Need to establish legal entity for business partnership or is signed agreement enough?
I'm thinking about entering into a business partnership with someone. The work product will be a revenue-generating web-based service. We plan to both sign a legal business partnership document, outlining who is responsible for what and how the profits will be split. Is such a document adequate or do we need to actually establish a legal entity (LLC, S-Corp, etc.)? If it matters, I'm in New Jersey and my potential partner is in the state of New York.
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How legal is the agreement you have in mind? What you describe is pretty much exactly what an LLC does. Be very careful with partnerships, you can enter into one without signing any papers, just by your actions of working together. It's unlikely that you can operate for long without a legal entity (LLC or S Corp), but it doesn't mean you should incorporate today either. – Alain Raynaud 12 years ago
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I was planning to find a relatively simple "partnership agreement" template and modify it as necessary. My partner and I would sign it, but I was hoping to avoid the extra steps (and hassle and costs) of setting up a legal entity. – Scott 12 years ago
1 Answer
Yes, you need a legal entity. If you don't establish a legal entity, then you are a partnership, and a partnership is THE WORST type of business entity you can have, for the following reasons:
1) It provides no protection of your personal assets from liabilities incurred by the business. So if your business gets sued, the courts can take your bank accounts, investments, etc. to pay the law suit or other business debts.
2) In a partnership, both parties are responsible for the debts regardless of who incurred them, so if your partner does something stupid (like sexually harass an employee), a law suit against the partner is the same as a law suit against you.
I recommend a multi-member LLC. They are simple to set up and provide liability protection for your personal assets. New Jersey is a good state in which to register an LLC because their LLC laws are more friendly to the business owner.
