Take These Steps to Help Prevent This from Happening to You

There are many advantages to operating business as a sole proprietorship as opposed to a corporation, particularly when the business is at an early stage of its lifecycle. But this doesn’t change the fact that even sole proprietors need help to run their businesses. Often, business owners will hire employees, allow them to become closely involved with the business, and won’t realize until it is too late, that they have unwittingly entered into a partnership with those “employees”, and must not share half (or more) business’ profits.

To avoid this from happening it is important for sole proprietors to know just what constitutes a partnership at law, and what courts will consider when determining whether or not one exists. Legally speaking, a partnership is “legal relationship in which two or more persons carry on business in common with a view to a profit”. Each element is an important part of the analysis. These are as follows:

  1. Carrying on Business. For the purposes of determining whether a partnership exists, “carrying on a business” is very broadly defined, and includes every trade, occupation and profession, and encompasses both ongoing activities and single transactions. In some cases, even businesses that have never opened their doors to the public have been found to fall within this definition.
  2. With a View to a Profit. This simply means the business in question is not for the purpose of carrying out charitable, social or cultural purposes. And it is important to note that a partnership need only be carried out “with a view” to a profit, meaning it is not necessary that it actually generate profits.
  3. In Common. The key question in the analysis is whether the alleged partners are carrying on business “in common”. The courts have found that partnerships can exist even without a written or verbal agreement if the conduct of the partners shows that a partnership exists. The following factors are some of the indicators that the courts have considered in determining whether a partnership relationship exists:
  • Sharing profits;
  • Sharing responsibility for losses;
  • Jointly owning property;
  • Degree of control over the business;
  • Access to partnership information
  • Signing authority for bank accounts, etc.;
  • Contributing money, services or property as capital to the partnership;
  • Full-time involvement in the business.

Sole proprietors should take precautions to ensure they do not become involved in a partnership without knowing it, thus having to give up half (or more) of the business they have worked so hard to create. the most important thing that business owners can do is to use written agreements drafted by lawyers for every business relationship they enter into, whether it be with an employee, contractor, supplier, distributor or otherwise. A skilled lawyer will ensure that all of the rights of the parties are made perfectly clear in the agreement and will leave no doubt as to who owns the business at the end of the day.

If you are operating an unincorporated business be sure to reach out to your lawyer before hiring or contracting with any third-parties to make sure your rights are protected.