When you’re working alongside someone to grow a business—whether it’s a side hustle, a new venture, or a joint project—it’s easy to assume that unless you’ve signed something formal, you’re not in an official partnership. However, the law may see things differently. This is where the concept of a de facto partnership comes into play.
What is a De Facto Partnership?
A de facto partnership is a legal term describing a business relationship where two or more people operate together as if they were partners, even if they haven’t formally registered a partnership or signed a partnership agreement.
Courts look at the substance of the relationship—not just what’s on paper. If you and your co-founder (or collaborator) share profits and losses, jointly make business decisions, and hold yourselves out as working together, a de facto partnership may exist.
Why Does It Matter?
If a de facto partnership is found to exist, each partner can be personally liable for the debts and obligations of the partnership—even if you didn’t intend to form a partnership. This can mean:
- You could be on the hook for contracts your partner signed without your knowledge.
- Your personal assets (like your home or savings) might be at risk if the business can’t pay its debts.
- You may be exposed to legal disputes with your partner if things go south.
In short, even if you didn’t think you were “partners,” the law might treat you as if you were.
How to Protect Yourself
The good news is you can avoid the risks of a de facto partnership by taking some important steps:
✅ Use a Written Agreement: Create a clear partnership agreement or operating agreement (for an LLC) that sets out each person’s rights and responsibilities. This can help prevent misunderstandings and provide clarity if disputes arise.
✅ Register a Business Entity: Form an LLC, corporation, or other legal entity to separate your personal assets from your business’s liabilities. This step helps protect you from personal liability.
✅ Avoid Acting Like Partners Without Clarity: If you’re not formal partners, avoid sharing profits and making decisions together without a written understanding. Be clear about the nature of your relationship in emails, marketing materials, and with third parties.
✅ Seek Legal Advice: A business attorney can review your situation and help you decide whether to formalize the relationship, create a business entity, or draft an agreement that protects you.
Conclusion
A de facto partnership can sneak up on you if you’re not careful. If you’re working closely with someone on a project or business, take the time to formalize the relationship and protect your personal assets.
If you have questions about whether you might be in a de facto partnership or need help drafting an agreement to protect your rights, Landry Legal is here to help. Email us at contact@landrypllc.com to get started.
