Which Business Structure Offers You the Best Protection in a Dispute Among Business Partners?
The first step in starting a business is filing for an employer identification number (EIN) for your business; an EIN is like a social security number, except for businesses instead of people. One of the first questions on the EIN application form asks you to choose an entity type, also known as a business structure; some of the most common business structures are partnership, S corporation, and limited liability company (LLC). Even if you have not yet filed for an EIN, you have probably already thought a lot about which business structure to choose. A lot of the advice about the pros and cons of the various business structures centers on how much you will have to pay in taxes and on how much paperwork is involved. In other words, the advice seems to be coming from optimists. No one founds a company expecting to disagree so sharply with one’s partners that the only way to resolve their differences is through a lawsuit, but partner disputes are a real possibility in any business, even if the partners were friends or family members before going into business together. The best time to contact a small business law attorney is at the beginning of your business relationship with your partners, not after disagreements have already taken root.
Extensive Written Agreements Prevent Prolonged Legal Battles
Different business structures have different requirements for documents in which you specify the rules for how you will run the business; depending on the type of business structure, these are called partnership agreements and operating agreements. Filing them is a prerequisite for having the State of Maryland or the District of Columbia recognize your business. Even though you might be in a hurry to get started on your business project, you should not rush through creating these documents, because if the members of your business end up suing each other, the court will require you to rely on the rules you set out in these documents, unless, of course, those rules are illegal. You should carefully think through every possible scenario involving member disputes. What will be the default solution? Can one member buy another member out of the business? Will the business dissolve and the partners go their separate ways? Sometimes just talking about these issues when you set up the company is enough to prevent disputes.
The LLC business structure is popular because it protects you from having to use your personal money to pay debts incurred by the business, but it is a double-edged sword. LLC members can be subject to garnishment of their distributions from the LLC in the event of a legal judgment against them. If you want to avoid that, then write a few provisions into your operating agreement proposing remedies the members must make before things get so bad that the other members are having a court garnish one member’s distributions.
Let Us Help You Today
You probably have not thought through all the “what if” scenarios related to disputes among business partners or LLC members, but small business attorneys have. You should talk to a skilled Washington DC small business law attorney early on in your business project, not just after the disputes start. Contact Tobin, O’Connor & Ewing or call 202-362-5900.