Involuntary associations

Walter obtained a lease for a valuable property that could be developed for business and office use. Walter, lacking the funds to develop the property, borrowed money from Sam and gave him a promissory note for the amount borrowed, but told Sam that he would share the proceeds of the effort with him equally. The development was successful, but Walter simply paid Sam the note and refused to give Sam an explanation of the financial experience of the development. Sam, even though he used bad judgment in not documenting the formation of the partnership in writing, he can recoup his share of the development income if he can show that Walter made the income sharing statement.

A partnership is the only business entity that can be formed by verbal agreement. The parties do not have to intend to form a partnership; they simply have to agree to share in the profits and losses of a business. Most states have adopted some form of Uniform Association Act that states: “The association of two or more persons to continue as co-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 conflict over what the parties agreed to, state law provides the partnership agreement. The terms of the default partnership agreement provided by state law are often a surprise to partners.

What happens if a creditor agrees to wait for payment until a transaction takes place? 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 knowledgeable entrepreneurs have a discussion over a beer about how they would plan and run a certain business built around an opportunity that they were both aware of; when one starts a business of this type successfully; Can the other claim that a partnership was formed?

There is only one defense to involuntary association. Make sure all business agreements are in writing. Do not act in recognition of a verbal agreement until it has been documented in writing.