A handshake 50/50 partnership:
who owes whom when the money is gone

The usual story

Two tradesmen shake hands on "everything down the middle." One of them thinks profit means what the homeowner paid minus materials. In reality there was also insurance, tools, trucks, subs, taxes, licenses and callbacks. They part ways, the business account is empty or in the red, and one says to the other: "You owe me my share."

Here is how Washington's partnership statute (chapter RCW 25.05) answers that. These are default rules: the partners' own agreement comes first, and the statute fills in whatever the agreement does not cover (RCW 25.05.015).

Not in Washington? This is probably still your law

Washington's statute is the Uniform Partnership Act (1997), often called RUPA, a model law written by the Uniform Law Commission. Most states have adopted it or something very close. Some still run on the older 1914 version, which has the same backbone and different details. Louisiana follows its own civil code.

Finding the same rule at home is easy: under each Washington section the history note gives its number in the model act ("1998 c 103 s 401" means § 401). Look up that section number in your state's partnership act.

• § 202: when a partnership exists (Washington: RCW 25.05.055).
• § 401: partner accounts, profit and loss, pay, decisions (RCW 25.05.150).
• § 306: partners' liability for business debts (RCW 25.05.125).
• § 801 and § 807: dissolution and the final settlement (RCW 25.05.300 and 25.05.330).
• What is almost always state-specific: statutes of limitation, the LLC statute, and some details of liability. They are flagged below.

You can be partners without any paperwork

A general partnership in Washington needs no filing and no written agreement. Under RCW 25.05.055(1), two or more people who carry on a business for profit as co-owners form a partnership "whether or not the persons intend to form a partnership."

• Sharing profit points to a partnership. A person who receives a share of the profits is presumed to be a partner, unless the money was wages, pay for work as an independent contractor, rent, repayment of a debt, interest on a loan, or one of a few other listed exceptions (RCW 25.05.055(3)(c)).
• Sharing gross revenue does not, by itself (RCW 25.05.055(3)(b)). "We split what is left after every bill" is shared risk. "I pay you 10% of every check" is not.
• A handshake deal is valid. Washington's statute of frauds (RCW 19.36.010; other states have a similar rule) requires writing for an agreement that by its terms cannot be performed within a year. A partnership with no fixed term (a partnership at will) can end any day, so an oral agreement to form one usually stands. The hard part is not validity, it is proving what was agreed.
• An LLC is a different animal. A company formed under another statute is not a partnership under RCW 25.05 (RCW 25.05.055(2)). More on that below.

What 50/50 means in the statute

Half the profit means half the loss. RCW 25.05.150(2): each partner gets an equal share of the profits and is charged with losses in proportion to that share. If nobody talked about losses, they are 50/50 as well.

Profit is what is left after every business expense. A partner who "didn't think" the costs would be that high is still bound by them: real expenses made in the ordinary course of business reduce both partners' profit.

The statute keeps a running account for each partner (RCW 25.05.150(1)):

• Credited with: money and property the partner put in (net of any debt on it), plus the partner's share of profit.
• Charged with: money and property the partner took out (net of any debt on it), plus the partner's share of losses.

Five more rules that usually settle the fight

• No salary for a partner (RCW 25.05.150(8)). Working more days on site than the other partner does not, by itself, earn you pay. The statute's only exception is reasonable pay for winding the business up. If you agreed on a salary, the agreement controls (RCW 25.05.015), but you will have to prove it.
• Business costs paid out of pocket are reimbursed (RCW 25.05.150(3)). Bought materials on your personal card? The business owes you.
• That payment, like money put in beyond the capital you promised, is a loan to the business and earns interest from the day you paid (RCW 25.05.150(4), (5)).
• Ordinary decisions go by majority; anything outside the ordinary course, and any change to the deal, needs everyone (RCW 25.05.150(10)). Two 50/50 partners have no majority, which is why a dispute between them so often deadlocks.
• Partners owe each other loyalty and care, and must act in good faith (RCW 25.05.165). Loyalty means not taking the partnership's customers, jobs or money for yourself and not competing with it before it dissolves. A partner must hand over to the partnership anything gained by breaking that duty.

Breaking up: the final settlement

When the business ends, the money is not split "half of whatever is in the account." It goes in a fixed order set by RCW 25.05.330. In a partnership at will, either partner can say "I'm out," and that starts dissolution and winding up (RCW 25.05.300(1)).

1. 01Finish the open work. Complete or hand off jobs, collect from customers, sell or value the trucks and tools. The partnership exists until winding up is done (RCW 25.05.305(1)).
2. 02Creditors first. Assets pay the debts: suppliers, subs, taxes, credit cards. A partner who lent the business money or paid its bills personally is a creditor too (RCW 25.05.330(1)).
3. 03Settle the partner accounts. Gains and losses from selling off the assets are posted to the accounts (RCW 25.05.330(2)). A partner whose account is positive gets paid. A partner whose account is negative must pay that amount into the partnership.
4. 04If one partner will not pay in, the other covers the creditors and can recover from the holdout whatever he paid beyond his own share (RCW 25.05.330(3)).
5. 05Debts that show up later, like a warranty callback, a tax audit or a forgotten supplier invoice, are shared in the same loss ratio even after the settlement (RCW 25.05.330(4)).

The point

An empty account means there is nothing to split. One partner can collect from the other only when, after the full settlement, his account is positive and the other's is negative. That usually happens when one put in more money or the other took out more.

A worked example

The numbers are made up; the method comes from RCW 25.05.150 and 25.05.330. Over the life of the business:

• Partner A put in $20,000 (truck, tools, the first materials). Partner B put in no money.
• Revenue from customers: $250,000.
• All expenses: $240,000 (materials $150,000, plus subs, insurance, fuel, taxes, callbacks). Net profit: $10,000.
• A took out $10,000, B took out $20,000. The account is at $0, no debts.
• A's account: contributed +$20,000, profit share +$5,000, took −$10,000. Balance +$15,000.
• B's account: contributed $0, profit share +$5,000, took −$20,000. Balance −$15,000.

What the example shows

The business made $10,000, the account is empty, and under the statute B owes A $15,000. B has to pay that in, and it goes to A. In effect B spent part of the money A invested.

The partner who "didn't count the expenses" figures it this way: $250,000 minus $150,000 of materials is $100,000 profit, my half is $50,000, I took $20,000, so I am owed $30,000. The law does not count that way: the other $90,000 of expenses were business expenses too and come off both shares. The only real arguments are that a specific expense was not a business expense (the other partner's personal spending) or that the deal was actually different, and either has to be proven.

If instead of $0 there were a $10,000 unpaid supplier bill, profit would be $0 and the accounts would be A +$10,000, B −$20,000. B pays in $20,000: $10,000 to the supplier and $10,000 to A.

Debts to suppliers and customers

In a general partnership every partner is liable for all of the business's debts jointly and severally (RCW 25.05.125(1)). A supplier or a customer can collect the whole amount from either partner, not just half.

• Your 50/50 deal does not bind the creditor. It only works between the two of you: pay the other partner's half, and you can recover it from him (RCW 25.05.330(3)).
• A creditor needs a judgment against the partnership and a judgment against the partner (RCW 25.05.130(3)), and usually has to try the partnership's assets first; the other routes to a partner's personal assets are listed in RCW 25.05.130(4).
• Leaving the partnership does not, by itself, end your liability for debts incurred before you left (RCW 25.05.260(1)).
• The exception is a registered limited liability partnership, an LLP (RCW 25.05.125(3)). A handshake partnership is not an LLP.
• For a construction business this matters: an unpaid supplier, a homeowner suing over defective work, or a tax bill can land on either former partner in full.

If you had an LLC

If the two of you registered an LLC, your state's LLC act applies, and the picture changes. LLC statutes vary between states more than partnership statutes do, so this list is Washington's (chapter RCW 25.15); check each line against your own state:

• No written split. Partnership: equal shares (RCW 25.05.150(2)). LLC: in proportion to the agreed value of what each member contributed (RCW 25.15.206).
• Personal liability for business debts. Partnership: yes, joint and several. LLC: generally no (RCW 25.15.126), except personal guarantees and a member's own wrongful acts.
• Paying in to cover a negative account. Partnership: yes (RCW 25.05.330(2)). LLC: no general rule; it depends on the LLC agreement.
• Order of payout on winding up. Partnership: creditors, then partner accounts. LLC: creditors, then distributions already owed to members, then return of contributions, then the rest (RCW 25.15.305(1)).
• An LLC may not make a distribution that leaves it unable to pay its debts (RCW 25.15.231). A member who knowingly took such a distribution can be made to pay back the excess, and the claim must be brought within two years of the distribution (RCW 25.15.236).
• An oral 50/50 has to be proven. If it is not, the contribution rule applies, and a partner who contributed only labor can end up with a smaller share than he expected.

An LLC with an empty account

In practice, there is usually nothing to claim from an LLC with nothing in the bank, unless the other member took money improperly, walked off with customers, or breached a duty.

How to claim money, and how to defend

The court action between partners is called an accounting: the court rebuilds every account and decides who owes whom. Under RCW 25.05.170(2) a partner may sue the partnership or another partner, with or without an accounting.

With a handshake deal, these papers decide the case:

• Statements for the business account and any personal accounts money moved through (Zelle, cards).
• Invoices to customers, supplier receipts, sub invoices.
• Messages (WhatsApp, text) that state the terms: "50/50", "after expenses", "you bring the truck".
• Tax returns. A partnership files IRS Form 1065 and gives each partner a K-1; those numbers show how the partners themselves split the profit. If you never filed, that is a separate problem for both of you.
• A list of business property and who kept what after the split. A truck or tools a partner kept count against his account at their value (RCW 25.05.150(1)(b)).

Steps, in the order businesses take them

1. 01Build the account table, like the example: contributions, share of profit or loss, what was taken. Often this alone shows the partner demanding money is the one who owes.
2. 02Hire a CPA for an independent count. It costs less than court and often ends the dispute.
3. 03Send a written demand letter with the numbers and a deadline to answer.
4. 04Mediation or arbitration.
5. 05A lawsuit (an accounting, or breach of contract) if nothing else works.

Deadlines, and if the demand is aimed at you

Statutes of limitation in Washington: 3 years for an oral contract (RCW 4.16.080(3)), 6 years for a written one (RCW 4.16.040(1)). Other states set their own periods, sometimes quite different. When the clock starts in a partner dispute is a question for an attorney in your state.

If someone is demanding money from you, do not argue about "half." Show the full account settlement under RCW 25.05.150 and 25.05.330. A demand for "my share" that ignores expenses, debts and what the demanding partner already took out has no support in the statute.

Takeaways

• An oral 50/50 in Washington, and in most states, means 50/50 of profits and of losses, unless you agreed otherwise.
• Profit is counted after every business expense, whether or not someone saw it coming.
• At the end, creditors are paid first, then the partner accounts are settled. An empty account does not mean nobody owes anybody: the partner with the negative account owes.
• Partners are personally liable for the full amount of business debts to outsiders; an LLC changes that a lot.
• To stay out of this: a written partnership or operating agreement, a separate business account, a monthly P&L, a record of every draw, and an exit plan written down in advance.

This is not legal advice

This is not legal advice; check with an attorney / accountant. The article walks through the default rules using Washington's statute; your state's law may differ. In a real dispute the details decide: what exactly the partners said, how the money was handled, whether there was an LLC. Before going to court, talk to a business litigation attorney in your state and to an accountant (CPA).