Have You Inadvertently Created a Joint Venture or Partnership?

Some business arrangements are still made with a handshake. Business owners discuss working together on a project or joint venture. A few colleagues have an idea and decide to develop it. 

Unfortunately, if they do not consult a Maryland business attorney before they embark on their business deal, they could inadvertently create a joint venture or partnership. They may not realize their mistake until the business deal goes sideways.

How Could I Form a Partnership or Joint Venture Without Knowing It?

There are many different legal entities you can create to do business in Maryland. Usually, business owners file documents to create business entities. However, you could inadvertently create a partnership or joint venture by agreeing to do business with one or more people.

A partnership is two or more people operating a business. General partners have active roles in deciding and operating the business. A joint venture occurs when two or more individuals or companies agree to work together on a specific project. 

You might not intend to create a partnership or joint venture. But, by agreeing to work together and proceeding on a project or business idea, you create a partnership or joint venture. In some cases, your actions could be sufficient to meet the legal requirements to create a legal entity. You could unintentionally create a joint venture or a partnership under the Revised Uniform Partnership Act of 1997 (RUPA).

Working with other individuals or businesses can offer many benefits. You can leverage the other parties' resources, skills, and capital. Their employees, locations, and contacts could benefit your joint venture or common business interest. For small business owners, working with other parties may be the only way to gain an advantage over larger competitors.

However, inadvertently creating a partnership or joint venture can create liability for you and your company. Without a written agreement clearly explaining the limits of your arrangement with the other parties, working together could create a business relationship you never intended to create.

Why Does It Matter if I Inadvertently Create a Partnership or Joint Venture?

Working together on a business idea could have many advantages. However, there could also be several disadvantages. Inadvertently creating a partnership or joint venture could cause significant liability. 

Generally, partners are jointly and severally liable for the partnership's obligation. Therefore, if your partner is sued, you could be liable for your partner's actions and the actions of the employees of the partnership you did not intend to create. 

The benefit of creating a joint venture is that the parties generally create a separate legal entity for their venture. They limit their liability to their interest to their investment in the stock of the LLC or corporation they create. However, failing to create a separate legal entity exposes you to liability created by the other people involved in your business venture. 

Creating a partnership or joint venture could also create a fiduciary duty for you. 

A fiduciary duty requires you to use good faith, care, and loyalty. Therefore, the parties could sue you if you take adverse actions to their interests. The facts and circumstances of the situation would dictate whether the fiduciary duty exists and how broadly those duties could be construed regarding your business interests.

How Can You Ensure You Do Not Create a Partnership or Joint Venture Unless You Intend to Create One?

The best way to protect yourself from liability is to create a formal agreement. The agreement should include all the parties you intend to work with on a project or business venture. If you intend to create a partnership, work with a business lawyer to formalize the partnership. You need to file the necessary forms and draft a written partnership agreement. 

If you intend to work on a specific project, consider a joint venture. Creating a separate legal entity to work on the project can limit your liability. The written operating agreement and other documents should clearly outline the scope of the venture. It should define the responsibilities of each party regarding the day-to-day operations of the new business. 

Be cautious of using online forms and templates to create a partnership agreement or business entity. Those forms are not customized and could be too broad to give you the liability protection you need before beginning a new business venture.

Contact Our Maryland Business Attorney for More Information 

The legal entity you choose for your business can significantly impact numerous aspects of your operations. Our Maryland Business Attorney assists you with all aspects of creating a new business, including choosing business entities. Consider our Fractional General Counsel services as you grow and expand your company.