Every person who is a partner with anyone else in an activity can typically be personally liable for damages resulting from the activity. For instance, if two siblings are partners in a farming operation, and one of the siblings causes a farm accident, the other sibling can be just as legally liable for the accident as the sibling who actually caused the accident.
Therefore, people who might have otherwise been partners may instead co-own an LLC as “members.” When one member of an LLC causes an accident within the scope of the LLC’s activities, the other member personally will not generally be liable for that accident.
In fact, when an LLC is in place, even a member of the LLC who actually, physically causes an accident (but not intentional acts that cause damage) within the scope of the LLC’s activities will generally not be personally liable for the accident.
A partnership can be created by circumstances without any written agreement. In other words, people can sometimes be considered partners even when they do not intend to be partners.
For instance, if two workers work together on a somewhat regular basis (some nights and weekends) to help people move household items when people relocate, those two workers would likely be considered partners in a moving business. If one of the workers causes damage as a part of work done in the moving business, the other partner can be personally liable for that damage.
A classic case of an actual but usually unintended partnership is where a small business owner uses his or her personal vehicle for the business’s activities. In such a situation, the business and the owner can be considered partners such that the business’s liability protections (like an LLC) could be circumvented.
A “limited partnership” that can provide some personal liability protection for some partners, but organizing and maintaining a limited partnership is often more cumbersome than simply using an LLC. And, unlike regular partnerships, limited partnerships (with its legal protections) cannot arise just because of circumstances.
In sum, there is a huge distinction legally between partnerships and relationships other than partnerships. Thus, most people do not want to legally be considered partners with other people. And, therefore, most people want to make sure that a partnership does not automatically arise just because people are working together in some fashion.
I usually recommend undertaking three steps to avoid unintended partnerships. First, identify all potential relationships or shared uses of resources that could lead someone else to think a partnership might exist. Second, create one or more LLCs to limit liability to each business segment or sector.
Third, have all people and entities who may possibly be considered partners enter into a written agreement among them all specifying that any shared uses of human resources or other resources (like machinery, equipment and vehicles) is explicitly not a partnership but is rather a series of “mini” lease agreements as to each use by another person or entity, which use will be regularly “reconciled” among the various participants.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.