McDowell Memo: Partnerships and LLC's

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Good Morning,
Today we are discussing partnerships and Limited Liability Corporations , both very popular forms of business ownership.
First , Partnerships are the joining of two or more individuals in ownership of a business. There are several ways this can occur. First there are equal partnerships, this is where each partner owns exactly the same percentage of the business assets, profits and debts. Then there are percentage partnerships in which individuals own different percentages of the business asset, profits, and debts. This can be one individual owning the majority of the business and others owning smaller parts. How big can partnerships be ? Depending on state laws they could one to hundreds of partners , although the legal work for something like that would be very prohibitive. Let's talk about the benefits and disadvantages of partnerships.
  • Equal Partnerships have no real "Boss" as everybody owns the same part of the company . You must be in agreement with your partner on every decision. 
  • Percentage Partnerships are great if you are the majority partner, if you are the minority owner you can be constantly overruled.
  • The extreme disadvantage to these partnerships are the tax and liability concerns. Most small partnerships are taxed by using the individuals personal taxes and just adding in the profits , and tax deductions , etc. Further should the business fold each partner is responsible for the debt of the company and liabilities of the company. You could therefore lose your house, etc.
  • In most cases the debt and liabilities would be split in a Percentage Partnership by the percent of your ownership, but if for some reason the assets of the partners are not equal and the majority partners assets cannot sustain the percentage of loss. It is then possible for the others to have to use their assets to make the debt holders whole. 
Now lets look at Limited Liability Corporations. Here based on state laws you can set up a corporation that again can be equal or percentage based. The laws allow you to only put certain assets available for recovery should the business fold. This allows many people to get involved in investing in businesses that would not normally be capable of withstanding the risk of investing. The percents that you can protect from recovery differs from state to state but in most case this is a very effective method of getting involved. The difference also is in how you file taxes and how you are sued. In this case many file taxes as a corporation and with that there is added cost for accounting purposes. Also , the corporation is the entity sued in these LLC's not the individual owners. Again with these there are issues of who is the controlling voice in management decisions unless this is a percentage ownership or specifically spelled out in the incorporation documentation.

  • Advantage to LLC protection from loss for business failure or lawsuit
  • Disadvantage - Legal fees and tax issues 
  • Popularity - this form is booming because it allows people to get involved that wouldn't be able to risk their homes ,etc. 
What are the disadvantages or pitfalls to avoid in both of these ownership styles? With these ownership styles there should always be a written partnership agreement reviewed and approved by a competent attorney. Too many times things that are not included are the basis for one partner or another wanting out and then the buyouts can become messy. I recommend the following that every partner should have the following:
  • A life insurance policy that covers the investment and potential liability that names their survivors as the receipients.
  • A stipulation to the partnership that specifies what occurs should a partner die.
  • A stipulation in the partnership that details how an owner can leave the partnership and how the buyout will occur.
  • A stipulation to the partnership that requires an annual audit and report by an independent CPA of the books of the partnerships business. 

Finally before getting involved in any business deal know your partner, you are putting your families well being in their hands. If you are not comfortable , buy stock in the stock market. If not take the chance and be prepared to work hard and dream big.

Next week : We will finish this section on ownership. Remember any questions , comments or concerns you can contact me at mcdowellcharles 517@yahoo.com

Have a great week and keep dreaming.
CHUCK

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