Depending on your point of view, the phrase “until death do us part” can either sound hopelessly romantic or like another way to say “albatross around my neck” – and no, I am not speaking of a traditional marriage.
In Idaho, a business partnership is a lot like a common law marriage. Fortunately for unwitting, starry-eyed couples, as of 1996 they can no longer inadvertently wind up as husband and wife by merely cohabiting with each other and using the “Mr. and Mrs.” artifice occasionally to save face, please the pastor or fool the kids. Unfortunately for unwitting business owners, however, they can end up in a 50-50 marriage-like partnership with the proverbial partner from hell if they aren’t careful.
A business “partnership” means “an association of two (2) or more persons to carry on as co-owners a business for profit formed under section 53-3-202, Idaho Code, predecessor law, or comparable law of another jurisdiction.” I.C. § 53-3-101(8). The scary part here is what follows in section 53-202: “Except as otherwise provided in subsection (b) of this section, the association of two (2) or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” (Emphasis supplied.) Subsection (b) merely provides that if you knowingly form a business association under some other provision of the Idaho Code, such as an LLC or a corporation, such an entity will not be deemed a partnership. Under subsection (a), the minute you start telling everyone you’re partners – and don’t take any other steps to create a separate and distinct legal entity – then you’ve just gotten legally hitched, for better or for worse, and you’ll need to formally divorce if things don’t work out so well down the road.
So, what does being legally hitched in a partnership mean in terms of real-life consequences? Well, for one, you and your partner will be jointly and severally liable for all contracts and agreements that the partnership enters into. “Joint and severable” liability means that, if your partner takes off in the dead of night with all the cash in the kitty, you are personally liable for 100 percent of anything the partnership owes. Sure, you can sue the errant partner for his or her fair share of the debts, but that is far easier said than done – especially if they turn out to be the kind of person who disappears in the dead of night.
Even if you intended to form a partnership, you need to have a written partnership agreement or Idaho’s Uniform Partnership Law will fill in any blanks, such as who owns how much of the business. The presumption is an even 50-50 ownership – and that means you share equally in profits and losses. Because two partners are presumed to own the business 50-50, they must reach consensus on all business decisions unless they want to head for a potentially costly divorce.
In addition, no partner is automatically entitled to be paid for services performed on behalf of the partnership barring some other verifiable agreement to the contrary. So, if one of you has the brains and the brawn to make a business dream a reality and the other has the cash, barring some proof to the contrary, the partner who mainly contributed the start-up funds and/or equipment gets to share equally in the partnership profits with the partner whose blood, sweat and tears ensured that the startup capital investment pays off. Not an inherently bad result if that’s what you intended all along. Not so great if either one of you thought otherwise but don’t have any proof to back up your expectation in court.
Bottom line: Mean what you say, say what you mean, and put everything in writing.
Molly O’Leary represents business and telecommunications clients throughout Idaho, and is a managing member of Richardson & O’Leary, PLLC, in Boise (richardsonandoleary.com). In addition, Ms. O’Leary serves as president of the Idaho State Bar Board of Commissioners, and on the statewide advisory council for the Idaho Small Business Development Center. You can follow her on Twitter: @BizCounselor.