Wednesday, September 4th, 2019
By Vanessa Dias
Last May, Forbes posted an article about Holland, Michigan being the number 1 city in the country for small businesses (Source: WalletHub). A recent study also reported an increase of 20 percent in startup businesses in West Michigan and showed that half of venture capital companies in the state have invested in start-ups in Holland (Source: Michigan Venture Capital Association).
Given the constant growth from companies in the area, the low cost for starting a business, and the easy access to resources, we are approached almost weekly with clients that would like to start, update, or formalize a business. The first question is: should I register my business in Michigan as a limited liability company or corporation?
Many people are involved in a partnership without realizing it. That is because the law provides that a partnership is an association of 2 or more persons, which may consist of husband and wife, to carry on as co-owners a business for profit (Sec. 449.6 (1)). Thus, there are no formalities to start a partnership and it is not rare that people end up in one without even noticing it.
For example, Mary and John are neighbors. Mary sells jewelry and John is going to school to complete his Marketing degree. Mary was struggling with her sales, so she decided to ask John’s help. She asked John, “would you like to help me to market my jewelry online? I can give you 20% of all online sales.” John accepts and immediately starts to market the products and to solicit new customers. However, Mary and John did not enter into a written agreement. One day, John posted on Facebook “the golden neckless: the jewelry that will never give you allergies”. Joana, who has a terrible copper allergy saw the post and bought the golden neckless. Almost immediately after wearing it she had a terrible allergic reaction which resulted in her hospitalization and large hospital bills. As it turned out, the neckless also contained copper. Joana then sues Mary, as the owner of the brand. Is Mary liable?
In a partnership the partners are responsible and liable for the acts of each other. And the liability is unlimited. Thus, the court could even reach Mary’s personal funds that are unrelated to her jewelry business. Some may say “but John and Mary have never agreed to be partners!”. Although that is true, the law does not require any agreement, nor does it require the term “partner” to be used. Mary and John were two people splitting profits. If a court finds that they carried the business as co-owners, their operation would be a partnership.
In order to avoid that risk, business owners should consider forming an entity with the Michigan Department of Licensing and Regulatory Affairs. The entity could be a limited liability or a corporation, both of which limit each owner’s liability for the acts of other owners. The type of entity will depend on the owner’s present and future objectives. If the owners decide that a partnership is desired, they should consider entering into a written partnership agreement.
Whether to form a partnership should be an informed choice. Understand your rights and liabilities is essential. Contact our office if would like to discuss starting a new business.
In subsequent posts we will discuss some of the main characteristics of the principal types of entities according with Michigan Laws.
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