Legal Question in Business Law in California

Re: Non-Corporate Entity Dissolution

Your 'business endeavor' would probably be classified as a general partnership if any issue surrounding it went to court. Despite an intention to incorporate or form an LLC (as suggested by your plan to do a private placement memo and issue securities under Reg. D), you seem never to have gotten that off the ground.

Unfortunately, forming a partnership is as easy as falling off a log. No written agreement, nor even an express oral agreement, is necessary -- a partnership can be held to exist whenever two or more persons combine to operate an activity for profit with the intent that the profits be divided.

Because of the personal liability that attaches to partnership debts and obligations, continuing to be associated in any way, even though you have moved out of state and perhaps no longer participate actively, is very risky for you.

The business is probably governed by the general partnership provisions of the California Uniform Partnership Act of 1994, codified in the Corporations Code (!) as sections 16100 through 16962.

I will complete my answer in a second posting in a few minutes.....

Re: Non-Corporate Entity Dissolution

I decided to break the reply into two parts to avoid the LawGuru length limitation.

I suggest you obtain a copy of the Partnership Act and read it. The California version can be found on line; sorry I don't have the URL handy. Iowa's law is probably nearly identical, by the way, since most states have adopted the Revised Uniform Partnership Act in the 1990s as California did in 1994 -- state-to-state differences exist, but generally they aren't significant.

Look at the following provisions: 16202, covering formation of partnerships; 16306, re liability of partners; 16401, partner accounts; 16601 to 16603 re dissociation of a partner; 16701 et seq. re dissociation when business not wound up; 16801 et seq. re winding up partnership business.

Starting at section 16901, the Act discusses conversion of partnerships to other forms of business entities.

Section 16404 regarding the fiduciary duties of partners may also be of importance.

Under partnership law, partners are not entitled to salaries or wages as such; however, the partnership agreement may provide otherwise. The concept is that partners take out their compensation through distributions of profits. It is common for partnerships to agree to pay salaries to those partners who work in the business, but by no means a universal practice.

The investor was entitled to his opinion, of course; the fairness of any proposed venture financing is always going to be a highly subjective issue.

I don't see a specific question buried in your facts, so I've given some general observations. I think you need to pull out of the partnership either by incorporating or dissociating in a way that covers your butt against its debts; exactly how you do that may depend upon whether the business is worth pursuing, your relationship with the other partner, the amount and nature of the assets and liabilities, and so on.

I'm available to assist if you need legal counsel.