It could be a big “so what” or a little “so what.” Let me explain. I was recently given the privilege of working with a couple of great guys who started a new company to launch a quite remarkable product. The company was already formed as a Michigan Limited Liability Company (LLC). My job is to write a disclaimer/terms of use for the website. Consistent with my practice of bringing added value to my clients, I took it upon myself to look at their state filings to see how they were formed. While doing so, I noticed that their 2010 state filing listed the title of the filer as “Partner.” Hmmm . . . I wondered to myself what lawyer they worked with to form the company (more later on why that matters). Turns out they didn’t work with a lawyer – they formed the company via Legal Zoom (according to the Articles of Organization).
So, why does that matter? Well, as any business lawyer will tell you, one of the main benefits of forming a LLC (or a corporation) is the liability shield it provides (hence “limited liability” company). The idea being that the LLC members are not personally liable for the debts and other liabilities of the company. The liability shield doesn’t come without effort. There are certain things business owners should do to ensure maximum liability protection (a topic for another post). If they don’t, it may be possible for a creditor to “pierce the veil” – that is, bypass the business entity and go after the business owner’s personal assets.
And what does that have to do with listing your business title as “Partner?” Well, a partnership is not a LLC (or corporation) and typically has no liability protection. Generally, all partners are personally liable for the actions of all the other partners. You can quickly see why not many businesses form as partnerships. I sure wouldn’t want to be personally liable for what someone else did! But Mike, my CPA said that I am a partnership – that’s how the IRS will tax my business. Assuming you didn’t elect otherwise, you are correct . . . for tax purposes you are treated as a partnership. If you formed as a LLC, you do NOT want to be treated as a partnership for liability purposes – it would defeat the point of forming the LLC.
Now it may seem trivial or overly protective, but listing your title as Partner could be used as evidence (albeit small) to “pierce the veil” and go after the owner’s personal assets. How does Legal Zoom (and other companies like them) come into this? Well, they say themselves that they are not lawyers – they are a document preparation company. Because they provide documents based on a questionnaire and not counsel, they are able to offer it at a much lower price than you would likely get working with a qualified lawyer. But at what ultimate cost? Losing your personal assets? That’s why I mentioned earlier that I wondered what lawyer they worked with. Every business lawyer I know would counsel the business owner about what liability protection means and how to ensure it protects them. For example, listing yourself as a Member or Manager . . . not a Partner.
Now I’m not faulting the guys who formed the business . . . not at all. Just like me – you don’t know what you don’t know. I surely don’t have the knowledge they do about how to create their product. And I’m looking forward to helping them maximize their growth while minimizing their risk. We all have our roles, and I hope by sharing this information with them (and you) I’ve helped fulfill mine.