By Cliff Ennico
“I have run my own professional services business for some time.
In the course of running my business I have become close and friendly with two other professionals in the county where I live.
We have worked together on a number of projects, and we seem to work well together.
So we have decided to market some of our services together as a team and split the profits from certain jobs. We have set up a website under the name ‘ABC Partners,’ with short bios and photos of each of us and a description of the services we will work on together.
We don’t intend to do everything together. Each of us will be free to work with clients outside of the arrangement. We will work together only on very large projects that are too big for any one of us individually. We may also bring on board people in other disciplines so that clients can get all of the necessary skills for a job in one place.
Our attorney is freaking out about this. She says we have formed a partnership and can all lose our houses if something goes wrong. We never intended to be partners, and we don’t have a partnership agreement. I know lawyers are paid to worry, but is she right about this? Can we get around this problem by just taking off the ‘Partners’ in our name?”
Sad to say, but your attorney is 100 percent correct.
By setting up this website, you have created what is called a “general partnership.” Once of the biggest misconceptions in the world of small business is that “you have to have a written partnership agreement to form a partnership.”
Not true.
You can legally form a partnership with a handshake. You can even (as is the case here) form one by accident.
It doesn’t matter that you used the word “Partners” in your name. Even if you hadn’t done that, your website holds the three of you out as partners, and that’s enough for the law to imply a partnership.
Partners have what is called “joint and several liability”. That means that if one of you makes a professional mistake, your aggrieved client can sue all three of you and can collect from whichever of you has the deepest pockets. He is not obligated to collect one-third from each of you. Depending on your state law, he may be able to put liens on your houses and other personal assets as collateral for his judgment.
There are two ways you can get around this problem.
First (and the better way), you can form a limited liability company (LLC) for the work you will be doing together. LLCs are inexpensive to form and easy to operate. You can define the “purpose” of the LLC as narrowly or broadly as you wish with the help of your attorney. Then make sure the LLC name appears clearly on your website, stationery, business cards and other marketing materials.
Of course, you will have to file a partnership tax return (IRS Form 1065) for the LLC each year, and each of you will need to receive Form K-1 showing your share of the LLC’s profits and losses for the year. You will almost certainly have to register the LLC as well for state and local taxes depending on the type of services you are rendering.
If you do not wish to form an LLC, there’s a second way you can get around the problem: each of you can form an LLC or corporation for his own business, and then list the LLC or corporation as the “partner” of “ABC Partners” on your website. Next to each of your photos, there would appear text saying “John Jones, Managing Director of John Jones LLC, partner of ABC Partners.”
By doing so, when people look at your website they will be seeing a general partnership consisting of three separate LLCs or corporations. Your LLC or corporation will still be liable for anything that “ABC Partners” does wrong, but your liability will be limited to the business assets you have contributed to the LLC or corporation. Your personal assets won’t be at risk.
You will need to word your website text very carefully to make certain clients and others who view the site know that you have limited liability. You should also create a short “disclaimer” document stating that you have limited liability, and post it on your home page so that it’s clearly visible.
Yes, I realize that making these changes takes a lot of the “pizzazz” out of your joint marketing efforts. That’s why I personally think the LLC is the way to go here.
One more thing: before you work with people in “other disciplines,” check your professional code of ethics to make sure you can. For example, lawyers are strictly prohibited from entering into partnerships – even accidental ones — with nonlawyers.
Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and host of the PBS television series ‘Money Hunt’. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. COPYRIGHT 2014 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC.
