involuntary associations
Walter obtained a lease on valuable property that could be developed for office and commercial use. Walter, lacking the funds to develop the property, borrowed money from Sam, handed over a promissory note for the amount borrowed, but told Sam that he would share the proceeds of the endeavor with him equally. The development was successful, but Walter simply paid Sam the note and refused to give Sam a report of the financial experience of the development. Sam, although he used bad judgment by not documenting the formation of the partnership in writing, can get his share of the development proceeds back if he can prove that Walter made the profit-sharing statement.
A partnership is the only business entity that can be formed by oral agreement. The parties do not have to intend to form a partnership; they simply have to agree to share in a company’s profits and losses. Most states have adopted some form of the Uniform Corporations Act which states: “The association of two or more persons to continue as joint owners of a for-profit business forms a partnership, whether the persons intend to form a society or not”.
If a partnership is formed, even inadvertently, without a written agreement between the partners, then in the event of a dispute about what the parties agreed to, state law provides for the partnership agreement. The terms of the default partnership agreement provided by state law are often a surprise to the partners.
What happens if a creditor agrees to wait for payment until some transaction occurs? Is a society formed? If an entity is formed for the purpose of conducting business, but additional promises are made based on what would happen if certain goals are achieved, is a partnership formed? Two savvy entrepreneurs have a discussion over beer about how they would plan and run a certain business built around an opportunity they were both aware of; when one starts a business of this type successfully; Can the other affirm that a partnership was formed?
There is only one defense against inadvertent association. Make sure all business agreements are in writing. Do not act in acknowledgment of an oral agreement until it has been documented in writing.
