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Beware the Unintended Partnership

Photo of two teddy bears, symbolizing an unintended partnershipThis post uses a real-life example to explain how an unintended partnership is created and why it can be a problem.

Client was one of two founders of a website. She provided content; Co-founder developed, maintained and promoted the site.

Client and Co-founder had been working together for three months when Co-founder presented a business agreement that had been prepared by his paralegal friend. Client asked that I review the agreement on her behalf.

I saw right away a problem that frequently arises in this situation: The parties were characterized as participating in a joint venture under which they would split earnings from the site. The problem arises because under California Corporations Code Section 16202(c)(3), subject to certain exceptions (see discussion below), “[a] person who receives a share of the profits of a business is presumed to be a partner in the business”. This is true even if the parties did not intend to form a partnership (Section 16202[a]), in which case they have created an unintended partnership.

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