Avoiding Partnership Liability for Potential Dealers and Distributors

While manufacturers may salivate at the thought of obtaining a new distributor or dealer, the distributor and the dealer must be careful not to allow themselves to be seen as partners with the manufacturer. This is because all partners are jointly and severely liable for everything chargeable against the partnership and — so far as liability to third parties is concerned — no formal agreement between the parties is necessary to make them partners. The test is whether they reasonably appear to be partners.

As to third parties, the following may create an unintended partnership:

• Statements by you or your firm that you or your firm are involved in a partnership;
• Not objecting to statements by another party that you or your firm are involved with that other party in a partnership;

This can become a concern in the distributor/dealer context when the manufacturer promotes relationships with distributors/dealers in a way that could lead outsiders reasonably to believe a partnership exists. For example, promotional statements may say, "We have partnered with XYZ Corporation to bring you better products and services."

To protect yourself, do not allow your name — or that of your business — to be used in connection with any other firm or person, unless you mean to create a partnership. In this regard, you may want to make sure that any written agreement specifically states that your business and the other firm are not engaged in a partnership.

If you discover your name has been used in a way that could lead a reasonable person to believe that a partnership exists, immediately refute the statements. Bear in mind that the correction should be as public as the assertion it is correcting.

On the other hand, you may avoid the problem by organizing a single-purpose limited liability company that can enter an actual partnership with the other firm, or you and the other firm can join together to form an LLC for the purpose of carrying on the joint business. Just make certain that all communications by all three parties identify your new entity — and not your main business — as the partner.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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