Insight Have You Formed a Partnership Without Knowing It?

Idaho law broadly defines a partnership as “an association of two (2) or more persons to carry on as co-owners of a business for profit.” Idaho Code s. 53-3-101; 53-3-202. This means a partnership can be formed by any two “persons”—including individuals, corporations, limited liability companies, or other partnerships—even if the people forming the partnership do not intend to create a partnership. In other words, if you or your business has teamed up with someone else, unless you have registered with the state as another legal entity, such as a limited liability company or corporation, you may have formed a general partnership without knowing it.

Factors that a court would consider to determine whether two or more individuals have formed a general partnership include whether those persons jointly own property or whether the persons share profits and losses. However, neither of these factors alone mean that the venture is a partnership. Anyone that receives a portion of the profits from a business is presumed to be a general partner of that business unless the profit sharing is compensation for services, payment of debt, or other limited exceptions. It is important to note that a “joint venture” is not a separate legal entity in Idaho, and the parties to a joint venture may well be considered partners.

So why does this matter? First and foremost, each partner is personally liable for all obligations of the partnership. This means that if someone obtains a judgment against the partnership, you may have to pay the entire judgment, not just your fair share. Each partner is also liable for the actions of his or her partners taken in the ordinary course of the business, including if your partner takes money from a third party and absconds with it. Second, each partner is an authorized agent for the partnership, meaning each partner has the ability to transact business and incur debt for the partnership. Third, property acquired with partnership assets is presumed to belong to the partnership, even if it is acquired in the name of one of the partners. Fourth, Idaho law imposes various duties of loyalty and care on partners, the violation of which could lead to additional liability.

For almost all business ventures, it does not make sense to operate as a general partnership. There are multiple forms of limited liability entities recognized in Idaho—including limited liability companies, limited liability partnerships, and corporations—that limit participant exposure to personal liability and provide more flexibility to determine who may act on behalf of the entity, how profits and losses are shared, and how business among the members is transacted. If you are doing business with someone else and have not formed one of these separate legal entities to conduct that business, you should consider doing so in short order. Otherwise, you or your business may be exposed to significant and unnecessary liability.

If you would like more information about this topic or other legal issues, please contact a member of our Business Group or call 208.344.6000.