QUESTION.
I'm probably going to form an LLC when I start my new business. I have a partner who is going to own 40% of the new company. Why should I consider forming an LLC instead of a simple partnership? Please advise.
ANSWER.
The short answer: to limit your liability exposure. Partnerships are very similar to sole proprietorships. If a partnership or sole proprietorship injure someone during the course of business through its negligence or other fault, then it or they can be liable to the injured party to the extent of his injury. Let's say the partnership is worth $25,000 and the two partners each have estates worth $100,000. In such a case, an injured person who has lost $250,000 can recover the full $250,000 from the two partners and the partnership.
If, however, the business were an LLC instead of a partnership, then the same injured person could only recover $25,000 (the value of the partnership).
Both an LLC and a partnership have similar agreements explaining the company and the owners' relationships. In a partnership the document is called a Partnership Agreement. In an LLC the document is called an Operating Agreement. Drafting either one of these documents can be time-consuming. They usually cost a bit to create since lawyers are often hired to write them. It's advisable to write your own after doing some research and then take it to a knowledgeable lawyer for review.
I hope my comments are helpful to you. Good luck! Regards, -Jeff
Jeff Lippincott
SCORE.org Counselor
Princeton, NJ
scoreprinceton @ aol.com
www.scoreprinceton.org
http://www.jlippin.com/
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