Partnerships are easy to create, which is why there are so many. A partnership is simply two or more people in business to make a profit. You don't need legal documents.

Undocumented deals always carry the risk that months or years later, participants will remember details differently. Sometimes the difference is so great that it's hard to believe that people are talking about the same thing.

One big job of business lawyers is to write all this down at the beginning to avoid misunderstandings later.

All partners have unlimited personal liability for partnership debts. When a partnership can't pay its bills, creditors become interested in the question of who is a partner and who isn't.

Protecting Houses, Cars, Kids
Cheesecake Factory Inc. sold food to Triples American Grille, a sports bar and restaurant owned by Triple Threat Inc.

Ordinarily, organization as a corporation protects shareholders, who risk only capital invested in the firm. That's one big attraction of corporations. Investors don't want to risk houses, cars and kids.

Cheesecake had to get around the corporation if it wanted to chase the owner of Triple Threat. "We didn't think," said Cheesecake, "that we were dealing with a corporation at all. We thought the customer was a partnership, and that John B. Baines was a partner in the company."  "Thus," said Cheesecake, "Baines has to pay the unpaid bill."

Ultimately, Cheesecake sued. The company won in the trial court. Raines, who definitely did not want to be a partner, took the case up to the Court of Appeals.

Walking, Quacking and Swimming
Trial and appellate courts ruled that Baines was a partner by estoppel. The principle of estoppel is old and basic. It says that if it walks, swims, quacks and has feathers like a duck, it's probably a duck.  Similarly, if it acts like a partner, that's more than likely what it is.

Cheesecake sued under the old Uniform Partnership Act. Because the old statute confused people, the Legislature adopted a new statute in 1997.

The old statute said a person who represents himself as a partner, or who consents when someone else does so, is a partner with unlimited personal liability for business debts. When the representation is private, liability extends only to those who extended credit on the strength of the representation.

If Only We Had Known
That's us, said Cheesecake. There would have been no credit sales if we had known the sports bar was a corporation instead of a partnership. That was because new restaurant and bar ventures often fail.

When the business is a corporation, vendors such as Cheesecake don't have anyone to chase for unpaid bills. A partnership "provides some comfort to creditors," said the appellate court.

The court decided that Baines was a partner by looking at his conduct -- at the "representations" that could lead a supplier to believe he was a partner.

Representations were few. Another member of Triple Threat, Frank Kolk, told Cheesecake at the outset that Baines was one of three partners in the business. Evidence suggested that Baines agreed with the statement. Baines opened regular and payroll bank accounts in the name of Baines: Bob, DBA Triples American Grille. Witnesses also testified that Baines was frequently at the sports bar and had access to the office area.  Baines talked with others about "his" sports bar and was a partner in the business.

On the strength of those "representations," the court held Baines personally liable for debts of Triple Threat Inc. He received no benefit from formation of the corporation that owned the bar and grill business.

Making Certain
This case makes it clear that business people using a form of organization make certain that vendors and customers know who or what they are dealing with.

Owners of Triple Threat Inc., thought they protected themselves by forming a corporation in which only their investments would be at risk in case of failure. They got stuck because they didn't look, at least to Cheesecake, like a corporation at all.

Results can be the same when owners, to avoid personal liability, organize as limited partnerships, limited liability partnerships or limited liability companies.

For owners of such companies, everyone, creditors and customers, should know exactly what they're dealing with. Business cards, letterheads, invoices, statements, contracts, sales literature and the like should be as clear as possible about the form of organization in which you choose to do business.

Lawyers are usually afraid of partnerships. Clients should be careful as well.

For full details, read Cheesecake Factory Inc. v. Baines, 37:38 N.M. Bar Bulletin 26 (Sept. 17, 1998).

Martin Paskind is an Albuquerque lawyer. His practice emphasizes legal services to small businesses. Questions or comments can be mailed to him in care of the Albuquerque Journal, P.O. Drawer J, Albuquerque, N.M. 87103. This column is not intended to provide legal advice to any specific person, or with respect to any particular problems or situations. Paskind's columns are available online at http://www.abqjournal.com/biz/pask/default.htm

For advice on specific problems and circumstances, contact your attorney.