What Did You Get Yourself Into? (Understanding Partnerships)
Of course, business lawyers are frequently engaged by clients who have gotten themselves into a business relationship and need to get out of the relationship for various reasons. Like marriage, or pretty much everything in life, business relationships are often “easier to get into than to get out of.”
Know What Partnership You are Getting Yourself Into
It is important to fully understand the various aspects of a business you are thinking about entering or starting.
We have had many experiences with individuals who have “entered into a partnership” and contributed capital to a venture without knowing the nature of the entity they just joined and without the proper paperwork. Eventually, many of these clients tell us that, “We sure wish we had talked to you in the first place.” In fact, a general partnership may be the worst type of business relationships to create.
Here are a few interesting facts about the general “partnership” based on New Mexico law. New Mexico has adopted the Uniform Partnership Act, as have most states. New Mexico statutes instruct that:
- “. . . the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” There are listed exceptions or clarifications however. This means that you don’t have to have a written agreement to be partners. You can be a partner with someone as soon as you agree (even verbally) to own a business with that person for profit and start doing it.
- “Each partner has equal rights in the management and conduct of the partnership business;” and “. . . each partner is an agent of the partnership for the purpose of its business.” If you desire that control of the company should follow the size of the investment or perhaps that one partner manage the company, you must have a written agreement and would be better served by forming a limited liability entity of some sort. In the meantime, your partner may be acting as your agent and binding you to financial transactions.
- “A partnership may file a statement of partnership authority.” This statement is filed with the New Mexico Secretary of State, who has forms and instructions available. This is one way to limit the authority of a partner or partners, at least as between the partners.
- “All partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.” That does not mean up to the amount of your investment, that means up to the limit of your personal resources! Remember what we told you about a general partnership maybe being the worst type of business relationships to create?
- “A partner or other person named as a partner …may file a statement of denial stating the name of the partnership and the fact that is being denied, which may include denial of a person’s authority or status as a partner.”
So, you could end up betting your entire life savings on a venture that you thought has only a few thousand dollars on the table. As we’ve said time and time again in our blog section, a little professional advice about your business investment may be the best money you could ever spend in the deal. We can assist you to create the right type of limited liability business entity with terms custom-made for the deal to which you agreed and to foresee future issues and risks, from a legal, managerial, financial or tax point of view.
Understand What You are Purchasing
Before making any financial commitment, it is important to fully understand what you are getting in return.
In a world in which you can pop a credit card number into an online box and generate a business document, you need to realize what you are buying. And that is not always a lawyer or legal help. You are often buying a piece of paper filled out by you, while an anonymous online provider tries to educate you about the process. The terms of a business agreement can be complex and you have to consider all of the consequences and potential pitfalls.
The lawyers at Law 4 Small Business are happy to discuss this with you in much more detail and to provide expert assistance. If you feel that perhaps you do not know as much as you need to know about business law, or if this article itself confounds you, give us a call.