Recently, I presented workshops on Business Law Essentials and Choosing a Business Structure for the U.S. Small Business Administration’s 2015 Washington State “Biz Fair”. In both workshops, I explained to participants that I rarely see a partnership that has been set up by an attorney, and that most attorneys generally don’t recommend partnerships as a business structure. Why?
Partnerships are governed by the Revised Uniform Partnership Act, which can be found at RCW Chapter 25.05. RCW 25.05.005(6) defines a partnership as “an association of two or more persons to carry on as co-owners a business for profit . . . .” Pretty simple, right?
But, what’s the relationship between the partners? What is expected from each partner in terms of the day to day operation of the business? What is each partner expected to contribute financially to the business? How will the profits be shared? How much reserve cash will be held to meet expenses? How will business disputes be resolved? What if one partner wants to sell her share in the business? What if one partner dies, and the deceased partner’s estate makes a claim against the business? What if a partner gets divorced, and the soon-to-be ex-spouse makes a claim that he owns a community property share of the business and wants to be included as a new partner? All of those issues, and more, are addressed in a partnership agreement. Generally, when a partnership agreement is drafted, the partners are represented by counsel and receive legal advice in working their way through the complex options the questions above present. The problem? The partners are paying for at least one attorney to be involved in preparing a partnership agreement, but they receive no bang for the buck in terms of protection from liability.
A partnership does not shield the partners from individual liability for the acts of the partnership, so each partner can be held liable for the business’s debts and obligations. On the other hand, a properly formed and properly maintained corporation or limited liability company can create a shield to protect business owners against individual liability.
Want to receive the most bang for your buck possible in relation to paying legal fees? Then don’t choose a partnership – it rarely makes sense.
Photo credit: Adam Grabek on Flickr