You and a few of your friends decide to start a business together. You figured you would just give it a shot and see if you could make some money together with your new idea. Before long, you begin to realize some success in the market and you and your friends begin making money. Customers increasing flow to your business. Cool, right? You and are your friends are making money.
One day, one of your partner friends is out personally delivering products to a new customer. On her way, she decides to meet an old friend for lunch. As they have not seen each other in a long time, they decide to have a few drinks and toast their old friendship. After a long lunch, your partner friend continues on her way to deliver products to the new customer. Sadly, on her way, your business friend slams into another vehicle; totaling the other vehicle and causing severe injuries to the driver and the driver’s passenger. You friend is charged with a DUI and further charges are pending, as the driver and passenger lie in intensive care.
Your business partner friend was uninsured. Weeks go by and one day you are served with a civil lawsuit. You are named in a wrongful death suit related to your partners accident. You are named individually, along with your friend, and an unknown general partnership, as defendants. The lawsuit alleges you and your friends were operating a business as a general partnership and you and your friends are all both jointly and severally liable. The lawsuit alleges your DUI partner friend was working at the time of the accident and, through the legal doctrine of vicarious liability, the partnership is liable for the damage. The lawsuit lists you, individually, as a partner, and maintains that you and each of your friends are personally, jointly and severally liable for the damages cause by your DUI partner. While you and your friends often casually referred to each other as partners and you loosely considered yourself business partners, you are confused by the claim you are a partner in a general partnership. You never formed a general partnership. There is no partnership agreement. Even more confusing is how you may be personally liable for your partners actions.
In Florida and most, if not all states, it is possible to unknowing and inadvertently form a general partnership. With this comes joint and several liability for the partnership and joint and several liability for you, individually, as a partner. Let me explain.
When two or more people collaborate together for the purpose of making a profit, courts have found such arrangements to qualify as general partnerships. That’s it. It is that easy to form a general partnership. Courts do not require you to have an intent to form a partnership. As a result, many people unknowingly establish general partnerships in generally the same way as in the example above. Sometimes, it just happens. There are many reasons why you do not want to let that just happen. One is personal liability for the partnerships actions.
Florida has a number of business entity choices, all of which have forms of limited liability protection. In fact, even a general partnership in Florida can be provided limited liability, but action must be taken by the partners to establish limited liability for the general partnership. As noted, one thing each of the other business entities have in common, unlike the general partnership, is limited liability. The substantive advantage of each of these legal entities over a general partnership is that the limited liability acts to shield management and ownership of business entities from individual liability for the actions of the business entity. For this good reason, general partnerships without limited liability are almost non-existent. General partnerships generally exist only through lack of business planning and general partnerships should never be inadvertently created or purposely created.
Generally, vicarious liability holds another liable for the actions of another. In an employment context, vicarious liability holds employers liable for employee actions while the employee is at work performing the job. In effect, this doctrine can also extend to partners in a general partnership acting for the partnership. Couple this with the joint and several liability of a general partnership, and you and your partners, as individuals, may put all of your personal assets at risk if you or your partner cause harm to others that gives rise to liability. Joint and several liability means a plaintiff can hold both partners liable (jointly) or may hold just one of the partners entirely liable (severally). When one partner is held severally liable, that severally liable partner may be burdened with the entire amount of the judgement against the partnership and its partners. That severally liable partner would then have to pursue the other partners for their share of the liability. This risk is what gave rise to the concept of limited liability.
Corporations were the first entity to have limited liability for its officers, directors, employees, and shareholders. The public policy reason for limited liability was to encourage business pursuits by minimizing the risk to individuals starting businesses by limiting the liability to just assets, contributions, and revenues of the business entity only. This protection later gave rise to limited partnership and limited liability companies. With all the limited liability entities emerging, Florida then created limited liability for general partnerships, in the form of limited liability partnerships. This allowed for general partnerships to be formed with limited liability. If you think you may have inadvertently formed a general partnership, you may be able to either convert the general partnership into an LLC taxed as partnership or file to make your general partnership a limited liability partnership. With proper planning, most businesses can establish limited liability. Without it, a general partnership can be an inadvertent trap for the unwary.Dislaimer: A Deeper Dive with DLT and each blog post is not intended as legal advice, nor should you consider any part of this blog or website as such. Nothing herein acts to create any attorney client relationship with the lawyers at DLT Law Group. The blog is designed to provide general information and thoughts from the lawyers at DLT Law Group. You should not act upon any information contained in this website without first seeking professional advice from a lawyer licensed in your state or country.