What is a business partnership and how is it formed?

Dear Alex:

My best friend and I have started social media marketing business together and would like to form a partnership.

We already have two clients and a business plan.

What do we need to do to create a partnership?

What you probably did not know is that any time two or more people act together and hold themselves out as co-owners of a business, they are automatically and by default doing business as a partnership.

In your case, since you already have clients and, therefore, have held yourselves out as doing business together, you are already a partnership.

An exception to this partnership-by-default rule is when the parties have formed a business association other than a partnership (such as a limited liability company or corporation), in which case the business owners operate under the rules of the business association, which they have chosen.

Now that you are partners in business, it is important that you understand the rules that come with partnership activities.

Business partners have what is called “mutual agency” to act on behalf of the partnership. This means that one partner, independent of the other partners, may create legal obligations of the partnership within the scope of the ordinary course of business – even if the other partners did not specifically know or approve of those activities.

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This is useful because it enables business partners to conduct business activities without all partners being present. This is also somewhat risky, because it means that your business partners can create binding obligations on your behalf, which you will be held accountable for.

In addition to the mutual agency authority to enter contracts and make agreements on behalf of one another, business partners are jointly and severally liable for partnership debts and the actions of their business partners.

This means that each partner can be held to be proportionately liable for the debts of the business, or individually wholly liable for the debts of the business.

For example, in the case of two business partners offering a service, if one business partner signs a lease for the partnership to rent an office for five years, the other business partner could be obligated to make those rent payments for the next five years.

Partnerships offer what is called “pass through taxation,” which means that the tax burden of the business is directly passed through to the business owners, which is generally preferable to taxation at the business level and the personal level.

Partnerships do not, however, offer limited liability. Some other entities types can create a layer of protection from business liabilities by restricting the debts and obligations of the business to the business itself. Partnerships do not offer this protection.

There are many factors accompanying partnership and the choice of business entity, and only a few are described in this column.

Business entity choice is an important decision that should be given thorough consideration.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on February 14th, 2017. You can read it on the Register's website here: "What is a business partnership and how is it formed?"

Mediation and arbitration

Dear Alex:

In one of my business’s contracts, there is a “Mediation and Arbitration” provision, which says that in the event of a dispute, the parties will attend mediation or arbitration instead of going to court.

Are those options faster or less expensive than a lawsuit?

Mediation and arbitration fall into the category of “alternative dispute resolution,” or ADR.

ADR encompasses a variety of methods that can be used by parties to resolve disputes without the need to have a trial.

Mediation and arbitration are two of the most popular methods of ADR, and they are not the same. Parties may prefer ADR for a variety of reasons, not the least of which is cost savings.

Although a significant amount of preparation is required in anticipation of a mediation or arbitration, the overall cost and time commitment of ADR is usually much less than the cost of taking a lawsuit all the way through a trial.

ADR is voluntary, and at virtually any point in a dispute – from the time that the dispute arises through preparation for court trial – the parties can agree to attend an ADR proceeding. In the case of your contract, the parties preemptively agree to submit themselves to ADR if a future dispute arises between them.

Mediation is typically a collaborative mutual effort to achieve a resolution, with a mediator facilitating the conversation, and helping the parties continue to progress toward a resolution that the parties themselves collaborate to reach.

The mediator does not usually render a decision, and instead assists the parties to come together in agreement upon a mutually agreeable solution. Mediation can be binding or non-binding.

Sometimes the parties just need a push in the right direction, other times if the parties agree to be bound to the resolution reached in mediation, they may reduce that resolution to a written and binding agreement.

Arbitration is more similar than mediation to the traditional trial format.

In arbitration, there is an individual who serves in a similar function to the judge or jury in a court of law. That person is the arbitrator. During the arbitration, the parties present evidence, make their arguments, and ultimately the arbitrator renders a decision, just as if a judge had heard the case.

Arbitration is not required to follow the rules of evidence that a court is bound to follow, and it may be less formal and less intimidating of an environment. In some instances, due to the amount of evidence and preparation for complex cases, arbitration may not result in a significant savings over a court trial.

In cases of both mediation and arbitration, the mediator or arbitrator is a neutral third-party, which is selected by the mutual agreement of the parties in the dispute.

Retired judges will often go into business as private mediators or arbitrators. Practicing and retired attorneys may also provide ADR services.

For parties who wish to reduce costs, save time, or are intimidated by the trial process, ADR can be a suitable alternative for resolving disputes.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on January 31st, 2017. You can read it on the Register's website here: "Mediation and arbitration"