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Partnership with a LLC

August 6, 2006

Q- For about six months I have been working out of my house in partnership (nothing formal) with two other people who possess complementary skill sets. The way I report my taxes is on schedule C for a proprietorship with TurboTax. However, one of my colleagues wants to set up an LLC (Limited Liability Company) with each of us owning one third. He thinks that organizing as an LLC will give us stature as a larger and more permanent company. Is this a wise idea for me?

Partnerships are not my favorite type of organization. By partnership I mean the business ownership being shared so that no one person has control. You can be a corporation or an LLC and still have a partnership arrangement where none of the partners owns a controlling interest. So it is not the legal type of business that determines a partnership but how the ownership is split up.

Partnerships are not worth going into because they basically mean no one is in charge and that is scary! Someone always needs to be in charge of an organization. Also, a partnership can be so sticky and nasty if things do not work out and generally they do not. I do know some that worked out over the long-term but this is rare.

The reason that partnerships do not work out is the same, or about the same, as the causes of our nation’s high divorce rate. People start out in a partnership in a courting period then move to the honeymoon. After this initial period, couples and partners see one another with a lot more clarity and frequently they do not like what they see.

Many partnerships establish agreements about the roles and duties of each partner before the partnership is finalized. In many ways, this is exactly like a prenuptial agreement, outlining how they will split the assets if the marriage does not work out.

If you do finally decide to follow through on the partnership, it is mandatory that you have a partnership agreement set up specifying such things like how a partner can be fired and what happens if a partner wants to sell his share. A lot of details need to be worked and many good attorneys can help you through this.

Being an LLC or corporation does not increase the perception as to the size of your business and this just is not good logic at all for entering into an LLC. For small companies, potential customers are much more concerned about your prior work, both with respect to quality and quantity, and your prices. They mainly want to make sure you can deliver on your promises.

I would continue to work with these people on a project by project basis without any long term commitment in terms of organization. You can still have a formal name, brochures and business cards but you are not wedded to the other parties in a legal relationship.

Thanks so much for asking this question.