Your Personal Liability in a Partnership
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Your personal liability in a business partnership, as well as your partnership liability, can vary. Partnership liability can depend on the type of partnership, as well as your position in the partnership. It can also depend on the laws of the state in which you do business. There are three types of partnerships: limited partnerships (LP), limited liability partnerships (LLP), and general partnerships. Each of these partnerships provide business owners with a different level of liability protection.
Personal Liability, Partnership Structures, and Your Business
In a general partnership, each partner has unlimited personal liability. Partnership rules usually dictate that whatever debts are incurred by the business, it is the legal responsibility of all partners to pay them off. This is true even if one partner enters into a bad contract, or rear-ends another car while working. All partners are responsible for paying the debts. Further, in many states partners are held severally liable. This means that if the partner who signed the bad contract can’t afford to pay it, but another can, the judgment will come out of the other partner’s pocket. If you are the other partner, your percentage of ownership will not affect the judgment.
A general partnership does not need to be “set up” in the same sense as other partnerships or business entities. The formation of a general partnership does not require any specific intent. If it can be established that two or more people are in business together, this is enough to prove that a partnership exists.
Partnership Liability vs Personal Liability
In an LP, the liability of one or more of the partners is limited. An LP must be established with at least one general partner and one limited partner. The general partner has full management power over the business and unlimited personal liability. Partnership agreements for an LP are similar to agreements for a general partnership in this sense. However, the limited partner’s liability is determined by the percentage of his/her investment in the partnership.
The limited partner is also limited in his/her involvement in business management. This being said, the limited partner is not always protected. If the limited partner starts playing a more active role in the business, then his/her partnership liability will be the same as that of a general partner. Unlike general partnerships, an LP must be registered with the state.
The partners of an LLP have more protection from each other’s mistakes. For example, if a group of accountants form an LLP, and one of the accountants is sued by a client, the other accountants are not personally responsible for the judgment, if there is one. However, as in other partnership structures, the owners of an LLP are legally bound by any of the contracts the partners sign as they establish the business.
Getting into business with people you trust and writing out a detailed partnership agreement can help clarify issues of partnership liability. A business lawyer can also help as you navigate the details surrounding personal liability, partnership agreements, and the pros and cons of partnerships versus other business structures.