Partnerships: What Are Your Legal Obligations?

Business partnerships are a source of numerous lawsuits. Business litigation attorneys are accustomed to hearing the complaints of one partner about another partner—my partner does not work as hard, my partner has another business that competes for his time, my partner is taking loans from the business or even the complaint that my partner and I just cannot work together anymore. Whether the partnership is pursuant to a formal written legal document or just two friends who have been working together, partners owe each other certain obligations and any business litigation over the partnership will involve certain partnership laws.

In California partnerships are governed by the Revised Uniform Partnership Act, which is set forth in the California Corporations Code. A partnership is an association of two or more persons to carry on as co-owners a business for profit. A person under the Code also encompasses corporations, governmental entities, other partnerships and other entities in addition to individuals. For example, a corporation and an individual can be partners in a partnership.

The fact that the two friends have been working together for several years but never got around to formalizing a partnership agreement between themselves does not mean that they do not have a partnership. The law does not specifically require a written contract in order for there to be a partnership. The Uniform Partnership Act provides for certain minimum obligations between partners, but a written agreement between the parties may alter some of those obligations. If there is no written contract then the basic obligations set forth in the Act will govern.

A partnership is a separate entity, distinct from its partners, for certain purposes (such as owning property, suing and being sued in court, or going bankrupt) but partners generally share in the partnership’s liability. Of course, there are limited partnerships in which the limited partners are protected from the liabilities of the partnership or limited liability companies in which all of the members are protected.

Partners in a partnership are in a fiduciary relationship. Business lawsuits often involve claims of breach of fiduciary duty. This is a claim that one or more of the partners violated a duty owed to the other partners or the partnership. Generally the idea of a fiduciary relationship is that a partner must act in good faith towards her other partners and may not take advantage of them or the partnership for that person’s own personal gain. A common breach of fiduciary relationship is when a partner usurps an opportunity offered to the partnership by keeping the opportunity for herself or others at the expense of the partnership. In other situations a partner simply starts competing with the partnership, stealing clients, vendors and important information to break off to form a different business. These can be grounds for a breach of fiduciary relationship claim.

Partnership litigation typically involves claims for breach of contract (whether written or oral), breach of fiduciary relationship, fraud, dissolution of the partnership and accounting. Other causes of action may apply in various circumstances. A claim for breach of contract basically alleges that one party broke their promise to the other promise. A claim for breach of fiduciary relationship goes a little farther in that it alleges that one partner has breached basic duties of loyalty or good faith toward the other partner. Fraud is the most extreme allegation in that it involves the allegation that a party made a misrepresentation or concealed something from the other partner. Dissolution and accounting are basically remedies—one to end the partnership and one to account for the business of the partnership.

Los Angeles business litigation attorney Laine T. Wagenseller has successfully handled many partnership and corporate shareholder lawsuits involving breach of contract, breach of fiduciary relationships and fraud. He is the founder of Wagenseller Law Firm in downtown Los Angeles. For more articles on partnership and corporate litigation, visit www.wagensellerlaw.com or contact Mr. Wagenseller at (213) 286-0371 or ltw@wagensellerlaw.com

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