Legal Question in Business Law in California

Well, here's the way I analyze the situation. The two of you started a new company, and there was no written agreement. Therefore, the company is (or was), by default, a general partnership. It is probably a 50-50 partnership because your capital contributions were about equal and there are no facts showing otherwise. A partnership can be formed without a written agreement. One can even be formed without an oral understanding. All you have to do is conduct a business together with the intention to share the profits.

Partnership law is partly statutory, partly historic common law based on judges' decisions.. The current statute is the Revised Uniform Partnership Act ("RUPA"), codified in the Corporations Code as sections 16100 et. seq. and pretty well fills in the blanks for partnerships without express agreements.

Once one (or both) of two partners decide to break it up, the partnership dissolves, and there are definite rules for dividing up the assets and liabilities and repatriating the capital back to the former partners. In a business of your size, with assets into the hundreds of thousands of dollars, I assume (and hope) that you've used an accountant or at least a talented bookkeeper to keep formal and accurate, tax-audit-worthy books of account, P&L and balance sheet statements, etc.

Figuring out how to divide up the assets, pay the bills, etc. is about 15% lawyer work and about 85% accountant work. The lawyer's role is to point out and explain the sections of the RUPA that deal with winding up a partnership, such as CC 16401, 16701, and 16801 through 16807.

The accountant's role has many aspects, but chief among them is to determine the amount of each partner's capital account. Since the computer-numeric-controlled machines were leased, the accountant will have to decide - perhaps with input from the attorney - whether the payments made to the lessor should be charged to the partnership or, rather, to the account of the partner that brought them in as his "contribution." The latter, I would think, because if his contribution to the partnership's capital was leased, rather than owned, making the lease payments probably should be at the "contributing" party's sole cost (as between the two of you). There may be a related issue as to what became of the inventory you contributed - sold, written off, or still on hand and valuable?

So, I think you are entitled to credit of some kind, and in some amount, for maybe about half of the payments made by the partnership to the machinery lessor, but determining the proper payouts to each partner upon termination of the partnership is a heavy-duty accounting exercise that needs to take into account draws, loans, profits and losses, and many other factors. In addition, all third-party creditors of the partnership need to be paid or otherwise taken care of before either former partner gets a dime.

The 'partners' are entitled to quit and split the assets of the partnership. It would help to have a detailed written partnership agreement laying out how that gets done. Now, if you two can't agree, and your attorneys can't work out a 'deal' or mediate it, then you will end up suing for a court order for an accounting and distribution. Feel free to contact me for the legal help you're going to need in this.

Best case outcome is that you both agree as to the division of assests. It sounds as if you may be close. An experienced negotiator with extensive partnership dissolution experience will be helpful. Contact me directly.