Saturday, November 3, 2007

partnerships - why not?

Lawyers dislike partnerships because they do not protect the partners' assets from business creditors. Corporations limit the liability of their shareholders to their interest in the corporation. The liability limited in a limited liability company is the members' assets to those invested in the LLC.

What lawyers like, clients often ignore. Partnership law allows for creating a partnership without an agreement, instead the mere actions of the people creates the partnership. Indiana Code 23-4-1-7(4) says:

The receipt by a person of a share of the profits of a business is prima facie evidence that the person is a partner in the business, but no such inference shall be drawn if such profits were received in payment for the following:
(a) As a debt by installments or otherwise.
(b) As wages of an employee or rent to a landlord.
(c) As an annuity to a widow or representative of a deceased partner.
(d) As interest on a loan though the amount of payment varies with the profits of the business.
(e) As the consideration for the sale of a goodwill of a business or other property by installments or otherwise
Other problems include:
  1. The partners act as agents of one another with the possibility of one partner binding another without the other's knowledge. Indiana Code 23-4-1-9
  2. "An admission or representation made by any partner concerning partnership affairs within the scope of his authority as conferred by this chapter is evidence against the partnership." Indiana Code 23-4-1-11
  3. Notice to one partner acts as notice for all partners. No problem if no gets absent-minded or is always forthright. Indiana Code 23-4-1-12
  4. One partner has the power to bind the partnership for his wrongful acts. Indiana Code 23-4-1-13
  5. A partner binds the partnership for any breach of trust to a third party. Indiana Code 23-4-1-14
Think about these problems when you start sharing business profits with another person.

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