Legal Updates

Parties may be part of an unregistered partnership even if they chose a different form of incorporation

December 2, 2020

An entrepreneur and a computer engineer began working on a joint project while stating in a founders agreement that the activity relating to the project will be transferred in the future to a new company to be incorporated. After the parties found themselves in disagreement, and prior to the establishing of the company, the engineer sought the activity to be recognized as a partnership, entitling him to half of the rights.
The Court held there was no partnership, therefore the engineer is not entitled to half of the rights in the joint project. When no partnership is registered, determining that two parties were in fact in an unregistered partnership is done be reviewing both the law and the facts of the case. The basic terms for the existence of a partnership is the existence of a business, jointly managed by the two parties, with a joint motive to produce profits. A partnership may exist even when the parties used other terms to define their relationship, and it can sometimes be determined that a partnership exists even when the parties specifically chose another way to incorporate, especially in cases of small private companies which operate as a de-facto partnership. However, when the partnership is unregistered and the parties do not have an explicit understanding on establishing such partnership, it is the responsibility of the party claiming for its existence to prove it. Here, the founders agreement between the parties clearly states that the parties intend to incorporate through a limited liability company and does not state that the parties will be partners in the interim period. In actuality, the company was never established and the parties’ cooperation was short-termed. The parties also set a vesting period only after which the engineer’s rights will be materialized, and the engineer did not take an active and equal part in managing the project in a way which can indicate the existence of a partnership. Therefore, the parties did not establish an unregistered partnership and the engineer’s rights did not materialize at the time that the discord arose.