When two or more people start a new business in Ohio, they will often form a corporation or limited liability company. Some professionals prefer limited liability partnerships to corporations or LLCs. The question I sometimes hear is: why don’t people form common partnerships anymore?
The answer is simple: liability. The general rule in Ohio is that shareholders and members (the owners of LLCs are called members rather than shareholders) are not personally liable for the bad acts of the company, its managers, officers, or employees.
The opposite is true for common partnerships. Ohio Revised Code Section 1776.36 holds each partner individually liable for the bad acts of the company and the other partners. Worse yet, Ohio law holds each partner jointly and severally liable. What this means is that if one bad partner commits a mistake, the innocent partner or partners may be the ones who pay for the acts of the bad partner.
As an illustration, let’s say the Al, Bob, and Charlie, are common partners. Al works on a project that goes terribly wrong and the company now owes a customer a million dollars. The customer can go after a judgment against all of the partners, and collect from whichever partner it chooses to collect from. It is possible that Bob pays the customer back completely while Al and Charlie pay nothing. Oftentimes, the partners then sue each other and the company goes out of business. Even if there is ample insurance, the customer will still probably sue each partner individually.
If Al, Bob, and Charlie would have incorporated or formed a limited liability company, it is unlikely they would be personally liable to the customer. Even if Bob and Charlie were personally sued, they could move to be dismissed from the case.
The laws of other states may be different, but in Ohio it doesn’t make much sense to form a common partnership.