Yesterday, while talking with our utah web designer about business entities I once again realized how often people unexpectedly enter legal business partnerships. Why does this matter? Well to answer that you really have to know what it means to be part of a legal partnership.
Wikipedia defines a partnership this way:
In the commercial and legal parlance of most countries, a general partnership or simply a partnership, refers to an association of persons or an unincorporated company with the following major features:
- Created by agreement, proof of existence and estoppel
- Formed by two or more persons
- The owners are all personally liable for any legal actions and debts the company may face
I would add a few other features:
- In the absence of an agreement otherwise, general partners split profits equally
- In the absence of an agreement otherwise, losses follow profits
- In the absence of an agreed upon exit strategy, dissolution can be triggered by any one of the partners
The reason people unexpectedly enter partnerships is because they can be entered orally. In addition, you do not have to use any special words like “I want to be your business partner.” Rather, any time more than one person agree to work together with the goal of making a profit, a general partnership has been formed. (Please take a moment to re-read that last sentence.)
So, this is what happens:
Guy says to Gal, “I have this blog that I think can make some money. You should co-author with me.”
Gal says to Guy, “Ok – I will blog twice a week.”
Guy says to Gal, “Sweet – if we make any money I will give you half.”
Guy does not mention anything about expenses, decisions, money losses, ending the “relationship”, etc.
6 months pass and the blog starts doing well. Really well. In fact, a company approaches Guy and offers to sponsor the blog and to give Guy a weekly radio show.
Guy splits the sponsorship money with Gal, but does not cut Gal in on the radio show.
Gal hears Guy on the radio show.
Gal asks Guy how he got the gig.
Guy responds that the company found him through the blog.
Gal asks Guy to cut her in on the radio gig and all of the associated business that comes with it.
Guy tells Gal to take a hike.
Gal speaks with an attorney who informs her that Guy and Gal are legal partners in the Blog and arguably Guy has violated some of his fiduciary duties owed to Gal.
Gal now feels she has a legal right to the proceeds from the radio show and consequently files suit.
Gal and Guy go to court, where a judge orders dissolution.
The Blog is sold off to the highest bidder – unfortunately for Guy and Gal the highest bidder paid about 80% less than the true value of the Blog.
Neither Guy nor Gal are Blogging.
Guy eventually loses his opportunity with the radio station because he no longer has the Blog following.
Morale of the story is this:
If you have agreed with someone(s) to do something in an effort to make a profit you are that person’s legal business partner. Take some time to figure out what that means!