MBE Rules · Business Associations
Partnership by Estoppel
Cal. Corp. Code § 16308
The rule
One who represents herself, or consents to being represented, as a partner is liable to third parties who extend credit in reliance on the representation, though no partnership exists.
In plain English
Partnership by estoppel occurs when someone acts or allows others to believe they are a partner in a business, even if no formal partnership exists. If a third party relies on this representation and extends credit, the person can be held liable for those debts.
Worked example
Alice and Bob run a bakery, but Alice never officially becomes a partner. However, she frequently introduces herself as a partner to suppliers. When a supplier extends credit to the bakery based on Alice's representation, Alice can be held liable for the debt, even though she is not a formal partner.
Memory hook
If you look like a partner and act like a partner, you might just be liable like a partner.
The trap
Exams may present scenarios where a person denies being a partner, but their actions suggest otherwise, leading students to overlook liability due to estoppel. Watch for subtle cues in behavior or statements that imply partnership.
How examiners test it
Questions often involve fact patterns where a party's representation leads to reliance by a third party, requiring candidates to identify potential liability despite the absence of a formal partnership agreement.
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