The Accidental Partnership: What to Know if You Have Unwittingly Formed a Business
Posted on August 16, 2021 by Harman Bual
One day you are sitting with your friend brainstorming different ideas for your new startup business and before you know it you have a name, marketing and social media accounts, and a lease for your store front. In the excitement of putting together a business, you never formalize (in writing) the structure of the business, division of responsibilities, or how to formally leave the business or otherwise by out the other business partner.
Perhaps years go by and you slowly become the only partner working at the business on a consistent basis and despite the unfair division of responsibilities, the profits are still split 50/50. Or perhaps you have noticed that business funds are being used inappropriately and that there is a lack of accounting of the financial records despite an ongoing split of the profits.
Are you really in a partnership if there is no written agreement? Can you just stop splitting the profits, change the locks to the storefront, the passwords to your business accounts, and hope your former partner doesn’t notice?
Forming a partnership is simple, in Washington a partnership is formed where there is an “association of two or more persons to carry on as co-owners a business for profit…whether or not the persons intend to form a partnership.” [1] All a partnership requires is: (1) two or more individuals, (2) co-ownership; and (3) a business for profit.
A partnership agreement refers to an “agreement, whether written, oral, or implied, among the partners” [2] that the individuals would like to engage in a single defined project together. It is well established in Washington case law that a written agreement is not required to show a partnership, instead the creation of a partnership can be determined by your intent as well as your subsequent actions and conduct. A partnership agreement does not need to be in writing, it can be formed through agreements made orally or over emails between the friends brainstorming ideas and putting together a basic business model. Often, friends starting a new business will discuss business ideas, the various aspect of services they would like to provide, how they will split the profits and losses all over the phone or over email without realizing the have created an implied partnership agreement.
Is a partner’s lack of contribution to the day-to-day management or misappropriation of funds enough to remove them from the business?
Regardless of whether the partnership if formalized in writing, all of the partners owe fiduciary duties to the partnership’s business and the other partners. Partners owe a duty of loyalty and a duty of care in how they operate in the partnership business.[3] The Duty of Loyalty requires that a partner is not gaining a profit at the expense of the partnership while the Duty of Care requires that each partner refrains from “engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.”[4] If there are concerns that a business partner is inappropriately using corporate funds or otherwise abusing your company to hide fraudulent behavior you still have a duty to maintain the partnership and to make decisions that benefit the partnership.
Each situation must be determined on a case-by-case basis and will depend on whether the partnership can be amicably resolved via an offer of one partner to buy out the other, or whether it dissolves into contentious litigation. Before starting any conversations about separating from your business partner you should always seek legal advice on whether any actions to slow down or wrap up the business are breaching any fiduciary duties owed to the partnership. You should also determine what steps you can take to limit the other partner’s access to the company’s funds without breaching any duties of loyalty to your partner.
If you need legal advice regarding your business, the attorneys in Lasher’s Corporate & Business and Business Litigation teams are available to help.
[1] RCW 25.05.055.
[2] RCW 25.05.005.
[3] RCW 25.05.165.
[4] RCW 25.05.165.
