You should never operate any business or practice as a general partnership. Why? Because a general partnership is a creditor or plaintiff’s dream and a partner’s liability nightmare. Consider three hidden dangers of a general partnership:
1. Partners Have Unlimited Liability for Partnership Debts
This tragic fact goes unrealized by many business people, professionals, and other entrepreneurs when they’re involved in general partnerships. They, in effect, personally guarantee every partnership debt and personally assume the risk for malpractice, accidents, and other liability sources of the entire partnership. They fail to consider that their liability as a partner is joint and with several other partners. A plaintiff who successfully sues the partnership can collect the full judgment from any one partner. An example:
Case Study: Jane and Ted’s Venture
Jane and Ted were friends who decided to go into a real estate venture together to refurbish an old office building to use as a location for their practice with extra room to rent to other tenants. Events went well for a while, but their real estate market went sour and they defaulted on a $650,000 loan to the bank. Jane was much wealthier than Ted, so the bank pursued Jane for the full amount, ignoring Ted.
2. Partners Have Unlimited Liability for Their Partners’ Acts
If you are a partner in a dermatology practice that’s structured as a general partnership, you assume all of the risk that any of your partners will cause a lawsuit. In a general partnership, when a lawsuit arises from one partner’s act or omission in the ordinary course of business, all partners are personally liable. The dreaded joint and several liability then applies — meaning if one of your partners gets into trouble, you can be personally liable for the entire amount — even if you were neither involved in the alleged incident nor aware of it.
Think of the many ways a partner could get you into trouble: He commits malpractice, gets into a car accident while on partnership business, defrauds someone through the business, sexually harasses an employee, wrongfully fires an employee, etc. Multiply this risk times the number of partners in your partnership. You have a lawsuit liability nightmare. A real-world example:
Case Study: Michael Gets Burned by His Partner
Michael was the founding partner in a successful three-partner dermatology practice near Phoenix, AZ. It was structured as a general partnership. Three years ago, one of the practice’s former employees sued the practice for sexual harassment. The suit was based on past behavior toward the former employee by one of the current partners.
Settlement negotiations were unsuccessful, and the trial jury awarded an extremely large verdict against the partnership. Furthermore, this type of claim was not covered by the practice’s malpractice coverage.
Since Michael was the wealthiest of the partners, the plaintiff’s lawyer pursued him first, forcing Michael to pay the entire amount — which was more than $1 million — from his personal savings.
Although Michael had not conducted any liable behavior, he was still liable under the risks of a general partnership.
3. You May Be an “Unaware” General Partner
A general partnership does not require a formal written agreement, as does a limited partnership. You can verbally agree to start a venture with another and create a general partnership, with all of its liability problems. Think about this whenever you start a new business venture with someone.
Even if you make no agreement to partner with another person, the law may impose general partnership liability on you if the general public reasonably perceives you as partners. You may already be part of a liability-ridden general partnership and not even know it.
Case Study: Roger Inadvertently Has Partners
Roger was one of four physicians who used a common office arrangement. They each had their own patients, whom they did not share. They did, however, share a common waiting area, support staff, and accounting. Each professional had his own practice methods, set his own hours, and was not otherwise accountable to the others.
When one of the doctors was sued by a client for professional misconduct, Roger and the two others had a rude awakening.
Although only the client’s physician was negligent, all four were defendants in the lawsuit. The court found that the patient could reasonably conclude the four professionals were partners together because of their office set-up and common support staff.
Therefore, the court allowed the plaintiff to proceed with the suit against all four, as a general partnership, with each jointly and severally liable for the plaintiff’s losses.
What Alternatives You Should Consider
What business form should you use, if not a general partnership? Consider a limited partnership, a C or S corporation, or a limited liability company. These entities have limited liability provisions for their owners.
If you do use a general partnership, each partner should set up a corporation and the corporations should become the partners in the general partnership.
This advice is followed by many medical professionals and attorneys using professional corporations (PCs). Each doctor or lawyer sets up a PC, and the PC is the official partner in the partnership, not the professional personally.
By structuring the partnership in this way, the underlying corporate owner’s personal assets remain protected from claims against the partnership. However, as with any corporation, the corporate formalities must be followed for asset protection.
You should never operate any business or practice as a general partnership. Why? Because a general partnership is a creditor or plaintiff’s dream and a partner’s liability nightmare. Consider three hidden dangers of a general partnership:
1. Partners Have Unlimited Liability for Partnership Debts
This tragic fact goes unrealized by many business people, professionals, and other entrepreneurs when they’re involved in general partnerships. They, in effect, personally guarantee every partnership debt and personally assume the risk for malpractice, accidents, and other liability sources of the entire partnership. They fail to consider that their liability as a partner is joint and with several other partners. A plaintiff who successfully sues the partnership can collect the full judgment from any one partner. An example:
Case Study: Jane and Ted’s Venture
Jane and Ted were friends who decided to go into a real estate venture together to refurbish an old office building to use as a location for their practice with extra room to rent to other tenants. Events went well for a while, but their real estate market went sour and they defaulted on a $650,000 loan to the bank. Jane was much wealthier than Ted, so the bank pursued Jane for the full amount, ignoring Ted.
2. Partners Have Unlimited Liability for Their Partners’ Acts
If you are a partner in a dermatology practice that’s structured as a general partnership, you assume all of the risk that any of your partners will cause a lawsuit. In a general partnership, when a lawsuit arises from one partner’s act or omission in the ordinary course of business, all partners are personally liable. The dreaded joint and several liability then applies — meaning if one of your partners gets into trouble, you can be personally liable for the entire amount — even if you were neither involved in the alleged incident nor aware of it.
Think of the many ways a partner could get you into trouble: He commits malpractice, gets into a car accident while on partnership business, defrauds someone through the business, sexually harasses an employee, wrongfully fires an employee, etc. Multiply this risk times the number of partners in your partnership. You have a lawsuit liability nightmare. A real-world example:
Case Study: Michael Gets Burned by His Partner
Michael was the founding partner in a successful three-partner dermatology practice near Phoenix, AZ. It was structured as a general partnership. Three years ago, one of the practice’s former employees sued the practice for sexual harassment. The suit was based on past behavior toward the former employee by one of the current partners.
Settlement negotiations were unsuccessful, and the trial jury awarded an extremely large verdict against the partnership. Furthermore, this type of claim was not covered by the practice’s malpractice coverage.
Since Michael was the wealthiest of the partners, the plaintiff’s lawyer pursued him first, forcing Michael to pay the entire amount — which was more than $1 million — from his personal savings.
Although Michael had not conducted any liable behavior, he was still liable under the risks of a general partnership.
3. You May Be an “Unaware” General Partner
A general partnership does not require a formal written agreement, as does a limited partnership. You can verbally agree to start a venture with another and create a general partnership, with all of its liability problems. Think about this whenever you start a new business venture with someone.
Even if you make no agreement to partner with another person, the law may impose general partnership liability on you if the general public reasonably perceives you as partners. You may already be part of a liability-ridden general partnership and not even know it.
Case Study: Roger Inadvertently Has Partners
Roger was one of four physicians who used a common office arrangement. They each had their own patients, whom they did not share. They did, however, share a common waiting area, support staff, and accounting. Each professional had his own practice methods, set his own hours, and was not otherwise accountable to the others.
When one of the doctors was sued by a client for professional misconduct, Roger and the two others had a rude awakening.
Although only the client’s physician was negligent, all four were defendants in the lawsuit. The court found that the patient could reasonably conclude the four professionals were partners together because of their office set-up and common support staff.
Therefore, the court allowed the plaintiff to proceed with the suit against all four, as a general partnership, with each jointly and severally liable for the plaintiff’s losses.
What Alternatives You Should Consider
What business form should you use, if not a general partnership? Consider a limited partnership, a C or S corporation, or a limited liability company. These entities have limited liability provisions for their owners.
If you do use a general partnership, each partner should set up a corporation and the corporations should become the partners in the general partnership.
This advice is followed by many medical professionals and attorneys using professional corporations (PCs). Each doctor or lawyer sets up a PC, and the PC is the official partner in the partnership, not the professional personally.
By structuring the partnership in this way, the underlying corporate owner’s personal assets remain protected from claims against the partnership. However, as with any corporation, the corporate formalities must be followed for asset protection.
You should never operate any business or practice as a general partnership. Why? Because a general partnership is a creditor or plaintiff’s dream and a partner’s liability nightmare. Consider three hidden dangers of a general partnership:
1. Partners Have Unlimited Liability for Partnership Debts
This tragic fact goes unrealized by many business people, professionals, and other entrepreneurs when they’re involved in general partnerships. They, in effect, personally guarantee every partnership debt and personally assume the risk for malpractice, accidents, and other liability sources of the entire partnership. They fail to consider that their liability as a partner is joint and with several other partners. A plaintiff who successfully sues the partnership can collect the full judgment from any one partner. An example:
Case Study: Jane and Ted’s Venture
Jane and Ted were friends who decided to go into a real estate venture together to refurbish an old office building to use as a location for their practice with extra room to rent to other tenants. Events went well for a while, but their real estate market went sour and they defaulted on a $650,000 loan to the bank. Jane was much wealthier than Ted, so the bank pursued Jane for the full amount, ignoring Ted.
2. Partners Have Unlimited Liability for Their Partners’ Acts
If you are a partner in a dermatology practice that’s structured as a general partnership, you assume all of the risk that any of your partners will cause a lawsuit. In a general partnership, when a lawsuit arises from one partner’s act or omission in the ordinary course of business, all partners are personally liable. The dreaded joint and several liability then applies — meaning if one of your partners gets into trouble, you can be personally liable for the entire amount — even if you were neither involved in the alleged incident nor aware of it.
Think of the many ways a partner could get you into trouble: He commits malpractice, gets into a car accident while on partnership business, defrauds someone through the business, sexually harasses an employee, wrongfully fires an employee, etc. Multiply this risk times the number of partners in your partnership. You have a lawsuit liability nightmare. A real-world example:
Case Study: Michael Gets Burned by His Partner
Michael was the founding partner in a successful three-partner dermatology practice near Phoenix, AZ. It was structured as a general partnership. Three years ago, one of the practice’s former employees sued the practice for sexual harassment. The suit was based on past behavior toward the former employee by one of the current partners.
Settlement negotiations were unsuccessful, and the trial jury awarded an extremely large verdict against the partnership. Furthermore, this type of claim was not covered by the practice’s malpractice coverage.
Since Michael was the wealthiest of the partners, the plaintiff’s lawyer pursued him first, forcing Michael to pay the entire amount — which was more than $1 million — from his personal savings.
Although Michael had not conducted any liable behavior, he was still liable under the risks of a general partnership.
3. You May Be an “Unaware” General Partner
A general partnership does not require a formal written agreement, as does a limited partnership. You can verbally agree to start a venture with another and create a general partnership, with all of its liability problems. Think about this whenever you start a new business venture with someone.
Even if you make no agreement to partner with another person, the law may impose general partnership liability on you if the general public reasonably perceives you as partners. You may already be part of a liability-ridden general partnership and not even know it.
Case Study: Roger Inadvertently Has Partners
Roger was one of four physicians who used a common office arrangement. They each had their own patients, whom they did not share. They did, however, share a common waiting area, support staff, and accounting. Each professional had his own practice methods, set his own hours, and was not otherwise accountable to the others.
When one of the doctors was sued by a client for professional misconduct, Roger and the two others had a rude awakening.
Although only the client’s physician was negligent, all four were defendants in the lawsuit. The court found that the patient could reasonably conclude the four professionals were partners together because of their office set-up and common support staff.
Therefore, the court allowed the plaintiff to proceed with the suit against all four, as a general partnership, with each jointly and severally liable for the plaintiff’s losses.
What Alternatives You Should Consider
What business form should you use, if not a general partnership? Consider a limited partnership, a C or S corporation, or a limited liability company. These entities have limited liability provisions for their owners.
If you do use a general partnership, each partner should set up a corporation and the corporations should become the partners in the general partnership.
This advice is followed by many medical professionals and attorneys using professional corporations (PCs). Each doctor or lawyer sets up a PC, and the PC is the official partner in the partnership, not the professional personally.
By structuring the partnership in this way, the underlying corporate owner’s personal assets remain protected from claims against the partnership. However, as with any corporation, the corporate formalities must be followed for asset protection.
