Guest Post: “Accidental Partnership” by Richard Bobholz

“Oops, I tripped,” won’t work too well as an excuse if you find yourself under scrutiny for an accidental partnership. Despite having the potential to be incredibly damaging, these arrangements happen all the time in business.

 

What is an Accidental Partnership

An accidental partnership is a partnership that was entered into inadvertently. Yeah, I know that didn’t help at all. These commonly occur when two or more businesses get together to try to put on an event, coalition, or joint marketing efforts.

For example: the very first instance I encountered this was very shortly after I began my firm. A colleague approached me and told me all about this great expo that she and a few other colleagues were going to put on, and she wanted to know what risks there were. That’s when I told her about the accidental partnership.

 

The Law

North Carolina defines a partnership as “an association of two or more persons to carry on as co-owners a business for profit.” Person can mean any individual, company, or association of any type. What constitutes a business for profit is very broadly interpreted and includes any activity where profit was desired, not necessarily achieved.

In the example above, it was actually a partnership of LLCs that was getting together to put on the expo. Since the expo was to be separate from each of their businesses and yet not an incorporated or organized entity, we’re looking at a partnership.

 

What does that mean for the partners?

A partnership is not necessarily a bad thing. Each of the individuals in the partnership would have had personal liability protection because of the nature of their LLCs, so they wouldn’t lose any personally owned property if something went bad. However, under the partnership, every partner is 100% liable for anything that goes wrong. That means that if one partner causes huge damages to an attendee at the expo, any partner could be held liable. The person who was harmed can choose one or all of the LLCs involved in the expo to sue for damages.

Partnerships are defined largely by contract law. This means that the partners can define a lot of the rights and responsibilities of the owners and of the company itself. There are default rules that cannot be contracted away, such as the duty of each partner to act reasonably prudent when acting on behalf of the company.

Unless a contract specifies otherwise, the ownership, profits, and losses are divided equally. Additionally, the liability and management are owned wholly by each partner. That means that each partner may make any decision on behalf of the partnership, and the other partners could be held liable for those decisions. This is a scary position to be in.

 

How do I protect myself?

First and foremost, being able to recognize these types of situations before you enter into them will provide huge protections. Anytime you join together with another company or individual to conduct anything business related, there’s a good chance you’re looking at a partnership. At that stage, you should think of whether or not you want to be in that partnership. You can always avoid it by removing the ownership components, instead either being a contractor or making the other participants contractors. In those cases, contractors should get paid, and management should only belong to the owners.

The best way to protect yourself if you do go forward with a partnership is two-fold:

  1. Create a separate entity for the project or business activity you’re doing in conjunction with other businesses. An LLC acts like a partnership and provides that liability shield.
  2. Create a clear and concise contract between the partners so that in the event something goes wrong, there are terms in place to protect you. This should also define what the rights and responsibilities of each partner is, as well as how to resolve any disputes as they come up.

 

 


 

 

Law Plus PlusRichard Bobholz is the Managing Partner at Law++, a revolutionary and award-winning business law firm in Durham, North Carolina. Law++ sets itself apart by offering flat rate pricing, easy to understand retainer packages, and the highest quality customized legal services to all their clients. They were also the first law firm in North Carolina to become B Corporation Certified.

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