You may be a partner…and not even realize it. If so, get ready for some unintended consequences…
Many business owners and investors are surprised to learn that in the eyes of the law, they are partners in a partnership. Maybe the word “partner” simply has picked up too many uses—think “domestic partner,” “tennis partner,” or “partner in crime.” For whatever reason, many people forget that yes, it means something in business law as well.
Here are some commonly-overlooked aspects of partnership law:
- You can be a partner without intending to be. Under the laws of California, “the association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”
- Each partner is personally liable for all partnership liabilities, including liabilities caused entirely by employees and by other partners.
- Each partner owes a fiduciary duty of care and a fiduciary duty of loyalty to the other partners. This means (for example) that he or she cannot compete with the partnership, take on a business opportunity in the same field without first offering it to the partnership, or try to “freeze out” another partner.
- Each partner has an equal right to manage and control the partnership. In other words, each partner has full authority to hire and fire, sign contracts, and make payments to further the business of the partnership.
- There are always tax consequences. Under federal tax law, partnerships do not pay their own taxes. Instead, each partner reports his or her share of partnership gain or loss on his or her personal tax return, even if no money was distributed. This can come as a rude and costly surprise.
In partnerships, as in other aspects of life, knowledge is power. Some business owners find that the default rules of partnership law suit them just fine. Others decide that they want to change one or more of these rules, particularly if they are uncomfortable with the personal liability that goes with being a partner. In most cases, it is relatively easy to convert a partnership into a corporation or LLC.
This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-217-3255.
