Accidental Partnership: Are You in a De Facto Business Partnership? | Attorney Aaron Hall

Accidental Partnership: Are You in a De Facto Business Partnership?

Overview

This story illustrates how two entrepreneurs can accidently 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.

Story

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.

Legal Analysis

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 expensive of hiring attorneys for full litigation. Thus, the partners are incentivized to negotiate and settle their differences outside of court.

Additional Resources

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.