Legal Question in Business Law in California

You are liable personally for any business taxes owed. You may not have any federal tax exposure on the business depending on how it was structured (INC vs LLC vs general partnership).

You should consult a CPA to discuss your specific situation in more detail. It is possible that you may have a claim against the partner under the right circumstances, but I would not conclude anything here.

If you would like to discuss further over a free phone consult, feel free to contact me anytime that is convenient.

Kind regards,

Frank

www.LanternLegal.com

866-871-8655

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DISCLAIMER: this is not intended to be specific legal advice and should not be relied upon as such. No attorney-client relationship is formed on the basis of this posting.

I assume the bakery business is a true general partnership, and that you are not using the term generically to denote a business association which is in fact a corporation or LLC. General partnerships are easily formed; usually with a written partnership agreement, but sometimes with an oral agreement and occasionally by just conducting business like partners, even though there is no express agreement, written or oral.

"Taking your name out" is technically referred to as "dissociating" from the partnership. If there are just two of you, your dissociation would have the effect of terminating the partnership, since a partnership cannot exist with only one partner. The specific rules as to what happens when a partner dissociates from a partnership are found in the California Corporations Code (which actually covers other kinds of business organizations as well) at sections 16601 to 16705.

Note also Corporations Code section 16306(a): "Except as otherwise provided in subdivisions (b) and (c), all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law." However, partnerships generally don't pay federal or state income taxes. Instead, they furnish their partners with Form K-1, reporting to the partner his or her share of the profits or losses for the year. Each partner then includes the partnership income in his or her 1040 each year.

Finally, it matters not that you haven't "physically"received any profits from the partnership. If the partnership had profits, you'll be taxed on your share (50%, perhaps) whether you received a dime. The tax liability isn't based on payout (distributions); it's based on the profits reflected by the partnership's tax books, whether it pays the profits out as distributions, or retains them in the business.

Partners are entitled to see the books of the partnership. They are also entitled to the utmost openness, honest and fair dealing by the other partner(s) in all matters relating to the partnership business. See Corporations Code section 16404.

I'll make the same offer to consult by phone at no cost or obligation - (707) 878-2230.