As an entrepreneur, the form of entity you want for your business is not a general partnership, but a corporation or a limited liability company.
State law determines who is liable for an entity’s debts. Under state law, corporations and limited liability companies have limited liability for their owners—there owners are not personally liable for debts of the business. The limitation of liability applies to all debts of the corporation or the limited liability company, including tax debts, with one exception. If a corporation or limited liability company fails to pay its payroll taxes, the “trust fund” portion of those taxes—income tax, Social Security tax, and Medicare tax withheld from employees’ wages—may be assessed against the “responsible persons” of the corporation or limited liability company. But the Internal Revenue Service must afford the target of the proposed assessment due process before making the assessment. The IRS provides the target notice of its intent to make the assessment, and affords the target a hearing on the proposed assessment before the IRS Collection Division. If the target is unable to persuade the IRS Collection Division that the assessment should not be made, the target must be allowed a further hearing before the IRS Appeals Office.
In contrast, partners have unlimited personal liability for debts of their general partnership, including its tax debts. A partner is personally liable for all federal tax obligations of his general partnership—all income tax as well as all employment taxes (not just the trust fund portion of employment taxes). The IRS need not separately assess a general partnership’s taxes against the partners—an assessment against the general partnership is, by operation of law, also an assessment against the partners. United States v. Galletti, 514 U.S. 121-24, 158 L. Ed. 2d 279, 124 S. Ct. 1458 (2004).
A general partnership exists when associates engage in business together, and agree to share profits and losses. The agreement can be a written, oral, or even implicit. A general partnership exists by default when associates engage in business together and agree to share profits and losses, without specifying any other kind of entity.
To avoid general partnership status, associates should specify that they are forming another kind of entity, such as a corporation or a limited liability company. A corporation is formed by preparing articles of incorporation and filing them with the state corporation authority. Minutes of shareholders’ meetings and minutes of directors’ meetings drawn, and stock certificates issued.
A corporation need not have more than one shareholder. If it does have more than one shareholder, they would be well-advised to have a shareholders’ agreement, specifying their rights in the corporation, drawn and signed.
A limited liability company is formed by preparing articles of organization and filing them with the state corporation authority. A limited liability company need not have more than one owner (called a “member’). If a limited liability company does have more than one member, they would be well-advised to have a membership agreement, outlining their rights in the company, drawn and signed.
Associates must not only form their entity as a corporation or a limited liability company, they must also operate it as a corporation or limited liability company. A corporation should have minutes of at least annual shareholders’ and directors’ meetings, or consent resolutions in lieu of meetings. A limited liability company should have minutes of at least annual members’ meetings, or consent resolutions in lieu of meetings.
In contracts and correspondence on behalf of their entity, associates should sign not in their own name, but in the name of their corporation or limited liability company, as follows:
A Michigan Corporation
A Michigan Limited Liability Company