Legal Question in Business Law in California

Partnership Agreement

My son and I have a oral partnership agreement though we filed for a sellers and business license under his name.

I have invested $50,000+ into the business, I'm on the lease agreement and I am a signer on the business checks. I have also been working in the business full-time.

I wish to have a written partnership agreement and he says the business has been established legally as a sole proprietor because of the business license and sellers permit. Though he wants the business to act as a partnership, he doesn't want it in writing.

Is he right? Can I force the issue of a written partnership agreement? If someone were to sue him (us), how would I be held legally in a law suit?

Thank you,

--name removed--Rosen

Asked on 6/08/05, 8:31 am

6 Answers from Attorneys

Antonio Maldonado Maldonado Myers LLP

Re: Partnership Agreement

There is a partnership between you. The "default" rules that apply to a general partnership apply to your partnership since you do not have a partnership agreement. In a general partnership every partner is liable personally for the partnership. You could be sued as a partner of the business and since your liability is not limited to what you have invested in the partnership a creditor could enforce a judgement against the partnership against any assets you own, including but not limited to your home.

It is a good decision to write down the terms that you and your son agree to. Be aware that since your son is your partner he has the fiduciary duties of

(1) Loyalty, which includes:

(i) accounting to the partnership for any property, profit or benefit derived by the partner in operating the partnership business or using partnership information (including the use of a business opportunity that would, under customary circumstances, be an opportunity that the partnership would take);

(ii) not dealing with the partnership as or for an adverse party, except in the partner's capacity as a lender to the partnership; and

(iii) not competing with the partnership until the partnership has dissolved;

(2) The duty of care, which is limited to avoiding grossly negligent or reckless conduct, intentional misconduct or a knowing violation of law; and

(3) The duty of good faith and fair dealing

towards you. He cannot ignore the fact that the business is a partnership and presume that he is the sole owner of the business. You could probably sue your son for an accounting of the partnership and win.

I believe that both you and your son would be better off recognizing the fact that you do have a partnership and formalizing the agreement you had between yourselves in friendly terms.

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Answered on 6/08/05, 8:49 am
Daniel Harrison Berger Harrison, APC

Re: Partnership Agreement

You can't legally require a written partnership agreement. You can, however, legally seek dissolution of the partnership, which, in turn, may likely lead to cooperation from your son. The California Corporations Code has default provisions for partnerships that govern in absence of a partnership agreement.

The issue of a lawsuit being filed is more of a complex issue. It depends what the basis for the lawsuit is. Generally, all partners of a general partnership can be sued personally for partnership debts/obligations. Also, if an employee or your son commits a tort (e.g. negligence) within the course and scope of his employment with the business, all partners can be sued personally as well. A partnership is really the worst business type possible, unless the partners are corporations or LLC themselves.

You should form a corporation, with you and your son being shareholders. Generally, licenses need only a qualified individual or "point-man" when issued to a corporation. Please feel free to give us a call or email with other questions. We can certainly help resolve your issues of concern.

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Answered on 6/08/05, 8:51 am
Ken Dallara Law Office of Ken Dallara

Re: Partnership Agreement

You are completely in tune with your intuition. A sole proprietorship and a partnership are really the same animal, it is just defining a split of the profits and losses usually. You are both singularly and jointly responsible for the debts and liabilities of the actions of the partnership and each other while performing business related activities.

With that amount of money invested, $50K, you should seriously!!! look into incorporating, at least an LLC. That formalizes the agreement and forces your son to put into writing his intentions and also protects your personal property.

Partnership agreements are great but in the real world are not worth more than the paper they are printed on or spoken of. You are in for expensive litigation to settle matters. LLC's put into writing the profits/losses and direction of the business, as well as memorializing contributions ( your 50 grand) as loans to the company. You are also looking at tax consequences, as you want that 50 grand as a loan, not as mere funding of a hobby.

I have counseled many in your shoes. Contact an attorney before your 50 grand goes the way of the buffalo and you are personally liable for actions of your son or of the partnership.

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Answered on 6/08/05, 8:52 am
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Partnership Agreement

Whether a business is a partnership or not doesn't depend solely upon the existence of an express agreement, written or oral; it depends ultimately upon how the business is conducted and the understanding of the parties as to how profits and losses will be divided (or not). See California Corporations Code section 16202(a) "....the association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intended to form a partnership."

It is difficult to advise you without knowing more about the quality of your business and personal relationship with your son, whether your $50,000+ investment is documented (and whether the documentation tends to characterize it as a loan or an equity investment), what kind of taxpayer ID number was used to open the business checking account, what the landlord (and suppliers, customers, etc.) were told about the nature of the business, and on and on.

My guess is that there is more than enough evidence to show that the Code definition of a partnership is satisfied and that you are coowners; that could be refuted, perhaps, if the money you've put up is clearly documented as a loan and couldn't be characterized as equity.

You are both liable for the business debts if it's a partnership. There are steps you can take to withdraw from the partnership, cut off future liability, and even require your interest to be bought out by the other partner.

Another factor to consider is that if you aren't a partner, and you're working in the business, you are an employee. Are you being paid minimum wages? Is he deducting and remitting withholding tax, Social Security and Medicare? These would be serious violations of various laws! What does the workers' comp insurance policy claim you are -- a co-owner or an employee? You do have comp insurance, of course?

You mention a business license and a seller's permit issued to him as a proprietor. This is some evidence to refute a partnership, but not very strong, in my opinion. Is the business required to file and publish a fictitious business name statement? What this says would be more significant. What might noe infer, if anything, from the business name, letterhead, phone listing and advertising?

I would be pleased to consult with you further on this difficult matter; no charge. You may contact me by e-mail, FAX or phone. See my Web site at

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Answered on 6/08/05, 10:00 am
Larry Rothman Larry Rothman & Associates

Re: Partnership Agreement

I suggest you file a lawsuit to recover you money and end the partnership. If your partner refuses to put the rights and obligationsof the partnerss in writing, any trust you have for him should be eliminated. You may also be liable for debts that you are not aware of if the rights and obligations of the partners are not set forth in writing. Please call me if you have any other questions or wish to learn the procedure for litigaition. Our firm handles cases throughout California.

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Answered on 6/16/05, 10:55 pm
David Lupoff Law Offices of David B. Lupoff

Re: Partnership Agreement

You have had great responses from other attorneys and therefore, I have nothing more to add to your replies on a legal basis. However, I have an entirely new angle that I hope gains some mileage between you and your son. Written operating agreements, such as an operating agreement found in an LLC, usually outline each partner's specific duties. A writing helps keep all the duties of each partner clear and thus will help avoid disputes which are commonly caused by misunderstandings between the partners (This is to assume that neither partner is trying to take advantage of the other). When conducting business with family (or anyone for that matter), you always want to minimize disputes and a writing can assist business partners in doing so. Having a writing is a healthy way to conduct business! Good luck.

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Answered on 6/08/05, 9:35 pm

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