In this video, Minnesota business attorney Aaron Hall speaks about the pros and cons of general partnerships.
How do I start a general partnership in Minnesota? I’ve been asked this question a number of times and I’ll answer it when we come back.
I’m Aaron Hall, Business Attorney from Minneapolis.
A general partnership is pretty simple. All you do is start working together with another person. You share your funds, you share your profits, and you work together. Is this a good idea? No. The reason is you’re both jointly, personally, liable for the acts of the other. That means if one person does something wrong in the business and causes harm to another, you’re personally liable.
That can affect your home, anything you own, all the money in your bank account. Unless you file for bankruptcy, your putting a lot at risk. A better option is a limited partnership, or even better yet, a corporation or and LLC. You’ll also find some tax benefits with an LLC which is taxed as an S corp, or an S corporation.
If you have questions about these types of issues, typically you can save thousands of dollars a year by working with an attorney, and their work may cost a few hundred dollars to get set-up properly. Feel free to give us a call if you have questions about general partnership formation or any of the other business types.
Video Transcript:
What is the defacto partnership or an accidental partnership? That’s when two people carry on a business as co-owners for profit. They don’t do any registration. They’ve never set up a formal partnership. They don’t have an LLC or an S corporation or a C corporation. Instead, it’s two people who are working in business together for profit.
The law says that if you do that, you are in a partnership. It’s often called an accidental partnership or defacto partnership because the people don’t realize all of a sudden this happens. Now when does this happen? Well, this might be two people who are working together on a business. That’s a simple example. It also often arises when two companies work together.
Now what happens if you have a contract? It’s possible that contract would clarify that this is not a partnership, and an attorney could make sure that it doesn’t have the elements of a partnership, but it’s important to remember that where two people or two organizations or two companies are working together as co-owners, sharing the profit, that can be deemed a defacto partnership or an accidental partnership under Minnesota law.
This is a common law partnership. It’s not a registered partnership. It’s not a limited partnership. And why does this matter? Because the partners are personally liable for the acts of their other partner. In other words, you might find yourself personally liable for that which your other partner does. And since there is no limited liability, this isn’t a limited liability company, also known as an LLC, it’s not an S corp. So since there’s no limited liability, you are personally liable for the acts of your partner. That’s a big deal.
That’s why whenever you go into business with somebody else, you should consider whether it makes sense to set up a business entity that will limit liability. Generally, that’s going to be an LLC or a corporation. I’m Aaron Hall, a business attorney in Minnesota. For additional information, see the links below.