Asked and Answered: Going into business with a friend? Don't be an idiot, get advice from an attorney and an agreement in writing. This question gets replayed time and time again. Do you want to be next?

Question:  If my husband has the business license under his name but the ex-business partner has the fictitious business name under his name, who is liable if sued?

Facts:  My husband started a business and needed some backing so he had a ” friend” partner with him for the backing. They transferred the fictitious name to his ”friends” but never the business license. That remains under my husbands name. And now the ” friend” doesn't find the business important enough to pour into so had stopped paying on the services to supply the clients who have already paid. Therefore, they are unable to use the service. So my question is who is liable if sued?

Answer:  There are a few different issues in your facts, three of them are important.  There are two contracts and we have to ask if they are valid and enforceable.  If the contracts are valid then the non breaching party can seek a remedy from the breaching party.  The other issue is the type of business that was formed here between your husband and his friend.  The type of business formed will determine the limits of liability.  First let us look at the type of business that was formed.

Business Formation

There are two types of business models that may be supported by the facts – partnership and LLC (Limited Liability Company).  A LLC must be registered by the state and must follow certain rules and pay certain fees mandated by the state you are in.  A partnership has no such requirement.  However LLC, as the name implies, has an important advantage over partnership in that liability is limited.  In a partnership liability is unlimited.  If the business were an LLC then the client must limit their recovery to the assets of the business itself.  However it seems from the facts that the business in question was a partnership.  If the contract between the clients and the business are valid and the contract is breached the clients may seek recovery from both business and personal assets in order to recover their losses.  So assuming the business is a partnership then at this point in the analysis both your husband, and his friend’s, business and personal assets are at risk.

Contracts

There are two contracts in your facts.  The first contract is between the clients and the business.  If the business breaches the contracts then the clients may seek recovery from the business.  If the business is a partnership then the clients may seek recovery from the personal assets of the partners themselves.  From the facts it seems that both your husband and his friend have an ownership interest in the business.  Therefore the clients may seek to recover their losses first from the business.  If that does not satisfy their losses then they may seek recovery the personal assets of your husband, or his friend, or both.

Up to this point things are not going well for you but the second contract may offer some hope.  The second contract is between your husband and his friend.  The agreement was that the friend would provide money to the business and in return your husband would give his friend an ownership interest.  If your husband held up his side of the bargain then so must his friend, otherwise his friend has breached the contract/agreement.  If the friend now refuses to provide the money that was agreed to then your husband may sue his friend to enforce the agreement.  That may provide the funds necessary so that the first contract is not breached.

Fictitious Business Name

Finally let me deal with the license/fictitious name issue.  It does not matter who has the license or name.  You have to look at who has the authority to make contracts with the client.  We call this agency law.  It seems from the facts that both your husband and his friend had the actual authority to enter into contracts with clients.  That is all that matters here.