If you are considering starting a business with anyone else, you must protect yourself. Even if you trust your business partner implicitly, no one can ever know what the future may hold. Taking the time to protect oneself now will pay off immensely in the future.
You and your partner(s) may need to secure financing to obtain capital for the launch of your business. Or, if you have already started your business with partners, it may make sense to be sure you are legally protected (personally) from any business debt. If you create a general partnership and end up leaving the business, you could still be liable for any business debt the partnership takes on and fails to pay. The following are some tips for protecting yourself from business debt in a partnership.
- Protect Yourself in a General Partnership
Your business structure will influence whether or not you are on the hook for business debts that go unpaid. Most business partnerships fall into two categories — general partnerships and limited partnerships. General partnerships are when two or more people start a business together. You do not need to create a legal entity to form a general business partnership. Suppose you and one of your good friends shake hands and decide to start a t-shirt printing company together; you started a general partnership.
In many general partnerships, there is no formal, written agreement between the partners. Unless all partners have signed a written partnership agreement, each partner will be equally liable for business debt and any outstanding business payments that go unpaid. Many people opt for a general partnership because it is less formal, but this business structure does not protect an individual’s (or a partner’s) personal assets from business liabilities (i.e. debts, lawsuits, etc.).
In other words, if a patron or customer brings a lawsuit against the business and is awarded a large verdict, or sum of money, the plaintiff could seek to collect from you personally (which also means s/he may collect against your personal property or other personal assets). A better option is to have all the partners sign an agreement which limits each one’s personal liability for partnership obligations, debts and/or liabilities. This agreement should also include a limit of liability should one partner leave the partnership for any reason, or under certain circumstances.
In a general partnership, every partner is 100% liable for the partnership/business debts and liabilities, including debts from loans, capital or financing, and damages awards from lawsuits. At Resnick Law, we can review your partnership and advise on whether you should become a limited partnership or require all partners to sign a contract limiting liability. In the alternative, there may even be a better business structure for your endeavor. An experienced attorney can help you determine the best structure.
- Protect Yourself in a Limited Partnership
A limited partnership is an agreement between a general partnership and a limited partner. Limited partnerships must be registered and have formal documentation of the agreements between any general and limited partners. The limited partner often acts as an investor or as a less active member of the business. In limited partnerships, the general partner is typically the person who is exposed to the greatest share of potential liability for business debts. The limited partner is often only accountable for their business interest in the company.
- You May Need to Set Up an LLC or Corporation
If you are concerned about being liable for your business debts, you may want to create an LLC or corporation. When you do so, you will separate your personal assets (i.e. your home, retirement savings, or other property) from your business assets. Personal liability in an LLC or corporation would generally only come about if you signed a personal guaranty for a business debt, or in some other special circumstances. Generally speaking, however, an LLC or corporation protects the individual partners, members, shareholders, etc. from personal liability of the business debts.
- Contact an Experienced Business Lawyer in Michigan
Speaking to an experienced business attorney is one of the most important things you can do to protect yourself from business debts and set up your business and personal life for success. At Resnick Law, our experienced business lawyers are ready to help. Contact us today to schedule your initial consultation.