When setting up a company a general partnership is the worst entity structure you can choose. A general partnership occurs when you and at least one other person engage in a business. The problem occurs when you become an accidental partner in a business.
A general partnership is a default entity formation that does not require any formal filing. Which means if you don’t create another type of entity or company, you are automatically a general partnership. The problem with a general partnership is that it does not provide you with any asset protection. You are 100% liable for the debt of the business. That means you are personally liable for whatever your business partner does. In the event of a collection or judgment against the business, they can come after you, you home, vehicles, or other assets. The creation of other corporate structures can prevent this personal liability.
Be wary of the accidental partnership
While this situation can occur in many ways, the following is an example of the creation of the accidental partnership:
Your friend asks you to borrow some money for a real estate investment deal and promises to be responsible for all of the liability for the deal. He offers to take the mortgage out in his name, put the property in his name, etc. He then promises to return your money plus a profit within 5 months.
There are many legal issues that can arise from this scenario, but one of the most problematic is the creation of the accidental partnership. Despite your friend’s contentions that they will be responsible for all of the liability, you have just set up a situation where you may personally responsible for 100% of that deals debt. Which means you could be reasonable for the repayment of the mortgage.
The creation of other corporate structures can easily prevent this personal liability. While there are many factors that should be considered when evaluating which corporate structure is right for you and your business, the creation of an limited liability company can protect you personally from any liability. You should always consult an attorney before forming a company not only to discuss corporate structures, but also to discuss licensing and other legal issues to make your corporate compliant with locate rules.
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The McDonald Law Group provides the information in this article for informational purposes only. The information does not create an attorney-client relationship or constitute legal advice.