before the sale. Even though it might temporarily increase expenses, a practice with properly classified W-2 employees is worth more and easier to sell than one that relies solely on high-risk 1099 contractors.

Dental Practice Sale Associate Agreements: Bottom line

The key takeaway from this article should be that dental practice sale associate agreements are not just simple administrative documents you tick off your transition checklist. These arrangements directly impact legal risk and post-sale business stability, and therefore deal value, making them super important for both buyers and sellers.

Experienced legal guidance can help you evaluate existing associate agreements, reduce risk, and simultaneously increase business value, benefiting the seller and protecting the buyer's investment.

Contact FinnLaw today to schedule your consultation and ensure your dental practice transition is handled with confidence.

Each week, I share a brief insight from my dental law practice. This week’s focus: how a seller’s lack of “good standing” can impact a dental practice transition.

Scenario: Recently, we had a client buying an oral surgery practice in Texas. As buyer’s counsel, we prepared the first draft of the purchase agreements. We received the seller's revisions, which included a major red flag. One of the standard representations and warranties that the seller of a dental practice will make to the buyer is that the seller is “duly organized, validly existing, and in good standing” with the state. In this case, the seller deleted that language. Upon further investigation with the state, we found that the seller’s legal entity had been administratively dissolved due to a nominal amount of unpaid taxes. Our client asked about his options regarding the purchase and the consequences for the seller.

Let’s break down why ensuring good standing of your dental business is one of the most important factors that will determine a successful dental practice transition.

We will cover what good standing is, how it affects the transition, and why working with an experienced dental practice acquisition attorney will help you avoid common pitfalls in the dental business transition process.

Understanding Good Standing in a Dental Practice Transition

Good standing is not just a simple technical term. It is official confirmation that a business meets all state requirements, including filing the required documents, paying any taxes owed, and paying annual or other recurring fees.

When it comes to a dental transition, good standing is essential, as it shows that a legal entity exists and can operate legally. That’s why a dental practice transition lawyer often starts by verifying the good standing status before moving the transaction forward, which prevents headaches further down the road.

The issue is that many dental practice owners, due to their packed schedules, become unaware that their business is no longer compliant.

Administrative dissolution may occur due to as minor an issue as an unpaid annual fee or a missed filing. But even these small things might derail a transaction long before it reaches a closing table.

Prioritize this step early. Ensure your business is in good standing. This is another reason to work with a dental practice lawyer.

Why Legal Capacity and Good Standing Are Critical Before Closing a Dental Practice Sale

When it comes to completing the transaction, good standing directly affects the seller's legal ability. A dissolved entity is likely to lack the legal capacity to even sign an Asset Purchase Agreement, rendering the contract voidable or unenforceable, posing an immediate legal risk, and impacting practice value.

On the other hand, poor standing is a major red flag for any buyer. This type of non-compliance signals deeper issues, such as tax concerns, liens, or poor record-keeping. An experienced dental practice attorney recognizes this as a critical due diligence concern. They will advise their client that a lack of good standing likely indicates hidden liabilities the buyer may inherit.

While it is important to ensure good standing early, proof of compliance at closing is non-negotiable. You will usually find a Certificate of Good Standing required to finalize the deal. Not having it will delay or stop a transaction.

The Impact of Good Standing on Dental Mergers & Acquisitions

In larger DSO transactions, compliance standards are higher. In practice analysis, there will be zero tolerance for any seller not in good standing.

When the stakes are higher, a lack of good standing will create more delays, as a dental practice M&A lawyer cannot finalize the transfer until the entity is reinstated. Depending on the state and case, this can take weeks or months, significantly affecting practice valuation and the final price.

Plus, sellers usually must make specific representations in the purchase agreement. For example, they may guarantee that the business is “duly organized and validly existing.” If that statement is inaccurate, it opens the floodgates to the seller’s legal liability. This can put the entire deal into jeopardy.

Maintaining Compliance Through a Dental Practice Lawyer

The best way to avoid significant legal issues is to address non-compliance early, before the sales process begins.

As a dental practice seller, you want to ensure your business is in good standing before it even goes to the market. As a practice buyer, performing basic due diligence as early as possible will prevent later issues that can derail the entire transaction.

Even if problems are discovered, an experienced dentistry business attorney will help you navigate the reinstatement process with the Secretary of State. While the process is sometimes more complicated, it often comes to filing missing documents and paying outstanding fees, which can be resolved quickly.

Whether buying or selling, don't let avoidable legal challenges stall your dental practice transition and undermine your business's market value. Contact Finn Legal now to schedule your personalized consultation and safeguard your dental practice's future success.