Though the majority of businesses in the United States are sole proprietorships, those of you who read an earlier post know that I recommend, for a myriad of good reasons, that an entity of some kind be placed between a person doing business and the rest of the world. Find an experienced business attorney to help establish your business entity.
In this post, I address briefly the general partnership form of business entity, the only form I consider more dangerous to the financial health of an individual than the sole proprietorship. Why, you ask? Because with the sole proprietorship, the sole proprietor is personally liable for the acts of the sole proprietor, the business and the business employees. In the general partnership, the partners are personally liable for the acts of the business, the employees and each other. What partners do can be fairly unpredictable, like contracting to purchase or lease things that cannot possibly be paid for out of the profits of the business, or like contracting to do that which cannot possibly be done profitably.
Why else is the general partnership dangerous to individual financial health? Because the general partnership can be formed without any document or writing whatsoever, and whether or not the person intended to be a partner. Hard to believe, is it not?
Take a look at the Code of Virginia § 50-73.88:
§ 50-73.88. Formation of partnership.
A. Except as otherwise provided in subsection B, the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership…. Emphasis added.
3. A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment: a. Of a debt by installments or otherwise; b. For services as an independent contractor or of wages or other compensation to an employee; c. Of rent; d. Of an annuity or other retirement benefit to a beneficiary, representative, or designee of a deceased or retired partner; e. Of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or f. For the sale of the goodwill of a business or other property by installments or otherwise.
What else will convert a person into a partner by operation of law as to “third persons,” those other than the putative partners? Merely acting as if they are partners. Think about that the next time you tell someone you are “partnering up” with so-and-so to open a business. You may be doing just that—and any partner, that guy you’re “partnering up” with, can bind the partnership, meaning you personally, even if you have formed some other type of entity, such as a corporation. Where you hold yourself out as “partners,” you may become partners with all of the liability of partners, whether or not you are otherwise partners. Do you really trust the person standing next to you with the ability to bankrupt you?
The take away for today is simply this. Do not act like a partner unless you want to be legally bound as a partner. I can think of not much that is more dangerous to a person’s financial health. Foolish, particularly where it is so easy and relatively inexpensive to get proper legal advice from your business lawyer in setting up exactly the right business entity, one that will serve a multitude of goals while protecting against a substantial amount of potential financial liability.
In a later post, I will discuss briefly limited partnerships and how you, too, can morph from a limited partner into a general partner.
© Neal J. Robinson 2010
Tarley Robinson, PLC, Attorneys and Counsellors at Law
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