Matthew W. Lucas

703.821.5522

Say you purchase a good piece of investment real estate with your brother-in-law. As soon as you purchase the property and start to operate or lease it, the two of you have formed a partnership. Consider,  when he forgets to shovel the walk and someone slips and falls, you both share the liability. If he forgets to renew the property insurance policy, you may find a judgment against you that can be satisfied out of your personal assets.

Partnerships are a risky way to do business. Unlike corporations and other limited-liability entities, there is no shield of protection. Partners are liable for the debts of the partnership, even beyond their investments in the business. That means that a business loss can can be extended to a  personal loss, a potential catastrophe for the partners.

 
Clearly, the more personal assets you have, the greater the possibility of  litigation. If you consider the risks of doing business in partnership too great, what can you do? The best solution might be to form a limited-liability company (LLC). A LLC  is simple to form. Your attorney can help set it up. It costs less than you may think and the peace of mind certainly justifies the cost.

LLCs have the limited-liability features of a corporation, but the taxing character of a partnership. That is, there is no double taxation. In a corporation there is corporate taxes on corporate income and personal taxes on the individuals when the corporation distributes its profits. In the LLC the taxing is paid by the individuals as income. There is no corporate tax.

Additionally, in an S corporation there are restrictions on the number of individuals who can form be a part of the corporation. An LLC has no limits as to the number of members.  

Doing business as a general partnership is like walking on a high wire without a net; there's no margin for error. A mistake can mean a personal financial disaster. By contrast, the most trouble you can get into with an LLC is the loss of your investment. If you are considering doing business with a partner, consider the advantages of a LLC.