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Internet_Partnerships_ _Dont_Throw_Away_Your_Business
| Internet Partnerships - Dont Throw Away Your Business
General partnerships are a poor business entity choice when it
comes to pursuing business activities. They fail to provide the
asset protection shield that should always be put between your
business activities and personal assets. Many small businesses,
however, find it profitable to combine their product or services
with other small businesses. In doing so, they often fail to
realize that they are subjecting them to the same exposure as a
general partnership.
Why Even Worry About It?
You put a lot of time, money and sweat into your business. After
years of effort, you have it fine-tuned and are making a nice
living. How willing are you to lose your business?
Consider the following hypothetical situation involving two sole
proprietors. Our first party, Programmer, creates computer
programs for managing websites. The second party is Mark, the
owner of a site that provides small businesses with websites.
Programmer and Mark come to the conclusion that they can make
big money by opening a joint site. This type of situation occurs
every day on the Internet. How should they do it?
The best option is to form a corporation or LLC. Each party will
own an agreed upon percentage of the company. Mark will
contribute his marketing ability while Programmer contributes
software platforms. The bylaws [administrative rules] of the
corporation will detail how profits are divided as well as
detailing who gets what [domain name, client list] if the
relationship doesn’t work out. If a corporation or LLC is not
formed, each party exposes their individual businesses to
liability just as would occur in a general partnership.
What has been accomplished? Mark and Programmer are protected
from liability arising from the new business. If the company
fails or is sued because of problems with the software, Mark and
Programmer will avoid personal liability and their original
businesses are not touched. Are they completely protected? NO!
Mark and Programmer are still open to liability on the "back
end". Without realizing it, each trusts the other to properly
run their independent businesses. Why is this?
Assume that Mark and Programmer follow the above plan and the
business is very profitable. One day, Programmer is served with
a lawsuit claiming that he violated copyright laws with a
program that he developed before meeting Mark. The nine
companies to which he sold the program also sue him. The trial
goes badly and Programmer is found liable to the tune of
$750,000.
Guess what happens next? Since he is a sole proprietor,
Programmer's interest in the joint business with Mark is seized
to satisfy the judgment. Alternatively, he files personal
bankruptcy. Either way, Mark is involuntarily going to have a
new business partner that probably can’t program! In short, we
are talking about a disaster.
How To Protect Yourself
Business entities are the key to limiting your exposure to
liability. In the above situation, Mark and Programmer should
own the joint company as individuals, but they should form
business entities for their personal businesses. If the personal
businesses are sued, their individual ownership of the joint
venture entity is shielded from attachment.
As a general rule, you should form an individual business entity
for each business you own. By doing so, you are better able to
limit the potential damage of a lawsuit involving one of the
businesses.
About the author:
Richard Chapo is with SanDiegoBusinessLaw
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