Articles Tagged with partnership

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Starting a business partnership can be very exciting. You are ready to hit the ground running with your new venture. However, you will want to pause and make sure you have your legal interests well documented and in order before you jump into starting the business. The corporate attorneys at Structure Law Group understand the intricacies of forming a partnership and putting safeguards in place should a problem later arise.

California Partnership Legal Classifications

General Partnership

Government contracts can be lucrative for many companies, large or small. Often, one company wants to bid on a government contract but needs assistance from another company to fully perform the contracted work. In such cases, the two companies would combine their resources to share the bid and the contract, if awarded.  When this situation arises, it is critical to ensure that the companies have an agreement, a “teaming agreement”, stating how the work set forth in the government contract is to be divided to protect the interests of each business.

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Many teaming agreements involve a large corporation acting as the primary contractor and one or more smaller businesses acting as subcontractors. Smaller businesses naturally want to protect their interests against larger corporate entities with more resources. Preparing bids can be costly and time consuming and can take focus away from other day to day operations of the business.

Unfortunately, the problem is that many teaming agreements have been deemed unenforceable by California state courts. Because a teaming agreement is signed before a contract is awarded and whether it takes effect is dependent upon winning the contract, many courts have stated that teaming agreements are “an agreement to agree” in the future instead of a binding contract. This means that a subcontractor could take the time to prepare a bid and enter into an agreement with a primary contractor, and once the government contract is won by the primary contractor, it could decide to use a different subcontractor, leaving little legal recourse for the subcontractor.

Foreclosure of a Charging Order

Limited liability companies (LLCs) provide their owners (members) a number of protections that do not exist for partnerships or sole proprietorship’s. One critical protection is limited liability protection.  Because an LLC is considered a separate legal entity and its assets and debts are separate and distinct from any assets or liabilities that its owners may have, a creditor of an LLC member typically cannot reach or interfere with the LLC and vice versa. However, California law does provide a tool for creditors to try to reach a judgment debtor’s LLC interest. The tool is called a charging order.

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A charging order is roughly akin to a wage garnishment, but instead of directing an individual’s employer to pay over a portion of the individual’s salary to the creditor, it directs an LLC in which the individual judgment debtor has a membership interest to pay over any distributions that would otherwise be made to the member to the creditor. Notably, a charging order ordinarily cannot compel an LLC to make a distribution to a member and does not confer any management rights, instead extending only to distributions made to a member. For this reason, charging orders do not always result in payment to the creditor. Nonetheless, a charging order can still be effective because they can cut-off an LLC member’s rights to receive any distributions from the LLC and may impact the member’s dealings with the LLC and its other members.

Corporate officers, partners in a partnership, and members of a limited liability company owe a fiduciary duty to the principal, i.e., the business entity, to act in the best interest of the organization. Failure to act in the principal’s best interest or actively competing against the principal to which a fiduciary duty is owed exposes the fiduciary, the agent of the principal, to civil liability. Care must be taken by the fiduciary not to compete against the organization to which they owe their duty of loyalty. The Silicon Valley Business Attorneys’s at Structure Law Group, LLP are highly experienced in preventing and resolving corporate disputes that may arise from a breach of fiduciary duty.

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The foundational tenet of agency law is the duty of loyalty owed by the agent, or fiduciary, to the principal or business entity. The duty of loyalty obligates the fiduciary to act in the best interests of the principal. The duty of loyalty extends to “all matters connected with the fiduciary relationship.”  Thus, the duty of loyalty prohibits fiduciaries from obtaining a benefit from others as a result of the fiduciary relationship. This prohibition extends to all dealings in which the fiduciary is involved on behalf of the principal. The duty to act with loyalty is not limited to financial matters.

The fiduciary’s duty of loyalty encompasses situations involving parties adverse to the principal. The fiduciary has an absolute duty not to act on behalf of a third party whose interests are adverse to those of the principal.  The fiduciary is duty-bound not to compete, either personally or on behalf of, another entity. The agent’s obligations last for the entire duration, and in some instances depending on contract language, last beyond the termination of the fiduciary’s relationship with the principal. However, agency law does provide for the fiduciary to plan and prepare to leave the principal, even to then compete with the principal.  Notwithstanding, the action taken by the fiduciary must not violate any other duty owed to the principal.

A partnership is created whenever two or more people agree to do business together for a profit. Additionally, partnerships should ensure that they follow sound business practices once they begin their new venture.

Steps in Forming a Partnership

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The first step to forming a partnership is choosing its name.  In California, a partnership may use the last names of the individual partners or any fictitious names. If a fictitious name is used, it must be distinguishable from the name of any business name that is currently on record.  Before choosing the name, a search should be run in the following databases such as California Secretary of State or The United States Patent & Trademark Office.   If a fictitious name is used, the state of California requires that a fictitious business name statement is filed in the office of the county clerk where the partnership intends to do business.  The fictitious business name must also be published in the county newspaper for four weeks.

While many well-known businesses are either corporations or limited liability companies, partnerships remain a common and savvy business entity selection. In fact, some of the biggest names in tech—Apple, Microsoft, and Google—started out as partnerships.

What is a Partnership?

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Partnerships exist whenever there is a cooperative endeavor of two or more people, entities, or some combination thereof, to provide a product or service. The main characteristic of any partnership is that the partners share in the profits and losses of the business.

Some of the world’s most successful companies started as partnerships. Microsoft, Apple, McDonald’s, Warner Bros., Ben & Jerry’s, and Google are only some examples of now corporate giants that began with only two people working together to start a business. Unfortunately, many partnerships do not work as well, often because of disputes between the partners. Many of these disputes may be avoided by simply drafting and signing a valid and appropriate partnership agreement at the beginning of operations. An experienced business attorney can help you identify which issues need to be addressed in your particular partnership arrangement.

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The law does not require an agreement

Anytime two or more people begin business operations, they automatically have a partnership. Much like a sole proprietorship, a partnership requires no filings with the Secretary of State or other formalities in order to establish the business entity. If you do not have a partnership agreement and a dispute arises, you will have little control over how the dispute is resolved. In cases without an agreement in place, California law will govern the situation and not the wishes of the respective partners, which can be problematic in many cases. For example, California law allows each partner an equal say in the management of the business, as well as an equal share in profits. This would not be fair if one partner contributed substantially more time, effort, or money to the business than the other. Therefore, not only will a partnership agreement help to avoid misunderstandings in the first place, but may also lead to a fairer resolution of any legal issues.