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In my opinion, it is better to have died a small child then be in a partnership. Unfortunately, many business owners form partnerships and don’t even know it. This occurs when they go into business with another person. If no business entity is formed, law considers business to be a partnership and treats it accordingly.
Partnerships are dangerous for one primary reason: a partnership does not provide any protection from liability and, in many ways, invites personal liability. Under well-established law, most partnerships are classified as "general". This simply means that all partners are contributing to administration and running of partnership business. This classification can have grisly results.
In a general partnership, each partner is jointly liable for debts of any other partner arising from business. For instance, you and your partner go to a business dinner with a client. Your partner has a drink and then a few more. They then get into an accident on way home. Each of partners is liable for damages claimed by injured people. That means YOU! Even if you were not in car, did not rent car, never saw car and don't drink!
Partnerships are a recipe for disaster. Stay away from them whenever possible.
Limited Partnerships ["LP"] are perhaps most misunderstood business entity. A limited partnership is similar to a general partnership, but allows a number of partners to limit their liability by being limited partners. It is critical to note that these limited partners are restricted to simply making a capital [cash, content, equipment] contribution to partnership. They cannot be involved in actively running business. If they are, they lose any protection from partnership debts. Many limited partnerships end disastrously. If you are married to idea of pursuing a limited partnership, you must do so in combination with corporations. That particular strategy is well beyond scope of this article, but feel free to contact me if you wish to pursue a limited partnership.
Business owners should protect themselves by forming entities for their business activities. The real issue is identifying structure that is best for your particular situation.
Richard A. Chapo is with SanDiegoBusinessLawFirm.com - This article is for information purposes only. Nothing in this article is intended to address the reader’s specific situation nor does it create an attorney-client relationship.