Put That Partnership Agreement in Writing!

By Nina Kaufman, Esq.

You’ve probably heard all the usual reasons why a partnership agreement should be in writing:  memories are fallible; it helps you plan your business better; you can set out your exit strategies.  In short, you choose what you want to have happen, rather than leaving it up to the default provision that state law provides.

But here’s another one I came across:  a court could find that your partnership didn’t exist!  Yes, indeed.  A Texas Appellate Court recently faced the following facts in Torres v. Kelley, No. 13-04-313-CV, 2007 WL 528849 (Tex. App.-Corpus Christi Feb. 22, 2007):

[Kelly and Torres] had drafted a written partnership agreement that they never signed and which stated that a partnership would be created upon execution of the agreement. There was also evidence of some type of verbal, profit sharing arrangement, but it was undisputed that Torres did not have access to the business’s finances . . . . Upon the parties’ falling out, Torres had taken some assets from the business and sold them under the name of a new company . . . .

Without a written partnership agreement, there was no procedure for the parties to follow for winding up the partnership, “there was no agreement about capital contributions, there was no agreement about sharing of losses or liabilities, and no partnership tax forms were ever completed.”   As a result, the Court concluded that “there was no probative evidence of a partnership,” and reversed the trial court’s ruling that Kelly was entitled to recovery.

Different states have different laws concerning the operation of business partnerships, so what happened in Texas might not always apply.  But if you’re serious about moving ahead with a business partner, why take the chances?  Make sure you put it in writing.

Want to learn more about Kaufman Business Law? This is the video to watch.