If you and a friend or family member have started a side business or some type of small money-making venture, you may have inadvertently formed a partnership. To form a partnership in Idaho, partners don’t need to file paperwork with the state of Idaho, form a written partnership agreement, or agree to form a partnership. Rather, under Idaho law, a partnership can form by conduct alone. Specifically, when two or more people get together and run a business as co-owners and share profits, they have formed a partnership, a legal entity separate from their individual entities. It doesn’t matter that they didn’t intend or want to form a partnership; a partnership may nonetheless exist.
As a partner in a partnership, you may have unexpected liabilities. Each individual partner is an agent of the partnership for purposes of the partnership’s business, and when a partner does any normal and expected business work or transactions (acts done “in the ordinary course” or running the partnership), those acts are almost always binding on the partnership, in additional to acts explicitly authorized by all partners. Acts that are binding on the partnership are in turn binding on all individual partners (with limited exceptions) because each individual member to a partnership is usually jointly responsible for the debts, obligations, and liabilities of the partnership.
Let’s give an example of how this law plays out. Suppose you and friend decide to form a furniture repair business as a hobby. You two agree to scour garage sales and secondhand stores, purchase and repair old furniture, resell it on Craigslist, and share the profits. Each Saturday morning, you and your friend independently shop around for furniture and then meet in your garage to repair the acquired inventory. One Saturday morning, your friend arrives with a solid oak dresser, which he explains he bought for $500 at is neighbor’s garage sale. Since you two don’t have a lot of cash on hand, the neighbor agreed to delay payment for a month. Unfortunately, you and your friend are unable to repair and sell the dresser before the neighbor demands payment. Are you and your friend both responsible for the $500? Probably. This purchase on credit seems to be in the ordinary course of your furniture business, so the debt became a partnership liability, for which you are both liable as partners. However, if your friend paid $5,000 for a dresser in nearly perfect condition, this purchase might not be an ordinary business transaction for your furniture repair business (key word: repair), and if your friend didn’t have your approval, he might be individually responsible.
A joint debt of $500 may not be a huge deal, but what if the partnership buys and sells used cars and the purchase is a $30,000 car? What if your partnership flips houses and the purchase is a $200,000 home? You get the picture.
The furniture repair hypothetical illustrates one of various types of problems that can arise when parties form small businesses without proper legal counsel. There are many legal options small business owners can choose from to manage business risks. If you have any corporate or business law needs, contact one of our corporate and business lawyers today. We can help solve your problem.
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