Startup Partnerships

Every business firm that is created must be categorized as some type of entity from the moment it begins to have value, either positive value or negative value. For many firms, the entity is simply a sole proprietorship. But if there is not a “sole” owner, then the entity must be something else, and if the owners have not incorporated as a corporation, limited liability company, or limited partnership, then that “something else” is a general partnership. In this way, the most important law that governs startup companies may in fact be partnership law. Through the application of state partnership law to a nascent venture, parties will have the right to an equal share of profits if not specified, have the right to co-manage the venture, and owe fiduciary duties to one another, including the duty of confidentiality and the duty not to compete with the venture. Most disputes that arise in which one party alleges an informal partnership involve relatives, former romantic partners, or acquaintances in small businesses. Some of these informal partnership cases, however, involve joint ventures between business giants and even billion-dollar technology startups. Though parties may find it surprising that the business idea they have been working on with acquaintances, friends, or even competitors is a general partnership, the legal doctrine that compels this result preserves expectations, protects the vulnerable from opportunistic venturers, and encourages entrepreneurship and information sharing.