Partnerships
When we discuss partnerships, we are focusing on a limited liability partnership (LLP) which is not a partnership in the traditional form. There are big partnerships out there with general partners and limited partners. If you are a limited partner in a venture, your risk is only to the amount of money that you have contributed to the partnership. But if you and a friend went into a partnership to provide a service or product, and if either of you should be sued for any reason, both of you are at risk. For that reason, we don't like using the structure of general partnerships. If you have an employee in your existing partnership, dissolve the partnership and form a corporation, today!
What we like about the LLP is that the limited partners are not normally personally liable for the debts of the limited partnership. The intent of this entity is to provide protection from personal liability for a partner in the partnership for the acts of the partnership and other partners in the absence of the partner's own negligence, misconduct, or wrongful act. The LLP also provides for some wealth moving and tax tools.
A limited liability partnership is composed of one or more general partner(s) and one or more limited partner(s). A limited partnership differs from a general partnership in several ways. Three basic ways are:
There must be a state statute that provides for the formation of a limited partnership. Most states have this provision but you should check with your State Attorney General.
The LLP MUST comply fully with all the requirements of the statute. If it does not comply completely, the partnership will be treated as a general partnership and protection is lost.
The LLP partner is liable only for the amount of capital contributed or agreed to be contributed.
As with all things, there is more than meets the eye, so for our purposes, this is designed only to get you started thinking. Here is a story.
Mom and Pop were right at retirement with 1.2 million in assets. They owned a little rental, occupied by a nice grandma. Grandma had her small grandchild come for a visit. The child got into lead based paint and became severely retarded. The resulting law suit was settled for about 2 million dollars. Mom and Pop lost everything. Had the rental been in a limited partnership, they would have lost the rental, but nothing else. This incident illustrates how we can be at risk and never even be aware of it.
Corporations
Corporations come in several forms. The 'C-corp' is what we think of as one of those big corporations we read about and invest in. It pays corporate taxes and gives out taxable dividends. The S-corp, also known as a 'Professional corporation' is often used by doctors, dentists, and lawyers. It is a corporation that almost always acts as a flow through entity, because profits or losses pass through to the shareholders. The new kid on the block is known as the Limited Liability Corporation (LLC). It is a corporate form under State auspices which functions as a corporation but allows the owners to decide each year if they wish to be taxed as a corporation or as a partnership where profits or losses flow to the partners. The tax return will most likely be on a form 1065 partnership form. Since it is a creation of the State a form 8832 must be sent to the Fed as notification of your taxing status.
The corporation is about a 'C' grade in asset protection but it is an 'A' in tax control. A well constructed corporation will provide you with the best vehicle to control your income taxes.
We will focus on the LLC as we believe it to be the best structure to use for small businesses.
The LLC has some characteristics of a sole proprietorship, some of a partnership, and some of a corporation. The LLC has members rather than shareholders and operates under a contract (called an operating agreement) between owners. To have a legal existence, it must file Articles of Organization with the Secretary of State. Personal liability is not imposed on members participating in management of the LLC.
Summary
Of all the topics and subjects offered in this web-site, Asset Protection is the one that should command your immediate attention. Most of the topics presented can be contemplated, developed and modified. This topic however, addresses issues that can turn your world upside down in an instant.
Your 'Will', durable POA, living will, and POA for medical decisions are a number one priority. Next marshal your affairs so that your POA or PR can step in, find your assets, and execute your wishes. Then analyze your insurance needs and secure the appropriate protection. Finally, if more sophisticated measured are being considered, seek professional guidance from an attorney or certified planner. Learn, as always, both the good and bad of each product being considered.
Asset Protection
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