I am trying to start a small farmer's market business with my brother, we wont be needing loans, etc as we have the funds, but we aren't sure what to file the business as with the secretary of state as we are not sure, we' be profitable in a year or so, and LLC minimum $800 tax kind puts pressure on us to make at least that in profits to be able to pay taxes.. Our options are really LLC or general partnership. and since it will be a sole proprietor, does general partnership work out in the long run?
I am not licensed in CA, but the benefit of an LLC over a partnership generally is that, as its name suggests, it limits liability. If someone eats a bad tomato from your business, and then sues the LLC, only the assets of the LLC will be readily subject to judgment. Conversely, in a partnership, the liability can (and does, generally... Again, I a, not licensed in CA, but doubt it is different there) and does run to the partners themselves. So you could lose your house over that bad tomato in a partnership.... Whereas in an LLC you can only lose your company.
This answer does not constitute legal advice nor form an attorney client relationship. I am not your lawyer. If you have a legal issue in Maryland, Virginia, or the District of Columbia, you may contact me for a free consultation.
My colleague above is correct. However, sometimes you can get adequate protection from insurance and avoid having to organize a separate company. Unfortunately, your insurance premiums are likely to be as much as the $800 minimum franchise tax on LLCs, and even if you do form an LLC you should consider insuring your activity nonetheless.
Please note, however, that you can't be both a partnership/LLC and a sole proprietorship. If you and your brother enter into this activity together and divide its profits, you've created a partnership for tax purposes whether you file any sort of paperwork with the state or not. You won't be separate sole proprietors.
I urge you to get a lawyer, CPA, and insurance agent on your team. General Partnerships are almost never used anymore because of the unlimited liability of each partner for the entire debts of the partnership. Even if it is your brother, consider a buy-sell agreement to pre-determine value for a buy out if the other partner dies, retires or becomes permanently disabled.
The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.
I agree with my colleagues - most notably in that a general partnership is not the best approach. Please see the post at the link below.
This information does not constitute legal advice and does not establish an attorney-client relationship.
All the attorneys are correct. A general partner has unlimited liability. It sounds like your business is going to be involving the public so your personal exposure could be great. The LLC can be taxed as a partnership or corporation, so from a tax standpoint it is tax neutral. The real issue is liability. The minimum tax is generally worth the liability protection. You really should sit down with a business or corporate attorney to discuss you goals and plan.
The general advice above does not constitute an attorney-client relationship: you haven't hired me or my firm or given me confidential information by posting on this public forum, and my answer on this public forum does not constitute attorney-client advice. IRS Circular 230 Disclosure: In order to comply with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.