This story illustrates how two entrepreneurs can accidentally find themselves in a partnership. A partnership doesn’t need to be registered with the state. A partnership can begin whenever two or more people carry on as co-owners a business for profit.
Amber and Jen discussed opening a business together. They never established a formal agreement. Amber started building the business. Jen did nothing, while Amber did all the work.
During this time, Amber and Jen did brainstorming together. Together, they came up with a business name. Using that name, Amber registered a domain name and social media accounts.
Then Jen changed her mind and decided not to be part of the business.
Can Amber keep the business name, website, and social media accounts? Jen wants Amber to pay Jen something for the business name, website, and social media accounts. Jen claims that Jen came up with some of the ideas, and since there is value to those ideas, Jen is entitled to payment.
When analyzing this scenario, the first question is whether there was a common law partnership. If there was no partnership, the assets belong to whoever got them first and the analysis is over. In general, a “partnership” is defined as “an association of two or more persons to carry on as co-owners a business for profit.” In this case, I believe the facts are sufficient to establish a partnership.
If there was a partnership, the partnership would own the business opportunities and other assets of the business. The partners would owe the partnership and each other fiduciary duties. Also, there should be some value put on the contributions of each partner, especially the labor.
The next question is whether a partner wrongfully withdrew from the partnership and the consequences of that under state partnership laws.
Finally, the question is how to liquidate the assets of the partnership and divide the proceeds between the partners. There should be some adjustment for the labor contributed by Amber.
Practically speaking, these types of cases rarely are worth the expense of hiring attorneys for full litigation. Thus, the partners are incentivized to negotiate and settle their differences outside of court.
Most states have partnership laws enacted into statute. These are usually based on some version of the Uniform Partnership Act. Each state has variances in their partnership laws. For example, Minnesota’s partnership statute can be found in Minnesota Statutes chapter 321.
What is the defacto partnership or an accidental partnership? That’s when two people carry on a business as co-owners for profit. They don’t do any registration. They’ve never set up a formal partnership. They don’t have an LLC or an S corporation or a C corporation. Instead, it’s two people who are working in business together for profit.
The law says that if you do that, you are in a partnership. It’s often called an accidental partnership or defacto partnership because the people don’t realize all of a sudden this happens. Now when does this happen? Well, this might be two people who are working together on a business. That’s a simple example. It also often arises when two companies work together.
Now, what happens if you have a contract? It’s possible that contract would clarify that this is not a partnership, and an attorney could make sure that it doesn’t have the elements of a partnership, but it’s important to remember that where two people or two organizations or two companies are working together as co-owners, sharing the profit, that can be deemed a defacto partnership or an accidental partnership under Minnesota law.
This is a common law partnership. It’s not a registered partnership. It’s not a limited partnership. And why does this matter? Because the partners are personally liable for the acts of their other partner. In other words, you might find yourself personally liable for that which your other partner does. And since there is no limited liability, this isn’t a limited liability company, also known as an LLC, it’s not an S corp. So since there’s no limited liability, you are personally liable for the acts of your partner. That’s a big deal.
That’s why whenever you go into business with somebody else, you should consider whether it makes sense to set up a business entity that will limit liability. Generally, that’s going to be an LLC or a corporation. I’m Aaron Hall, a business attorney in Minnesota. For additional information, see the links below.