Legal Question in Business Law in
Informal business partnership
I am involved in a business partnership (verbal agreement only) with someone who is endebted to a First Nations People lender for $15,000.00. My name is not on the loan, but both names are on our business account. It is a small horseback trail riding business, started early this year. The business operates at my farm and an addition to my existing barn was built and horses added to my existing herd. Recently, my "partner" became afflicted with a neurological/seizure disorder and can no longer physically contribute to the business. She wants to liquidate all "assets" to repay as much of the loan possible, but my husband and I have contributed greatly both physically and monetarily to this venture (more so than my partner). Are we entitled to any renumeration? Can the barn addition be legally "liquidated"? What are we entitled to, if anything, and what are our options?
1 Answer from Attorneys
Re: Informal business partnership
Without a written partnership agreement, you will
need to rely on your jurisdiction's equivalent of
the Unifrom Partnership Act or similar act. I am
not sure where you are. If CA is in Califronia,
then you need to consult the California regs. for
partnerships which act as 'gap' fillers where only
a partial agreement or no agreement is written. If
you are 'CA' as in Canada, you need to consult your
Provincial law regarding business partnerships.
In general, under most US and Canadian law,
general partners (as opposed to 'limited' partners)
are liable for all debts of the partnership and
any partner can encumber the assets of the other
general partner(s) as long as they are acting
within the framework or provisions of the business
but not if they commit fraud or a felony outside
of the business operation. Normally, a general
partnership can be terminated 'at will' by any partner
unless provisions for an orderly termination are
written into a contract. The partnership then "winds
up' and is liquidated, and often a new partnership
is simultaneously created with the remaining partners.
In your case, if there were only two partners, the
period of liquidation of partnership assets would
result in a split of 50/50 of partnership assets and
liabilities. If you have filed a partnership return for
the business, it would list the assets of the business
and if you have contributed more than half, the split
or division of remaining assets is still 50/50
in most cases under US law. It may be different
if there were an agreement for unequal division
and there is evidence( a letter or memo or verbal
understanding with witnesses).
Your options are to 'liquidate' the assets of the
general partnership and divide the proceeds, if any,
equally. If there is still liability after liquidation,
both partners would be personally liable for any
remaining partnership debt. (This is why businesses
form corporation's and LLC's for limiting the personal liability
of the owners.)
You could also offer to 'buy out' your partner's interest,
and assume 100% control of the business and assets. Of course,
the liability at the bank would depend upon the nature of the bank loan,
and what security was given for the loan, etc.
If the funds were deposited/assigned directly to the business account,
then the debt would likely be considered a partnership liability, unless
otherwise characterised.The debt would remain for
the new owners of the business.
There is insufficienct information here to give you a determination.
Look at the terms of the loan (papers) and the
'understanding' of the parties. Were all the funds
used in the business? If yes, and there is a paper trial to show
purchases of supplies, etc, then this is probably a joint
debt of the general partners.Good luck in resolving your
partnership. MH
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