Legal Question in Business Law in California

Re: Partnership that's gone sour

Continue on, negotiate or litigate, take your pick. It might help to arrange a mediation with a 'neutral' mediator to help the parties work out the details, and clarify the risks and costs of argument over the issue. If interested, feel free to contact me to make such arrangements. I am a court appointed arbitrator and mediator.

Re: Partnership that's gone sour

He is your de facta partner, regardless of the fact that you both signed no documents. Half the business is probably his, but what does that mean? Half of what? What is the value of your business? How can it be valued? These are questions that must be answered before he can demand a legitimate buyout (or before you can legitimately offer him a buyout).

Re: Partnership that's gone sour

Partnerships can be and often are formed with oral agreements, or with no express agreement at all. Modern partnership law basically says, "If it acts like a partnership, then it is a partnership."

When there is no express agreement, courts will use a combination of statutory presumptions and the facts and circumstances of how you ran the partnership to determine what your agreement is.

Most partners are surprised to learn that a partner is not legally entitled to be compensated for working in the business - that's expected of partners - so the fact that you did 90% of the work will not necessarily entitle you to 90% of the net value of the partnership upon its breakup.

Partners can, of course, work as employees of the partnership, and in that capacity, would be entitled to pay, but ask yourself whether you were really an employee. Did the partnership withhold taxes? Send you a W-2?

A partner can withdraw at any time. Such withdrawal can be "rightful" or "wrongful," and this governs to a degree what his or her rights are in winding up or continuing the business of the partnership.

The Corporations Code contains the statutory provisions governing partnerships. Sections 16601 through 16807 cover withdrawal of partners and termination of partnerships. Generally, a rightfully withdrawing partner must be bought out at fair value if the remaining partner(s) decide to continue the business. If the partnership has kept books according to sound bookkeeping principles, this should not be too hard.

If there are no books and records, as well as no express partnership agreement, it will be much harder to apply the law. What to do depends upon the value of the business. If it is worth, or potentially worth, say, more than $100,000, each of you should get a lawyer and an accountant.

If it is worth between $10,000 and $100,000, your best bet might be to agree on a mediator or arbitration process.

If the value of the business is less than $10,000 (based on what a third party might pay you two for it), I would suggest abandoning it, paying off the creditors, and mutually releasing one another. Then go your separate ways and maybe start over with suitable partners and a written agreement.