Cheap Can Be Expensive/Simple Can Be Complicated

By Rollyn H. Samp

Two entrepreneurs have a thriving computer software business.  They had "saved" on startup costs by avoiding what they thought was a complicated legal entity instead proceeding with a simple partnership.

Everything worked great until one of the partners was liable for injuries greater than his auto insurance in a car accident.  The injured party got a judgment against the partner and successfully came after the partnership assets.              

How could this have been legally avoided?  

  1. Stay away from "partnerships".   By law, partners may become liable for each other. This is called "joint and several" liability which means both partners may be liable for the total amount of a claim.   
  2. Utilize Limited Liability Corporations (LLC).  These are viewed legally as hybrid corporations but may be taxed like a partnership.  Most importantly, in the growing popular world of "asset protection" LLC's in certain states can provide great protection from creditors, defecting spouses or other claimants from collapsing an LLC.              

The most popular states for setting up an LLC are Alaska, Delaware, Florida, New Jersey, South Dakota, Texas and Virginia; called the "Magnificent Seven" by many business planners. South Dakota is preferred among these seven states because a judgment creditor cannot seek payment from an LLC to collect against a member.              

There are many other favorable asset protection features of LLC entities which can be explained by a business law attorney.

The lesson: 
Cheap may be expensive to those who fail to seek legal advice on business organization and asset protection.