De Facto Partnership: Are You Accidentally Partners?

What makes two people partners under Minnesota law?

You are partners when two or more of you carry on a business as co-owners for profit. The statute forms the partnership “whether or not the persons intend to form a partnership,” so no filing, written agreement, or partnership label is required. The test turns on what you actually did together.

Each part of the test is broad:

1. Two or more persons. A “person” includes an individual, a corporation, a partnership, and “any other legal or commercial entity” (Minn. Stat. § 323A.0101(12)). Two companies can be partners with each other.
2. A business. Under Minn. Stat. § 323A.0101(1), a business “includes every trade, occupation, and profession.”
3. As co-owners, for profit. Under § 323A.0202(c), “In determining whether a partnership is formed, the following rules apply.” One is the presumption, covered in the next section, that “A person who receives a share of the profits of a business is presumed to be a partner in the business,” unless the profits were received in payment for one of the listed reasons.

The partnership agreement need not be on paper. Chapter 323A defines it as the agreement among the partners, “whether written, oral, or implied” (Minn. Stat. § 323A.0101(9)). One limit matters here: under § 323A.0202(b), an association formed under another statute, such as an LLC or a corporation, is not a partnership under chapter 323A. If you would rather choose the form deliberately, the page on starting a general partnership on purpose covers that path.

Are implied partnerships recognized in other states and countries?

Other states and countries apply their own partnership law, so the test for an implied partnership, and what follows from one, can differ wherever the business operates. Minnesota’s statute answers which law governs the partners’ dealings with each other. Subject to an exception in subsection (b) for limited liability partnerships, “the law of the jurisdiction in which a partnership has its chief executive office governs relations among the partners and between the partners and the partnership” (Minn. Stat. § 323A.0106(a)). For a partnership that has not registered as a limited liability partnership, that section speaks only to relations among the partners; it does not say which law decides a customer’s or creditor’s claim. If you do business with someone across state or national lines, I suggest getting advice from a lawyer licensed where the business operates before assuming Minnesota’s rules apply.

How does sharing profits create a presumed partnership?

Under Minn. Stat. § 323A.0202(c)(3), “A person who receives a share of the profits of a business is presumed to be a partner in the business,” unless the profits were paid for one of six listed reasons. Sharing gross revenue, or co-owning property, does not by itself make you partners.

The six exceptions cover profits received in payment:

1. of a debt, by installments or otherwise;
2. “for services as an independent contractor or of wages or other compensation to an employee”;
3. of rent;
4. of a retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner;
5. “of interest or other charge on a loan, even if the amount of payment varies with the profits of the business”; or
6. for the sale of a business’s goodwill or other property.

Two other rules narrow the test. Co-ownership of property “does not by itself establish a partnership, even if the co-owners share profits made by the use of the property” (§ 323A.0202(c)(1)). And “The sharing of gross returns does not by itself establish a partnership” (subsection (c)(2)). Splitting revenue from a shared asset is different from splitting the profit of a business you both run. The words “by itself” matter: either fact can still count when other facts point toward co-ownership.

When does a project between two companies become a joint venture?

Under Minnesota case law, a joint venture exists only when four elements are all present: contribution, joint proprietorship and control, an agreement to share profits, and a contract, express or implied. In Rehnberg v. Minnesota Homes, Inc., 236 Minn. 230, 52 N.W.2d 454 (Minn. 1952), the Minnesota Supreme Court stated that “an enterprise does not constitute a joint adventure unless each, of the following four elements are present.” It also said partnership rules govern the parties’ rights with few if any material exceptions.

The court described the elements this way:

1. Contribution. “the parties must combine their money, property, time, or skill in some common undertaking, but the contribution of each need not be equal or of the same nature.”
2. Joint proprietorship and control. “there must be a proprietary interest and right of mutual control over the subject matter of the property engaged therein.”
3. Sharing of profits. An express or implied agreement to share profits, though not necessarily losses.
4. Contract. “there must be a contract, whether express or implied, showing that a joint adventure was in fact entered into.”

Once a joint venture exists, “the rules and principles applicable to a partnership relation, with few if any material exceptions, govern and control the rights, duties, and obligations of the parties.” Rehnberg referred to Minnesota’s earlier partnership statute only “In the analogous situation of a partnership.” The plaintiff’s contract made him an employee paid partly from profits, and the court found three of the four elements missing. “The essential element of joint proprietorship and control is, however, lacking,” because “There is no showing that plaintiff had any control over the manner in which the enterprise was carried on.” The court added that “the third element of sharing in the profits in a manner consistent with a status of a joint adventure is absent,” and that “the indispensable element of a contract for the formation of a joint adventure is also absent.” It concluded that “a joint adventure is not established by the pleadings, and the order of the trial court must be affirmed.”

In my experience, the question also often arises when two companies work together, such as on a shared event. For federal tax purposes, “a joint undertaking merely to share expenses does not create a separate entity” (26 C.F.R. § 301.7701-1(a)(2)). Splitting costs differs from splitting profits. The page on Minnesota joint venture law covers these arrangements in more depth.

How can you be liable as a partner when you are not one?

You can be liable as a partner if you present yourself as one, or consent to someone else presenting you that way, and a person relies on it in dealing with the business. Under Minn. Stat. § 323A.0308(a), this “purported partner” rule applies even when no partnership exists between you.

The statute covers a person who “by words or conduct, purports to be a partner, or consents to being represented by another as a partner.” That person “is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership.”

The rule reaches further when the representation is public. “If the representation, either by the purported partner or by a person with the purported partner’s consent, is made in a public manner, the purported partner is liable to a person who relies upon the purported partnership even if the purported partner is not aware of being held out as a partner to the claimant.” Calling a collaborator “my partner” on a website, a proposal, or social media can create exposure, even if you and that person are not partners and the partnership is only purported, not actual. Outside those representations, “persons who are not partners as to each other are not liable as partners to other persons” (§ 323A.0308(e)). I suggest using “partner” in business materials only for an actual co-owner, because the word itself can create the reliance the statute protects.

What does an accidental partnership mean for your personal liability?

Each partner in a Minnesota general partnership is personally liable for the partnership’s obligations. Under Minn. Stat. § 323A.0306(a), “all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.” That includes obligations your partner creates.

Three rules combine to create that exposure:

1. Your partner can bind the business. “Each partner is an agent of the partnership for the purpose of its business” (Minn. Stat. § 323A.0301(1)). An act apparently in the ordinary course binds the partnership “unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority.” An act outside the ordinary course “binds the partnership only if the act was authorized by the other partners” (paragraph (2)).
2. The partnership answers for your partner’s wrongs. A partnership is liable for loss or injury caused by “a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership” (Minn. Stat. § 323A.0305(a)).
3. You answer for the partnership’s obligations. Joint and several liability under § 323A.0306(a) means a creditor may look to any partner for the full amount, subject to the collection rules below.

The statute gives partners some procedural protection. “A judgment against a partnership may not be satisfied from a partner’s assets unless there is also a judgment against the partner” (Minn. Stat. § 323A.0307(c)). Under subsection (d), a creditor may reach a personally liable partner’s own assets only on one of five listed conditions. The first is that “a judgment based on the same claim has been obtained against the partnership and a writ of execution on the judgment has been returned unsatisfied in whole or in part.” Others include the partnership’s bankruptcy, the partner’s agreement, and a court’s permission. A person admitted into an existing partnership “is not personally liable for any partnership obligation incurred before the person’s admission as a partner” (§ 323A.0306(b)).

Can an implied partnership affect your personal credit score?

It can, once a partnership creditor pursues you personally. Partnership law decides whether you owe the debt, not what a credit bureau reports. Under § 323A.0306(a) you are jointly and severally liable for the partnership’s obligations, and under § 323A.0307(c) a creditor needs a judgment against you, not only against the partnership, before collecting from your own assets. A debt you signed for or guaranteed in your own name is a liability apart from the partnership. Under Minn. Stat. § 323A.0307(d)(5), a creditor with a judgment against you on that debt need not first pursue the partnership. An unpaid personal debt can affect your credit the way any other personal debt can. I suggest keeping business accounts in the business’s name rather than your own, and settling a partnership creditor’s claim before it becomes a judgment against you.

What insurance covers an implied partnership’s liabilities?

Insurance pays covered claims up to the policy’s limits, and it does not change who is liable under § 323A.0306. Coverage depends on each policy’s terms, including whom it names as an insured. An accidental partnership may run on a policy one person bought as a sole owner, and that policy may not list the partnership or the other partner. If you find you have been operating as partners, I suggest asking your insurance agent whether your general liability, professional liability, and property policies cover the partnership and each partner, and having the named insured changed if they do not.

Who owns the name, website, and equipment of an accidental partnership?

If a partnership existed, what it acquired belongs to the partnership. Minn. Stat. § 323A.0203 provides that “Property acquired by a partnership is property of the partnership and not of the partners individually.” Whose name is on the title, and whose money paid for it, decide which of the statute’s presumptions applies.

One fact pattern shows how this plays out: two people brainstorm a business and a name together, one of them registers the domain and social media accounts and builds the business, and the other later drops out and asks to be paid for the ideas. The first question is whether a partnership ever formed under § 323A.0202. If one did, Minn. Stat. § 323A.0204 sorts the property:

1. In the partnership’s name. “Property is partnership property if acquired in the name of” the partnership, or of a partner with an indication in the transfer document of the person’s capacity as a partner or of the partnership’s existence (subsection (a)).
2. Bought with partnership money. “Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership” (subsection (c)).
3. In one partner’s own name, with that partner’s own money. That property “is presumed to be separate property, even if used for partnership purposes” (subsection (d)).

These presumptions matter for a domain name, a lease, or a vehicle. I suggest keeping the account, title, and payment records for each asset, because they are what decides which presumption applies.

What duties do accidental partners owe each other?

Accidental partners owe each other the duties chapter 323A sets, and under Minn. Stat. § 323A.0103(b) their partnership agreement, written or not, may not eliminate the duty of loyalty, unreasonably reduce the duty of care, or eliminate the obligation of good faith and fair dealing. Under Minn. Stat. § 323A.0404(a), “The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care.” Every partner must also act in good faith.

The duties are defined narrowly:

1. Loyalty. A partner must “account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity” (subsection (b)(1)). A partner must also refrain from dealing with the partnership for an adverse party, and “from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership” (subsection (b)(3)).
2. Care. The duty “is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law” (subsection (c)).
3. Good faith. Partners must exercise their rights “consistently with the obligation of good faith and fair dealing” (subsection (d)). But “A partner does not violate a duty or obligation under this chapter or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest” (subsection (e)).

Without a different agreement, the statute also sets the economics. “Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner’s share of the profits” (Minn. Stat. § 323A.0401(b)), and “Each partner has equal rights in the management and conduct of the partnership business” (subsection (f)). “A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership” (subsection (h)). These are defaults: under Minn. Stat. § 323A.0103(a), the chapter governs “To the extent the partnership agreement does not otherwise provide,” and that agreement can be oral or implied. A partner who diverts a deal the business was pursuing faces the claims described in taking a partnership opportunity.

How does an accidental partnership end?

A partner can leave at any time by giving notice of the partner’s express will to withdraw. In a partnership at will, which is one where the partners never agreed to stay together for a definite term or a particular undertaking, that notice from a partner who has not already dissociated in another way dissolves the partnership under Minn. Stat. § 323A.0801(1). The business is then wound up.

Under Minn. Stat. § 323A.0602(a), “A partner has the power to dissociate at any time, rightfully or wrongfully, by express will.” Leaving is wrongful only in the cases subsection (b) lists: when “it is in breach of an express provision of the partnership agreement,” or when a partner withdraws early from a partnership for a definite term or particular undertaking, subject to the exceptions in that subsection. “A partner who wrongfully dissociates is liable to the partnership and to the other partners for damages caused by the dissociation” (subsection (c)). An accidental partnership is at will under the definition in Minn. Stat. § 323A.0101(10) when the partners “have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking.”

After dissolution, “a partnership continues after dissolution only for the purpose of winding up its business” (Minn. Stat. § 323A.0802(a)). All of the partners, other than one who left wrongfully, may instead agree to waive winding up and continue (subsection (b)). In winding up, partnership assets “must be applied to discharge its obligations to creditors” first, and then “Each partner is entitled to a settlement of all partnership accounts” (Minn. Stat. § 323A.0807(a) and (b)). Settlement can also require a payment in: “A partner shall contribute to the partnership an amount equal to any excess of the charges over the credits in the partner’s account but excluding from the calculation charges attributable to an obligation for which the partner is not personally liable under section 323A.0306” (subsection (b)). A former partner keeps access to “books and records pertaining to the period during which they were partners” (Minn. Stat. § 323A.0403(b)).

In my experience, a dispute over the assets of a small accidental partnership is rarely worth the expense of full litigation, which gives both sides a reason to negotiate a settlement of accounts. The page on a partner who walks away covers the departing partner’s side.

What filings does an accidental partnership already owe?

An accidental partnership needs no filing to exist, but operating one can trigger filings. Minnesota requires an assumed name certificate, renewed each year, when the business uses a name that does not include the true name of every owner. Federal tax law defines a partnership to include unincorporated arrangements through which a business is carried on, and federal and Minnesota law each require a partnership return for each taxable year.

1. Assumed name. Under Minn. Stat. § 333.01, subd. 1, no person may conduct a commercial business in Minnesota “under any designation, name, or style, which does not set forth the true name of every person interested in such business” without filing a certificate with the Secretary of State. The certificate must be filed “before commencing such business” and published (Minn. Stat. § 333.02). If the business sues before filing, “the defendant may plead such failure in abatement of the action; and all proceedings had in the action shall thereupon be stayed until the certificate provided for by sections 333.001 to 333.06 is duly filed,” and section 333.06 adds a $250 cost consequence (Minn. Stat. § 333.06). The certificate “shall remain in effect as long as an annual renewal for the certificate is filed in each calendar year following the calendar year in which the original filing was filed,” and “The certificate expires in the calendar year following a calendar year in which the annual renewal was not filed” (Minn. Stat. § 333.055, subd. 1).
2. Federal tax return. For federal tax purposes, “The term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation” (26 U.S.C. § 7701(a)(2)). “Every partnership (as defined in section 761(a)) shall make a return for each taxable year” (26 U.S.C. § 6031(a)).
3. Minnesota tax return. Under Minn. Stat. § 289A.12, subd. 3(a), “Partnerships must file a return with the commissioner for each taxable year.”

I suggest asking your tax preparer about the federal and Minnesota partnership returns for any year in which you operated together, because the obligation follows from the arrangement whether or not anyone called it a partnership.

How do you keep a business relationship from becoming a partnership?

One way is to form an entity under another statute before you go into business together. Under Minn. Stat. § 323A.0202(b), an association formed under another statute is not a partnership under chapter 323A. A Minnesota limited liability company (LLC) or corporation also gives its owners a liability shield.

1. Form an LLC or corporation. “A limited liability company is formed when articles of organization have been filed with the secretary of state accompanied by a payment of $135” (Minn. Stat. § 322C.0201, subd. 4). For a corporation, “corporate existence begins when the articles of incorporation are filed with the secretary of state” (Minn. Stat. § 302A.153). An LLC’s debts “are solely the debts, obligations, or other liabilities of the company” and do not become a member’s “solely by reason of the member acting as a member” (Minn. Stat. § 322C.0304, subd. 1). The shield has limits: under subdivision 3, except as to a failure to observe formalities relating only to internal affairs, “the case law that states the conditions and circumstances under which the corporate veil of a corporation may be pierced under Minnesota law also applies to limited liability companies.” A shareholder owes nothing further for the shares “except to pay to the corporation the full consideration for which the shares are issued or to be issued” (Minn. Stat. § 302A.425).
2. If you are already partners, consider a limited liability partnership. Registration does not take you out of chapter 323A, which defines “Partnership” to include “a limited liability partnership” (Minn. Stat. § 323A.0101(8)), and § 323A.1001(a) provides that “A partnership may become a limited liability partnership.” After approval by the vote the statute requires, a partnership “may become a limited liability partnership by filing a statement of qualification” (Minn. Stat. § 323A.1001(c)). An obligation incurred while the partnership is a limited liability partnership “is solely the obligation of the partnership” (Minn. Stat. § 323A.0306(c)). The status takes effect only “on the later of the filing of the statement or a date specified in the statement,” and it “remains effective, regardless of changes in the partnership, until it is canceled pursuant to section 323A.0105(d) or revoked pursuant to section 323A.1003” (§ 323A.1001(e)). Under Minn. Stat. § 323A.1003(c) and (d), “An annual renewal must be filed once each calendar year beginning in the year following the calendar year in which a partnership files a statement of qualification,” and the secretary of state “must revoke the statement of qualification of a partnership that fails to file an annual renewal when due or pay the required filing fee.”
3. Pay collaborators in a form the statute excludes. Wages, a contractor’s fee, rent, or loan interest keep a profit-based payment from raising the presumption in § 323A.0202(c)(3). The form has to match the actual relationship, because Minn. Stat. § 181.722, subd. 1 bars a person from failing to “classify, represent, or treat an individual who is the person’s employee pursuant to subdivision 3 as an employee,” and an owner or partner who “knowingly or repeatedly engaged in any of the prohibited activities in this subdivision may be held individually liable.”
4. Put the relationship in writing. A label alone does not decide the question, because the statute forms a partnership “whether or not the persons intend to form a partnership.” I suggest a written agreement that matches how you actually operate, because the statute looks to whether you carry on the business as co-owners, not to the label you chose. A no-partnership clause describes the relationship accurately only when the arrangement it describes is real.

If you already operate as partners and want to keep going together, the clauses a partnership agreement should cover and the rules for converting a partnership to an LLC are the next decisions.

Deciding Whether You Are Partners

Under Minnesota law, you are partners if two or more of you carry on a business as co-owners for profit, whatever you intended and whether or not you filed anything. A share of the profits creates a presumption of partnership unless it is paid as wages, a contractor’s fee, rent, loan interest, or one of the other listed exceptions. Once a partnership exists, each partner can be personally liable for its obligations, its property belongs to the partnership, and the partners owe each other duties of loyalty, care, and good faith. Forming an LLC or corporation before you start is how owners choose a different set of rules. Partners can register as a limited liability partnership, which remains a partnership under chapter 323A, so that obligations incurred while it is one are solely the partnership’s, and the status lasts only while the partnership files its annual renewal. The choices are collected under Minnesota business formation. If you are unsure whether a working relationship has become a partnership, email [email protected] with a brief description of how the business is owned, run, and paid.