Many closely-held businesses are owned by a two or more individuals who are (or were) also friends, family members, or former co-workers. Because of their prior relationship, these individuals enter into their business relationship with a certain amount of inherent trust. Because they are focused on building and growing their new business venture, they don’t spend much time worrying about their respective roles, obligations, and responsibilities in the business. Instead, they both work hard simply to do what needs to be done to make the business a success. However, without a written agreement, default rules of partnership may be placed upon them.
What these entrepreneurs often do not realize is that by declining to formally incorporate or expressly define their rights and duties in a written agreement, these business associates will likely (perhaps unwittingly) be deemed to have formed a partnership or a joint venture in the eyes of the law. As such, the general law of partnership will be imposed upon them. For example, unless otherwise specified in a written agreement, the following default partnership roles may be imposed upon them:
Default Rules of Partnership
- Partners share equally in the profits and losses of the partnership (regardless of each partner’s contribution).
- The partnership must repay individual partners for expenses reasonably incurred by partners in furtherance of the partnership.
- All partners have equal rights in management and conduct of partnership business.
- Partners not entitled to compensation for work performed on behalf of partnership.
- No partner can be added without consent of all partners.
- A vote by a majority of the partners will carry an initiative.
- Partners also owe each other a fiduciary duty.
- Partners are required to share with each other all information concerning the status of the partnership upon request.
While there is nothing wrong with these default rules of partnership per se, they may not at all be the sort of relationship that the parties had in mind when they began their business relationship. This can be particularly troubling to a “partner” who has devoted substantially more time, energy or capital to the business, only to learn that his “partners” are entitled to share equally in the management and profits of the business.
A discussion of the factors that Georgia’s Courts will consider in determining whether a partnership exists are discussed more fully in another post titled Indicia of Partnerships.