Creating a Partnership Structure

When determining what type of business structure is necessary for your business partnership, one of the considerations needs to be how to protect yourself from the business and from your partners.

People considering partnerships generally struggle with the type of entity they should create. Should they create an LLC, an S-Corporation, or Sole Proprietorship?

Answer these questions with your professional advisor: What is the business doing that presents risk, what is your role, and what assets are you trying to protect?

It is critical to understand the core principle of asset protection: if you can separate what you do from what you own, you have the elements of any reasonable asset protection strategy. The primary mission in asset protection is to effectively separate the (risky) activity in the business from the personal assets of the partners or otherwise unaffiliated business assets. This should guide the decision between you and your professional advisor on which entity to use.

Let me share a personal story. In a past business, my partners and I did not set up our legal or financial structure of the partnership correctly. Our side of the partnership was sued for over $90,000. We were best friends and we ended up dissolving the partnership and have barely spoken to each other since. This occurred because we did not have proper legal structure set up in the beginning, and we did not have a professionally drafted corporate agreement.

Should you pay an atto
ey to create a legal entity for you? That is a personal choice. It is very easy for you to go through the process and file the paperwork yourself. Where I am adamant is that you should pay a skilled and seasoned atto
ey to draft your corporate agreement or analogous document for your partnership. This document governs how you and all of your partners are going to be responsible to the business, how everyone will engage the business with appropriate compensation levels, and spell out remedies in the case that somebody does not do what they agreed to do.

If you want to save money and do the corporation filing yourself, do so, but the corporate agreement (or analogous document) is literally the most important document in your partnership set up.