People in California who plan to go into business with each other should carefully consider how they will structure their organizations. Choosing the right structure can help minimize liability risks while clearly defining the responsibilities of each partner.
Limited liability partnerships
In a limited liability partnership, the partners will only be liable for their own wrongful acts and not those of each other. For example, if one attorney at a law firm that is structured as a limited liability partnership commits legal malpractice, the other partner will not be personally responsible for the negligent attorney’s wrongful acts. However, both partners will be responsible for paying the debts of the firm. A limited liability partnership reduces the risks faced by each partner that they would otherwise be an issue in a general partnership.
In a general partnership, two or more partners agree to do business together. Each co-owner is responsible for all the debts created by the partnership and shares equally in the profits. General partners create partnership agreements that define the roles each partner will have and how each person’s personal liability may be affected by the business’s income and debts. By contrast, a limited partner will only be personally liable for the debts of a partnership to the extent that he or she has invested in the business.
Before people begin doing business together, figuring out how to structure the company is a critical first step. By choosing the right legal entity structure, business owners may protect themselves from personal liability. People may want to consult with experienced business law attorneys for advice about the most appropriate type of structure for their particular business types.