What is the best kind of business to form when you’re working with family? Here are the points to consider.
My brother and I are home improvement contractors who have only recently decided to do it full- time for ourselves. Our organization is a general partnership, no contract, everything 50/50. After a slow start, business is picking up faster than we can handle by ourselves. Our father wants to join us and we are unsure about our best organizational structure. A friend suggested that we incorporate to protect ourselves in case of lawsuits or bankruptcy. Is this a good idea, or unnecessary for us? If it is a good idea, where do we get started?
— JC in Richmond
There are many factors you need to think about here. For instance, your dad could work for you without being a principle (owner) in the business. Do you want him as a principle who would have voice in how you run the business? Or, do you want him to be just an employee? Something else to consider would be whether taking your father on as an owner would have long-term financial implications for the business. You need to check with an accountant to find out what impact having your father as part-owner would have on the business if he dies.
You also need to talk to an attorney in your local community who works regularly with small business owners. He or she would be able to advise you about local laws you need to be aware of, and will help you decide which would be the best form of business for your particular situation.
Chance are, after talking to an attorney, you’ll find that operating as a general partnership is not the best way to go.
“When you do business as a general partnership, each partner is jointly and severally liable for all obligations owed by the partnership and each partner’s personal assets are exposed to those potential liabilities,” says Kent Seitzinger*, who is the senior partner in the Roseville, California law firm of Seitzinger & Wilkens.
In other words, if one partner does something that incurs a debt, fine or penalty for the business, all the general partners are responsible for paying that debt – out of their own money if the business can’t pay the debt.
To avoid that problem, you may want to form either a limited liability company or corporation. That way, “if your brother or father did something negligently in the course of business, your personal exposure would be limited to your interest in the LLC or corporation and not your personal assets,” explains Seitzinger. The LLC or corporation would not shield your assets from liability for your own misconduct, or negligence, though.
“The formation of either an LLC or corporation can be very complex with issues such as what happens if there is a falling out and one person wants to leave, or one person dies, for example,” Seitzinger says. “Sitting down with a lawyer and resolving these matters up front will maximize the chances that the business will not be destroyed by collateral disputes among the three of you and, more importantly, will minimize the chance that family relationships will be stressed or ruined. “
* Kent Seitzinger is the senior partner in the Roseville, California law firm of Seitzinger & Wilkens. His firm is primarily a litigation firm with more than 50% of its practice in the area of employment and business law. He can be contacted by email at SWLAW1@aol.com