Inadvertent Partnerships

Walter obtained a lease on valuable property which could be developed for office and retail use. Walter, lacking the funds to develop the property borrowed money from Sam, delivering a promissory note for the amount loaned but told Sam that he would share the profits of the endeavor with him equally. The development was successful, but Walter merely paid the note to Sam and refused to give Sam an accounting of the financial experience of the development. Sam, though he used poor judgment in not documenting the formation of the partnership in writing, can recover his share of the development proceeds if he can prove that Walter made the statement to share the proceeds.

A partnership is the only business entity that can be formed by oral agreement. The parties do not have to have the intention of forming a partnership; they merely have to agree to share the profits and losses of an enterprise. Most states have adopted some form of the Uniform Partnership Act which states: “The association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership.”

If a partnership is formed, including inadvertently, without a written agreement between the partners, then in the event of a conflict about what the parties agreed, state law provides the partnership agreement. The terms of the default partnership agreement provided by state law are often a surprise to the partners.

What if a creditor agrees to wait for payment until some transaction occurs? Is a partnership formed? If an entity is formed for the purpose of carrying on business, but additional promises are made based on what would happen if certain goals are reached, is a partnership formed? Two knowledgeable entrepreneurs have a discussion over a beer about how they would plan and conduct a certain business built around an opportunity of which they were both aware; when one starts such a business successfully; can the other claim a partnership was formed?

There is only one defense to the inadvertent partnership. Make sure all business agreements are in writing. Do not act in recognition of an oral agreement until it has been documented in writing.