You agree to do a business deal with a colleague and split the profits at the end. When your colleague’s conduct causes a third party to sue, you get sued, too. In reading the lawsuit filed against you both, it states you are partners and you are liable for your colleague’s conduct.
How can something like this happen? How can you become partners with someone without ever intending to do so? Inadvertent partnerships are more common than you may think, and you need to think carefully through your potential business ventures before you act.
Why Does This Matter?
A fair question for people entering into a new business venture would be, “Why does it matter if we form a partnership?” What’s the difference if you end up in a partnership or not?
The primary difference involves liability. As partners, you would each have the ability to bind each other for business purposes, and you would each assume some liability for the other’s actions on behalf of the business. If your partner makes a mistake or fails to pay an obligation incurred on behalf of your venture, then you as a partner are also liable.
How Are Inadvertent Partnerships Created?
The Revised Uniform Partnership Act (RUPA) of 1997 makes it quite clear: “the association of two or more persons to carry on as co-owners a business for profit creates a partnership, whether or not the persons intend to create a partnership.” ORS 67.055(1).
The 1942 Oregon case of Walls v. Gribble established that a joint venture is like a partnership but only for a single transaction. When starting a new business with someone else, the language required to create a joint venture looks a lot like the language of a partnership.
Here are some intentional acts you can take to avoid unintentional ramifications:
- Expressly disavow a partnership: Using language specifically stating that you are not creating a partnership will be the most important strategy for avoiding the inadvertent creation of a partnership.
- State the scope of responsibility clearly: It also helps to have each party’s responsibilities and liabilities clearly drawn out in the contract.
- Create a separate entity to carry out the business operations: Having a separate entity, such as a limited liability company, that carries out the day-to-day operations of your new business can create one more layer of protection against an inadvertent partnership and the liability it carries.
Most importantly, make sure you are working with a legal team that has experience in the creation of new business entities. Most people starting a new business are not experienced attorneys. There is a lot at stake and a lot of ways things can go wrong when handling these matters on your own.