Take Control of Your Partnerships
It is a too-little known fact that the law imposes certain rights and obligations upon individuals who do business together. I recently contributed to an article published in the San Diego Professional Journal that identifies some of the most important, commonly ignored, laws that apply to those who engage in business together.
1) You do not need to intend to create a partnership. California law states that a partnership is created when two or more people are doing business together. Cal. Corp. Code § 16202.
2) You can be held liable for acts of your partner even if you did not agree to the act. This means that your partner can enter into binding agreements with third-parties without telling you, and you can be held liable. To protect yourself, draft a partnership agreement that outlines the authority of its members. Cal. Corp. Code §§ 16301 and 16305.
3) Partners are jointly and severally liable for all liabilities of the partnership. It is a mistaken belief that if a person is not making big decisions for the partnership, they will not be held liable for the debts or other liabilities of the partnership. This includes not only professional liability, but an individual's private assets, such as their home. If you are not actively participating in the business, such as those in the role of an investor, you will want to protect yourself from liability. One way to do this is to create a partnership agreement in which all members agree to the limitation of liability. You may even need a limited liability partnership or other business entity instead. Cal. Corp. Code § 16306.
4) Each partner is entitled to an equal share of the profits and losses. The law understands sweat equity. Sweat equity is the time and labor that it takes to run a profitable business. This means that one's financial contribution does not necessarily entitle them to a pro rata share of the business's profits. A different distribution of profits can be agreed to in a partnership agreement. However, certain provisions, such as sharing all profits and no losses, may not be enforceable. Cal. Corp. Code § 16401(b).
5) Partners cannot participate in businesses that compete with the partnership. Partners have duties of loyalty and care to the partnership. Consider, for example, a photographer who starts a partnership but also works as an independent contractor to earn money while the partnership grows. The photographer's duty of loyalty may require that all of those profits be contributed to the partnership. Exceptions to one's duty of loyalty can easily be included in a partnership agreement. Cal. Corp. Code § 16404.
If you do not like the default rules discussed above, there is an easy way around them! All you have to do is contact an attorney such as those at T.Burd Law Group and ask them to draft a partnership agreement with the terms that are best for you and your partners.