Partnerships: Initial Legal Considerations
This article assumes that you’ve already thought about whether or not you want to be in a partnership, analyzing and realizing that the best way for you to pursue your business is to partner up with one or more people. As you know, there are alternatives, like loans for cash, or paying for services.
Having decided that, we get to some of the legal stuff:
First of all, what’s a partnership. I’m glad you asked, because that definition is not always clear, even to lawyers; in fact, sometimes you can find yourself in a partnership by accident –- but more about that in a minute.
A “partnership” is an association of two or more persons to carry on as co-owners a business for profit. This language is taken directly out of the California statute governing partnerships. Each of these words has significant legal meaning which I have no intention of breaking down for you in much detail. However, there are some general things to consider:
First, if you’re going to “work with someone” on your business idea, then you’ve already dipped your toe into the pool of partnership law. So, now you immediately have to ask yourself: Self? Do I take every step here intentionally, or do I just shoot from the hip and see what happens?
So, to be intentional about this, put it in writing. Yes, we are a partnership. No, we are not a partnership. Yes, we’re sharing ideas and profits. No, this is my idea that I’m only sharing with you on a limited basis until I figure out next steps. Yes, I want to be responsible to you and have you be responsible to me. No, we’re not the boss of each other – I’m just doing my own thing. The kinds of writings you can use are written agreements, term sheets, a non-disclosure agreement, anything that says what you intend, and then hopefully your behavior will match your agreement.
Let’s talk for a minute about forming a partnership by accident. This happens all the time. Folks get to talking and then maybe trade a document or two, and then Jill does something for Jack like helping him buy a new pail, and the next think Jack knows, Jill’s saying she gets half the proceeds from any water sales because she chipped in. Maybe all she did was help him up after he fell. Maybe, just maybe, all she did was type up his list for the hardware store. If Jack had talked to me first, I’d have told Jack to a) say thank you to Jill, and b) give her some cash, a present, even a gift card, to say thank you. If he gives her something for her services, then that helps prevent Jill from saying she’s a partner, because she got payment for services. Partners, generally, don’t get paid for their services. So anyone helping you that you’re not paying is becoming your partner, whether you, or they, like it or not. Remember, you do not have to intend a partnership. They can just happen.
And you may want to be a partnership for the same reasons you, or likely the other person, doesn’t want to be a partner with you. You share the benefits, you share the burdens. Pretty much like getting married, except not entirely. And in some ways, even harder to get out of. The duties that partners owe to each other can be, in some ways, more complex and stringent than with married couples.
Watch for more articles to come on this topic. I’ll be drilling down a bit into operating, and finally getting out of, a partnership.
© David Herzog Legal 2015