Business Law (part 36)

Creation and Operation of a Partnership

(part A)

 by

 Charles Lamson

A partnership is formed as a result of a contract, written or oral, express or implied, just as all other business commitments result from a contract. The parties to the contract must give the utmost fidelity in all relationships with the other partners. If any partner fails in this duty, the other partners have several legal remedies to redress the wrong.

Partnership Agreements

The partnership agreement must meet the five requirements of a valid contract:

1. Consideration. Consideration is the value that convinces the parties to engage in a contract. Each party agrees to furnish an item of value to the other party in a contract.
2. Offer and Acceptance. A contract needs to have a valid, understandable, and specific offer, and there must be acceptance of the offer. Both the offer and acceptance of offer must be brief but clear enough so there will be no room for error.
3. Legal Purpose. A contract must have a legal purpose that does not break any law. For example, it is not legal to hire someone to break into a building and steal something. If you get into an agreement to commit an illegal act, this would not represent a legal contract.
4. Capable Parties. One must know or comprehend what one is doing to be considered "capable" of making a contract. Minors and individuals who have been proven insane are usually classified as not capable of entering into an agreement because they do not know what they are doing. Additionally, persons under the influence of drugs or alcohol can't enter into any binding contract. 
5. Mutual Assent. Each party in a contract has to agree on the meaningful terms and to be bound by the contract. Simply put, the parties must see eye-to-eye regarding the nature of the agreement and the contract specifics.

A partnership may also be created when two or more parties who do not have a written agreement act in such a way as to lead third parties to believe that a partnership exists.

Written Agreement

The partners ordinarily need not have a written agreement providing for the formation of a partnership. However, having an agreement in writing might help avoid some disputes over rights and duties. If the parties choose to put their agreement in writing, in the absence of a statute to the contrary, the writing need not be in a particular form. The written partnership agreement is commonly known as the articles of partnership. Articles of partnership vary according to the needs of the particular situation, but ordinarily they should obtain the following:

1. Date
2. Names of the partners
3. Nature and duration of the business
4. Name and location of the business
5. Individual contributions of the partners
6. Sharing of profits, losses, and responsibilities
7. Keeping of accounts
8. Duties of the partners
9. Amounts of withdrawals of money
10. Unusual restraints upon the partners
11. Provisions for disillusion and division of assets
12. Signatures of Partners

Implied Agreement

A partnership arises whenever the persons in question enter into an agreement that satisfies the definition of a partnership. Thus, three persons who agree to contribute property and money to the running of a business as co-owners for the purpose of making a profit, even though they do not in fact call themselves partners, have formed a partnership. Conversely, the mere fact that persons say "we are partners now" does not establish a partnership if the elements of the definition of a partnership are not satisfied.

In many instances, the death of witnesses or the destruction of records makes proof of exactly what happened impossible. Because of this, the Uniform Partnership Act provides that proof that a person received a share of profits is prima facie evidence of a partnership. This means that in the absence of other evidence, it should be held that a partnership existed. This prima facie evidence can be overcome, and the conclusion then reached that no partnership existed, by showing that the share of profits received represented wages or payment of a debt, interest on a loan, rent, or the purchase price of a business or goods.

Partnership by Estoppel

The conduct of persons who in fact are not partners could be such as to mislead other persons into thinking they are partners. The situation resembles that in which a person misleads others into thinking that someone is an authorized agent (an individual who manages another person's, company's, or group's business affairs). In a case of a false impression of a partnership, the law will frequently hold that the apparent partners are estopped from denying that a partnership exists; otherwise, third persons will be harmed by their conduct. 

Partnership Firm Name

The law does not require a firm name for a partnership, but it makes identification convenient. The firm may adopt any name that does not violate the rights of others or the law. The partnership name may be changed at will by agreement. In some states the name of a person not a member of the firm or the words and Company, unless the term indicates an additional partner(s), may not be used. Many of the states permit the use of fictitious or trade names but require the firm to register under the fictitious name registration statutes.

A partnership may sue or be sued either in the firm name or in the names of the partners. Under the Uniform Partnership Act, any partnership property, whether real or personal, may be owned either in the names of the partners or in the name the firm. To hold partnership property and the names of the partners, the owner should convey the property to the partners d/b/a (doing business as) the partnership.

Partner's Interest in Partnership Property

In a tenancy in partnership (also called owner in partnership), each partner owns and can sell only a pro rata interest in the partnership as an entity. The purchaser of one partner's share cannot demand acceptance as a partner by the other partners. The purchaser acquires only the right to receive the share of profits the partner would have received. A surviving partner does not get full ownership upon the death of the other partner, as is the case in joint tenancy. one partner may not freely sell an interest in partnership property. The personal creditors of one partner cannot force the sale of specific pieces of property of the partnership to satisfy personal debts nor can they force the sale of a fractional part of specific assets. The personal creditors of one partner can ask a court to order that payments due the debtor partner from the partnership being made to the creditors. They also can force the sale of a debtor partner's interest in the partnership. 

*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS.386-389*

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