Legal Question in Business Law in California

Accidental Partnership?

I recently joined a network of computer consultants. This group has a name, a web site, and a voicemail box. It has bylaws of a kind, and members hold elections to decide whether or not to add a new member. It does not have a shared bank account or any assets to speak of.

The group acts as a common intake channel for prospective clients. Clients contact the group and jobs are handed out to the members according to who is interested and available.

The members of the group believe that they are all sole proprietors, and that the club does not exist as a legal entity. I suspect that the group qualifies as a general partnership, however. Can you suggest whether this may or may not be the case?

Thanks very much for any information you can provide on this subject.


Asked on 2/15/06, 7:06 pm

2 Answers from Attorneys
Gregory Cartwright The Cartwright Law Group, APLC

Re: Accidental Partnership?

The situation you've described happens more than we'd like to admit. This group, in all likelihood is a partnership under the California Corporations Code, along with all of the rights, duties and obligations of a partnership. The lack of a formal agreement does NOT preclude such a finding.

This is an incredibly dangerous position to find onseself in. Not only does each partner owe each other partner a fiduciary duty (as well as many other duties), each general partner is 100% personally liable for the debts and obligations of the partnership(including without limitation those reduced to a judgment following a lawsuit). All of the income is subject to self-employment tax. There is no asset protection nor tax advantage to your situation, only liabilities. This is the worst of all possible situations you can be in.

You must immediately form a new entity - probably an s-corporation, with a buy-sell agreement.

If you elect to form a corporation do not use an internet-based company to do it. Hire an attorney. Trying to accomplish this all on your own will only cost you and your partners much more money and heartache in the future.

Drop me an email if you want to discuss your options further.

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Answered on 2/15/06, 7:37 pm
Terry A. Nelson Nelson & Lawless

Re: Accidental Partnership?

Sounds like a partnership to me, and probably to any creditor that checks up on it. They are asking for problems unless they correct this promptly. There should probably be a corporation with consulting or employment contracts, but there are several options available to them. Contact me if interested in doing it right.

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Answered on 2/15/06, 9:11 pm


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