Just like doctors make the worst patients, the most savvy, educated business-minded people often make the worst business decisions. A salesperson may excel at selling, but completely fail to protect his own business interests among his partners. Tara Burd, identified these five important, and often ignored, facts about partnerships:
1) You do not need to intend to create a partnership. That’s right, if two or more people are doing business together, they are in a default partnership whether they like it or not. Cal. Corp. Code § 16202.
2) You can be held liable for acts of your partner even if you did not agree to the act. There is no default rule that the act of one partner requires consent of the remaining partners. This means that your partner can go right ahead and enter into binding agreements with third-parties without telling you, and you can be held liable. To protect yourself, draft a partnership agreement that outlines the authority of its members. Cal. Corp. Code §§ 16301 and 16305.
3) Partners are jointly and severally liable for all liabilities of the partnership. Some people wrongly believe that if they are not making big decisions for the partnership, they will not be held liable for the debts of the partnerships. But, not only will you be liable as a partner, your private, individual assets – such as your home – are also up for grabs by a partnership’s creditors. If you want to protect yourself from liability, you need a partnership agreement in which all members agree to the limitation. You may even need a limited liability partnership instead. Cal. Corp. Code § 16306.
4) Each partner is entitled to an equal share of the profits and losses. Contributing 75% of the partnership’s startup capital does not entitle you to 75% of the partnership’s profits. “The law understands sweat equity,” says Tara Burd. Sweat equity is the time and labor that it takes to run a profitable business – it’s not all about the money. If your partners agree that your 75% contribution should entitle you to 75% of the profits and losses, put it in writing! Cal. Corp. Code § 16401(b).
5) Partners cannot participate in businesses that compete with the partnership. Partners have duties of loyalty and care to the partnership. If you are in a partnership that runs a photography business, you may be breaching your duty of loyalty if you accept a photography gig without contributing those profits to the partnership. But what if you also work as an independent contractor for another company on the side? To avoid any potential conflict, this type of scenario should be laid out in a partnership agreement. Cal. Corp. Code § 16404.
You and your partners can control profits, responsibilities, and liabilities. Planning your business now, saves your business later.
You can see more about Tara Burd on her web site Tburdlawgroup.com
or on The Small Business Trendsetters site http://smallbusinesstrendsetters.com/tara-burd-san-diego-contract-litigation-attorney-litigation-doesnt-make-friends-contracts-do/
On CNN iReport http://ireport.cnn.com/docs/DOC-1166525
Or the T. Burd Law Group
4452 Park Blvd., Suite 310
San Diego, CA 92116