Legal Question in Business Law in California

No company formed yet, but.....

Last year, three associates and I had talks of possibly starting a business

together. No partnership agreement was ever drawn up, no stakes divided, no

money came in.....nothing. The name of this so-called company is not even

registered, so we're technically not a company at this time. Three of us also

have regular 9-5 jobs that take up most of our time anyway.

A couple of month's ago, a potential client asked us to take on a project that

will require a HUGE amount of funding to even get it off the ground. The only

kicker is that the client will not work with us if one our associates is involved

with our group. This particular person has been a problem regardless and

could potentially be a liability to us. We've told him that he is not welcome on

our team and that if we did proceed with this business, he would not be

included (especially at the request of the potential client).

This person is now seeking legal advice and told us he would contact us

''formally''. Since we're not a company, is there anything that can be done

here? We have nothing formalized and the client will not work with

us if he is involved. As well, the project needs huge funding so we're not sure

if we'll even do this.

Asked on 2/01/06, 3:28 pm

3 Answers from Attorneys

Gregory Cartwright The Cartwright Law Group, APLC

Re: No company formed yet, but.....

The short answer is that the default in California in this situation may very mean that there is a partnership in place with all the rights, duties an obligations that this presents, including the fiduciary duties one partner owes to another pursuant the California Corporations Code. This is not as simple as deciding that a company was formed or not. You should contact an attorney in your area to advise you immediately.

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Answered on 2/01/06, 4:15 pm
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: No company formed yet, but.....

Forming a partnership is a lot easier than you may imagine. It does not require bringing in any money, nor execution of a written agreement, nor filing any forms.

The Corporations Code says (section 16101(9)) partnership means "an association of two or more persons to carry on as coowners a business for profit....." See also Corporations Code section 16202 for details and certain exceptions. It is not even necessary to intend to form a partnership; its existence flows from the facts, not the intention.

Nevertheless, from the brief facts stated, I think there is considerable doubt whether you four formed a partnership through your discussions, or if you did, whether it persists.

If there were a partnership, then Corporations Code section 16404, "Fiduciary duties," would apply, especially 16404(b)(3), to refrain from competing with the partnership prior to its dissolution.....but the partnership can be dissolved, if it exists, pursuant to Corps. Code section 16801.

In conclusion, I would say (1) get a lawyer; (2) have the full details of your prior business-formation talks reviewed, not only for acts that would create a partnership but also involving oral promises to do this-or-that, and any trade secret disclosures that might have occurred; (3) take precautionary measures to be sure any alleged "partnership" is formally dissolved, then (4) formally create the new business, preferably in a liability-resistant format such as an LLC or corporation.

I can handle all of this for you efficiently and economically, if you wish, as well as handling any threats or claims raised by Mr. #4.

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Answered on 2/01/06, 5:24 pm
Nate Bernstein Nate Bernstein & Associates, Attorneys and Counselors at Law

Re: No company formed yet, but.....

I would schedule a meeting the person, and explain why he will not be part of any partnership- tell him straight out. Don't lead him to believe that he will be part of a partnership. Then I would document your position to him in a letter- it is a question of intent. When and if you do set up the partnership, have a formal agreement that states that there are no verbal side deals that will be construed as being part of the partnership. It sounds like his hiring of an attorney may be a bluff, but in case its not, you can hire your own attorney to even the playing field. Thanks,, [email protected].

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Answered on 2/01/06, 6:41 pm

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