Creating a Partnership or Joint Venture Under California Law

Considered in comparison to a Corporation or Limitied Liability Company (“LLC”“), a general partnership or joint venture are the easiest business entities to create, and can be done very informally, although doing it that way has some distinct disadvantages for the partners if a future dispute arises.

No formal or written agreement among the partners is needed to create a partnership, even though under current law, “A partnership is an entity distinct from its partners”. Corp. Code § 16201; 9 Witkin, Summary of California Law (10^th Ed., 2008), Partnership, § 23.

A partnership can be created even if the parties didn’t think they were creating a partnership or intend or agree to do so, as they can create a partnership simply by the nature of their business transactions dealings together of two or more persons or other business entities.

Those dealings can create a partnership not just between individuals, but also a partnership or joint venture between corporations, LLCs, other partnerships and individuals, or any combination of them.

“A partnership, especially where, as here, the rights of third persons are involved is to be determined by the contract, taken with the conduct and dealings with the world of those who are parties to it. If that contract, and if those dealings, so far as the world is concerned, measure up to the partnership relation, with the joint duties and liabilities attaching thereto, then, so far as third parties are concerned who have had dealings with them, they are partners. ( Westcott v. Gilman, supra, p. 568.)” (Emphasis added)

Associated Piping Engineering v. Jones (1936)17 Cal. App. 2d 107,111; In re Lona, supra,393 B.R. at 14

“A joint venture has been defined as an undertaking by two or more persons jointly to carry out a single business enterprise for profit with its existence dependent upon the intention of the parties as shown by an express agreement or by inference from their acts and conduct. ( Lasry v. Lederman (1957), 147 Cal.App.2d 480, 485 [305 P.2d 663]; Beck v. Cagle (1941), 46 Cal.App.2d 152, 161 [115 P.2d 613].) CA(4)(4) There is a difference in the determining of the relationship where third parties are involved, as here, and where the issue is only between the parties themselves. In the case of third parties the fundamental question is what had those parties the right to believe from the language of any contract and from the conduct of the parties to it as affecting them, and not as affecting each other. ( Westcott v. Gilman (1915), 170 Cal. 562 [150 P. 777, Ann.Cas. 1916E 437].)” (Emphasis added)

Foote v. Posey (1st Dist. 1958) 164 Cal. App. 2d 210, 216.

Thus, if - from the business dealings of a supposed group of Partners” - it appeared to a customer, supplier, landlord, etc that they were a partnership, then that party has “a right to believe that a partnership existed”.

Under these circumstances a partnership or joint venture is created by virtue of the legal doctrine of “estoppel by conduct”, such that they will be prevented from asserting they were not partners, at least as to their dealings as to that other person.

(a) If a person, by words or conduct, purports to be a partner, or consents to being represented by another as a partner, in a partnership or with one or more persons not partners, the purported partner is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership. . . .”

Corp Code § 16308.

Unless there is an agreement otherwise, each partner is liable for the debts or the partnership business, and either partner can bind the partnership to a contract even if the other partners did not consent to that contract.

Partnerships are easily dissolved, and may be dissolved by the death or withdrawal of a partner, unless agreed otherwise in a written partnership agreement, similar to a shareholder’s agreement for a corporation or an operating agreement for an LLC.

Such written agreements are highly advisable, and help ensure the success and continunity of the business, avoid disputes and litigation, set out the rights, duties, contributions and power of the partners, determine what happens when a partner wishes to sell his or her interest, dies or is incapacitated, is divorced (sometimes spouses’ signatures are required for such agreements to be valid), when and how to take on new partners, etc etc.

Probably the most prevalent reasons for partnership dissolutions, litigation, and lack of success is to fail to agree in advance in writing on these terms before a dispute arises, which then forces the parties into an irreconcilable dispute and dissolution of the partnership, or into contentious and expensive litigation which could ruin both the business and the partners.

If there is no written agreement, the law and the Courts will effectively decide what your rights are, not the partners themselves.

In the absence of an agreement the partners have equal rights and duties in all things related to the partnership business, including the right to a full accounting of the fiances and affairs of the partnership, access to the books and records. Partners are also jointly and severally liable for the debts of the partnership and to third persons injured by the partnership

Written agreements are especially needed for “joint ventures”, which are a kind of partnership which is limited in time or scope, such as for a particular event or project etc, as the partners clearly do not wish to have broad powers given to the joint venturers in these circumstances, and need some method specified for winding down the venture and disbursing, property and assets and liabilities, etc.

These type of relationships between companies are quite common and enable the ventures to take on larger and more complicated projects than they might be able to do on their own, by sharing resources, personnel, bonding capacities, equipment, skills etc

Even in the absence of a written agreement partners and venturers are “fiduciaries” to each other and in a confidential relationship, and are required to consider the interest of the other partner at least as highly as their own, and to deal with each other honestly and fairly, without self-dealing or trying to take unfair advantage over another partner, or engaging in transactions which could injure the partnership or the other partners, such as setting up a competing business in the same area, having conflicts of interest with the partnership or a partner etc etc.

Failure to act as a true fiduciary can result in being held liable for damages arising form the breach of those duties, including Punitive Damages!

General partnerships may also be converted into an LLC or a corporation or other entities.

Before forming any business entity of any kind it is highly advisable to first get the advice of a CPA, tax adviser and experienced business attorney to make sure you pick the appropriate business form for your investors and type of business, taking into account the concerns of the owners, future plans, likely future events and changes, and tax and liability issues, all of which can vary greatly depending on the business form chosen.

Partnerships and joint ventures may also need to file separate informational tax returns, make certain filings with the California Secretary of State, have a fictitious business name on file in counties were it does business, and have a partnership license even if one of the partners already has such a license.

For example, even if one partner or joint venturer already holds a contractors license, the partnership or joint venture must get its own license or it will be contracting without a license, and thus may not be able to get paid, file suite to collect for its work, and may be ordered to refund all monies received from the customer.

Even a joint venture which includes a licensed contractor as one or both of the partners must also itself hold a separate Contractors License for the joint venture itself. Bus & Prof. Code §§ 7029, 7029.1(a), & 7096

Obviously joint ventures composed of one or more otherwise unlicensed partners then also must get a separate contractors license to contract for or perform any construction “work” or “project”. Bus. & Prof. Code § 7071 , 7068(b)(1).

“Plaintiff contends that even if it acted as a contractor under section 7026, it substantially complied with the requirement of section 7028, since Lewis held an individual license. The "person" that did the contracting work, and was required by section 7028 to have a license, however, was the partnership of Lewis and Queen, and it had no license. Nor did Queen individually. Section 7029, furthermore, expressly requires individual licensees who engage jointly in the contracting business to obtain an additional, joint license. (Cf. Joseph v. Drew, 36 Cal.2d 575, 578 [225 P.2d 504]; Wise v. Radis, 74 Cal.App. 765, 773 [242 P. 90].) (Emphasis added)

Lewis & Queen v. N. M. Ball Sons (1947) 48 Cal. 2d 141, 148-149.

“[B]usiness and Professions Code section 7031 makes it clear that the contractor's license is not required for the person who “does the work” but, instead, for the person who is the building contractor. (All further section references are to the Business and Professions Code.) Section 7031, subdivision (a) provides, in part, that ‘no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract ... .” A’contractor,’ including a corporation so acting (§ 7025), “for the purposes of this chapter, is synonymous with ‘builder’ and, within the meaning of this chapter, a contractor is any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, [or] repair,” inter alia, a structure. (§ 7026, italics added.)” (Emphasis added)

Opp v. St. Paul Fire & Marine Ins. Co.(2007) 154 Cal. App. 4th 71, 74.

One “acts in the capacity of a contractor” when one enters into a construction contract.

Other licensing authorities may have similar rules and requirements.