Small businesses are the backbone of the American economy. While the big boys get all the media attention, there is little doubt that small businesses make the wheels go round. That being said, the legal and tax regulations are not very friendly towards these businesses.
When it comes to businesses, the laws surrounding how things are formed and run are legendary in their complexity and voluminous nature. Larger corporations employee an army of accountants and lawyers to just keep up. As a smaller business, you simply don’t have the resources to do the same thing.
In the legal arena at least, the government and courts have recognized this fact. To deal with it, they have set up default provisions to make your life immeasurably more difficult. Why? Well, you might be doing business as a default entity and not even realize it. This can lead to serious complications if you then get into a dispute that results in a lawsuit being filed against you. Let’s take a closer look.
I know how to build out websites. You know how to get them ranked in the top 10 on Goggle, Yahoo and MSN. Hey! We could pursue a joint venture where I build websites and you get them ranked. I’ll charge for my services, you charge for yours and we’ll make a mint! The future is so bright we’ve gotta wear shades!
A year passes and we are indeed making some serious headway. Then Google changes the way it ranks sites. You can no longer get the top 10 rankings. Clients’ sites drop like rocks. They get testy. They file lawsuits against you. Thank god I had nothing to do with the ranking process!
Not so quick.
The lawsuits come in claiming that both of us are liable because we acted as a general partnership. Huh? We never signed a partnership agreement and never called ourselves a partnership.
The bad news is the law is going to consider us to have been a partnership. Why? Well, when two parties get together to pursue a business venture, they must designate the type of business entity or relationship they want. If they do not, they will be classified by default as a general partnership. This is not a good thing. Why? All partners are liable for the debts of the partnership regardless of whether they were involved in bringing them about. In this case, I would be just as liable as you despite the fact I never once worked on getting sites ranked on the search engines.
If you are in business with another party and have not addressed how you will do business together in writing, you are most likely going to be considered a general partnership under the law of your state. This can lead to a disaster if you get sued. Make sure to take steps to avoid this or risk the loss of your business and personal assets.