While some people may not think twice about filing a lawsuit, it’s safe to say that no one wants to get sued. That’s why a formal letter – especially one from an attorney representing an aggrieved party – threatening legal action tends to be so effective.
But what if you get one of these letters and you didn’t do anything wrong? What if your business partner did something wrong? Can you really get in trouble, too? Can an angry customer, client, or competitor really sue you as well? The answer is, maybe. It all depends on how your partnership is organized.
In California, a general partnership is simply defined as one involving at least two people (called general partners) who go into business together.
There are no strict requirements for the formation of this type of partnership. Experts recommend that partners draft an agreement addressing various concerns, but they are not legally obligated to do so. In fact, the only real criterion is that the general partners go into business together to make money.
As a general partner, each person has a say in how the business is managed. Each general partner is also personally liable for any debt the business incurs.
Clearly when it comes to financial matters – someone can sue the business to collect money owed. But in a general partnership, your personal assets are at risk as well. In addition to your interest in the business, your house, your car and any other personal possessions are fair game. This is the case even if your business partner incurred the debt by mismanaging money or engaging in illegal conduct.
These are not the only circumstances in which your business and personal assets may be at risk, however. Although it is unlikely, let’s say for example, that the business arrangement for your medical or law practice is a general partnership. Now let’s assume that one of your partners is accused of malpractice and the accusation leads to a lawsuit. In this case, you are also personally liable – even if you didn’t participate in or even know about the transgression.
This is why experts urge anyone involved in a general partnership to get liability insurance. As long as you have enough coverage, this type of policy offers protection from a lawsuit or other petition against your business.
Like a general partnership, a limited partnership is a business with at least two owners. However, limited partnerships feature two different types of owners. Some are general partners, as detailed above. Others are limited partners. But what is the difference, and how does it affect liability?
General partners are legally responsible for all business debts, meaning their personal and business assets are at risk. They also decide how to run the business and manage it accordingly. Finally, general partners are authorized to make legally binding business decisions.
Limited partners are basically investors in the business. Their contributions at start up are usually made in the form of cash or property. Their liability for any business debt is limited to the worth of their monetary contribution. They have no say in management of the business and cannot rescind their original investment.
However, there is an important caveat. Limited partners relinquish their privilege with regards to liability if they in any way assume a general partner’s role. In other words, if you are a limited partner in a California business and you start making management decisions, you lose your limited liability. Your business interest and personal assets are therefore at risk for collection or judgment in a lawsuit – even if your business partner is at fault.
Limited liability partnerships
In this type of business arrangement, none of the individual partners are legally responsible for the debts incurred by or claims against other partners. In other words as a partner in an LLP, you cannot be sued for something another business partner did. Furthermore, if someone sues the business as a whole, your personal assets are not at risk.
These characteristics distinguish an LLP from a general partnership, where all partners share liability, and a limited partnership, where some partners have conditional, limited liability.
But again, there is an important catch. California restricts the types of businesses that can take advantage of this business structure. In fact, California is one of only four states that limit the formation of LLPs to individuals licensed in certain professions. If you want to structure your business as an LLP here, you (and your partners) must be licensed public accountants, lawyers or architects.
Contact Los Angeles business lawyers to learn more
If you want to learn more about how to structure your business and protect your personal assets, contact the business attorneys at the Los Angeles Law Firm of Parag L. Amin P.C. (“LawPLA”). You can reach us by filling out our contact page, clicking the link to schedule a free consultation, or giving us a call. We are always happy to help.