Person writing in notebook at desk with gavel and scales


David H. Schwartz, INC June 8, 2022

Establishing a basic business partnership in California is not much of a formal process except when it comes to taxes. You can shake hands with another person, or group of persons, and agree to start selling widgets or something else, or provide services of some sort.

Once everybody chips in some start-up money, you’re off and running. You don’t even have to register with the Secretary of State or create a written partnership agreement, though the latter is strongly recommended as a shield against future disputes.

Of course, you will have to file with the Internal Revenue Service (IRS) and the Franchise Tax Board (FTB) for taxation purposes, and also obtain licenses, permits, and perhaps even a fictitious business name registration, but after that, you and your partners will have to work together to make the business function smoothly and turn a profit.

What happens, however, if your partner – or one of your partners – suddenly does something, or fails to do something, that threatens the viability or profitability of your business? What are your options? Can you sue a business partner if need be?

The answer is “yes” if the partner’s action or inaction falls into one of a handful of civil litigation categories, including negligence, fraud or theft, breach of an existing partnership agreement, or breach of fiduciary duty.

If you operate a business in or around San Francisco, California, or anywhere in the Greater Bay Area, and you suspect a partner is jeopardizing the future of your business, contact the Law Offices of David H. Schwartz, INC. Business litigation attorney David H. Schwartz has been helping partnerships with their internal and external challenges for 45 years. He can help you analyze the situation and explore all your options available.

Likewise, if you are a partner who is being challenged or accused by another partner or partners, attorney David H. Schwartz will meet with you and help develop a strategy for the resolution of the issue, while protecting your rights.

The Law Offices of David H. Schwartz, INC. proudly serve clients throughout the Greater San Francisco Bay Area, including San Jose, Santa Clara, San Mateo, Oakland, and Alameda County.

Justifications for Suing a Partner

Lawsuits should always be the last option in resolving partnership disputes. Negotiation, mediation, and even arbitration should be tried first. Better yet, you should never create a partnership without also creating a partnership agreement that specifies the obligations of each partner and also sets forth resolution options. The agreement can set limits on when a lawsuit is justified.

Nonetheless, sometimes a lawsuit is the only route to holding a partner accountable and moving the enterprise forward. Potential lawsuits generally involve one of the following:

BREACH OF FIDUCIARY DUTY: If one partner abandons the partnership, that person can be sued for breach of fiduciary duty. Fiduciary duty means all partners have an equal responsibility to place the interests of the business above their own interests. Other actions may also rise to the level of breach of fiduciary duty, especially when one partner places his or her self-interest above that of the partnership.

FRAUD OR THEFT: If one partner steals from the partnership or engages in fraud in carrying out his or her responsibilities, that can be cause for a lawsuit. Unfortunately, the lawsuit may result in the dissolution of the company as the other partner or partners seek to recover the money or property that was illicitly taken.

BREACH OF PARTNERSHIP AGREEMENT: Hopefully, when you created the partnership, you also had everyone consent to a partnership agreement outlining their rights and responsibilities. The agreement thus becomes like a binding contract, and If one partner fails to observe what was agreed upon, a lawsuit can be initiated for breach of the agreement.

NEGLIGENCE: Partners have a responsibility to act in good faith and not cause harm to the partnership. Each partner thus owes a “duty of care” to the partnership, just as vehicle operators owe a duty of care to others on the road with them. If a partner does something or fails to do something that abrogates their duty of care, a breach can result. The breach thus amounts to an act of negligence. If the breach results in harm to the corporation, a lawsuit based on negligence can be initiated.

What If You Are Being Sued?

A lawsuit can have serious consequences. If you are being sued, you can be liable for restitution of anything you obtained illicitly, or for any harm or financial loss you caused the partnership. You can also be forced out, or expelled from the partnership. Finally, as mentioned earlier, sometimes the only logical result of a lawsuit against a partner is the dissolution of the whole enterprise.

Hopefully, all of these outcomes can be averted through a mutually agreed-upon settlement, and the partnership can resume its operations from that point forward.

How Skilled Advocacy Can Help

Partnership disputes are probably no doubt almost inevitable, but hopefully, most can be resolved among the partners without recourse to the courtroom.

If your partnership is involved in a dispute that can lead to legal action if not resolved, contact the Law Offices of David H. Schwartz, INC. With his 45 years of experience in business litigation matters, attorney David H. Schwartz can discuss your situation with you and lay out your best options, and then help you move forward toward the best possible outcome.