Many entrepreneurs will organize their business into a limited liability company (LLC) or similar entity to obtain limited liability protections. Lawyers counseling these business owners often recommend that their clients observe corporate formalities by following such practices as conducting regular corporate meetings, taking minutes of those meetings, and approving resolutions of important actions taken by the LLC. Maintaining limited liability is an important reason for a company to follow corporate formalities and maintain formal records, but there are other important reasons to maintain these practices that are even more basic.

In the case Kelegian v. Mgrdichian (1995) 33 Cal. App. 4th 982, a California Court of Appeal quoted the trial judge’s wise words:

The California Corporations Code requires founders to follow specific procedures and file specific forms before the entity comes into existence. For example, articles of incorporation must be filed with the Secretary of State in order to create a corporation. In contrast, a general partnership can be formed without any document at all.

A partnership is formed when two or more individuals co-own a business for profit. Cal. Corp. § 16101 (9). No writing at all is required to form a partnership. However, written partnership agreements are often created by the partners and this article discusses one reason why a partnership agreement is important.

For example, Sallie and Juan open a bakery shop together in downtown San Jose. Sallie buys all the groceries, pays for them and hires the staff. Juan gets up early, bakes everything and stocks the display windows. Together Sallie and Juan help customers and man the cash register. At the end of each day, they split the proceeds after costs are paid. They are clearly doing business together in their San Jose bakery. Even without a written partnership agreement or the intent to form a partnership, they have.

However, one day Sallie tells Juan that she has to move out of state to care for an elderly relative. Sallie leaves San Jose for Reno the next day. Juan no longer has a partner.