Formalize Your Business Structure to Avoid an Accidental Partnership
When you work with another person or a group of people, if you do not formalize your business entity (as a corporation or otherwise), then, by default, you may unknowingly create a partnership under California’s Uniform Partnership Act (“CUPA”). Under the CUPA, a partnership is defined as “the association of two or more persons to carry on as co-owners a business for profit…whether or not the persons intend to form a partnership.” Cal. Corp. Code, § 16202, subd. (a).
Note that such a partnership is implied by operation of the law. If you are working with a colleague and you do not want to create a partnership, then you need to consult an experienced corporate attorney to formalize your arrangement and avoid unintended consequences.
What is a Partnership?
Generally, a partnership is a legal arrangement in which one or more persons co-own a business while sharing in the profits and losses. Mostly, partnerships are formed via detailed written partnership agreements. But, as noted, partnership can be created by the conduct of the parties even if they do not intend to create a partnership.
For lawsuits and legal actions, the partners are each liable for injury or damages caused as a result of a wrongful act or omission of a partner acting in the ordinary course of business of the partnership or with authority of the partnership. Cal. Corp. Code, § 16305, subd. (a). Finally, partners are generally liable for debt and legal liabilities “jointly and severally” which means that each individually can be held liable for the total debt or liability even if he or she only owns 33% of the partnership. Cal. Corp. Code, § 16306, subd. (a). These are true whether your partnership is formal or accidental.
Accidental Partnerships: Lessons from Common Law
Two recent cases illustrate the factors that courts will consider in determining if there is a partnership.
In the first case, Second Measure, Inc. vs. Kim, 143 F. Supp. 3d 961 (N.D. Cal. 2015), the court held there were enough facts presented to show the existence of a partnership. The court noted these facts alleged by the plaintiff:
- An explicit oral agreement where each would have one-half ownership and one-half profit share;
- Both agreed to have an equal say in the control of the business;
- They both worked long hours together;
- They split business costs; and
- They made joint decisions about incurring certain business expenses.
In opposition, the defendant argued that no such explicit oral agreement had been made, that he never intended to form a partnership or joint venture, that no profits had in fact been split and that no property (personal or real) was jointly owned.
In resolving the Motion to Dismiss, the court held for the plaintiff.
A second case reached the alternative result. The case of Cravea v. F. Bari Nejadpout, No. B237993 (Cal. App. 2nd Dist. 2013) involved attorneys. The plaintiff was represented by the Law Offices of Benjamin Donel (“Donel”). In providing legal services for Cravea, Donel occasionally asked defendant Nejadpout to attend court hearings. Nejadpout was not paid, but rather, Donel reciprocated and handled the occasional court call for Nejadpout. Nejadpout also consulted on various legal matters, but, again, was not paid.
The plaintiff alleged that the two lawyers were partners. However, the court disagreed citing these facts:
- Donel and Nejadpout did not operate a business together on a continuing basis
- No clients were jointly represented;
- No agreement existed or did the lawyers have a custom or practice to share profits, losses, revenues, or expenses; and
- Nejadpout’s name did not appear on Donel’s representation agreements or letterhead.
As can be seen, whether a partnership exists absent a formal agreement depends on the unique facts and circumstances of the case.
Legal Lessons: Formalize Your Business Arrangement
The lesson from cases like Second Measure and Cravae is that you do not want to leave it up to the courts and costly litigation to determine whether you are in a partnership or not. Take action now to avoid an accidental or unintended partnership by incorporating or formally writing up a partnership/joint venture agreement. These will define your business’s legal existence and set the parameters on how you collaborate with your colleagues.
Contact San Diego Corporate Law
When forming a new company, it is important to seek the advice and counsel of an experienced business attorney like Michael J. Leonard, Esq., of San Diego Corporate Law. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. He can assist you with the incorporation of your contemplated business and/or the drafting of partnership or joint venture agreements. Mr. Leonard can also assist with nondisclosure, employee handbooks, and any other needed business contract.
Contact Mr. Leonard by email or by calling (858) 483-9200.