You should avoid Accidental partnerships whenever possible. Why? Because they’re bad. That’s why.
What are Accidental Partnerships?
First, we need to show what accidental partnerships are. Can’t avoid them if you don’t know what you’re looking for.
An accidental partnership happens when two or more people, or entities, going into business together without realizing it. For example, you could start promoting a business idea together. This would fit. More commonly, these occur when two businesses co-host something like an event.
The actual elements that are required are (1) intent to make a profit and (2) a substantial step towards that profit. For example, if you and your friend are planning to write a profitable blog together, once you buy that domain name, you’re in business. Conversely, if you’ve only joked about the idea so far, you’re just fine. Courts are going to look at the whole picture to see if a step is substantial enough.
Why Are They Bad?
Accidental partnerships are bad primarily because of the potential liability they create. If the partnership does something wrong, the customer can sue you, the partnership, or everyone involved. This is bad. In entities like the LLC or corporation, you have a shield from personal liability.
What Can We Do To Avoid Them?
The best thing you can do is create LLCs or corporations at the first hint of a business. However, that isn’t always practical. Instead, it is best to be aware of what may or may not be a business. If you’re in it for a profit, it’s a business. Once you take a substantial step towards that profit, it’s the accidental partnership. That is, unless you’ve formed a different, more protective, entity.
Alternatively, the next best thing is to spot potential business situations and make your intentions clear before they go too far.
We sincerely hope this helped and you don’t find yourself liable as a result of an accidental partnership. Keep in mind that you have to be in one and also end up with some sort of liability before things are bad for you.
Richard is the managing attorney for Law Plus Plus, a local small business law firm. As managing attorney, he helps small businesses and nonprofits startup, creating the contracts, and navigate the legal needs of businesses. Some of his practice areas include: corporate, contract, mergers & acquisitions, corporate litigation, and estate planning.