General partnerships are a bad business entity choice when it comes to pursuing business activities. They don’t deliver the asset protection shield which should always be placed between your company activities and individual assets. Many smaller companies, however, find it rewarding to combine their merchandise or services with other little businesses. In doing this, they frequently don’t realize they are subjecting them to the identical vulnerability as a general partnership.
Why Even Worry About It?
You put plenty of time, sweat and money into your enterprise. After years of effort, you’ve got it fine-tuned and are making a wonderful living. How prepared are you to lose your company?
Consider the following hypothetical situation between two sole proprietors. Our first celebration, Programmer, creates computer programs for managing sites. The next party is Mark, the owner of a website that offers small businesses with websites. Programmer and Mark come to the conclusion they can make big money by opening a joint website. This sort of situation occurs daily online. How should they do it?
The best choice is to form a corporation or LLC. Each party will have an agreed upon portion of the provider. Mark will contribute his marketing ability whilst Programmer contributes software platforms. The bylaws [administrative rules] of this corporation will detail how gains are divided in addition to detailing who receives what [domain name, customer list] if the relationship does not work out. If a corporation or LLC isn’t formed, each party exposes their unique companies to liability just as would happen in a general partnership.
What’s been accomplished? Mark and Programmer are shielded from liability arising from the new enterprise. If the business fails or is sued due to issues with the software, Mark and Programmer will avoid personal liability and their first businesses aren’t touched. Are they completely shielded? NO!
Mark and Programmer are still open to accountability on the»back end». Without realizing it, each trusts the other to properly run their separate businesses. Why is this?
Assume that Mark and Programmer follow the above plan and the company is quite profitable. 1 afternoon, Programmer is served with a lawsuit claiming that he violated copyright laws using a program he developed before meeting Mark. The nine firms to which he offered the program also sue him. The trial goes badly and Programmer is found liable to the tune of $750,000.
Guess what happens next? Since he is a sole proprietor, Programmer’s interest in the joint company with Mark is seized to satisfy the judgment. Alternatively, he files bankruptcy. In any event, Mark is going to have a new business partner that probably can not program! In a nutshell, we are discussing a disaster.
How To Protect Yourself
Business entities are the key to limiting your exposure to liability. In the above situation, Mark and Programmer should have the joint business as individuals, but they ought to form business entities for their private businesses. If the personal companies are sued, their personal ownership of the joint venture entity is protected from attachment.
As a rule of thumb, you should form a single business entity for every business you have. In that way, you are better able to limit the possible harm of a lawsuit involving one of the businesses.