Ba--Part--Creation And Determination Of Partnership Existence

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Existence

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• Determined by intent of parties
• Writing best evidence; in its absence look to factors such as – profit sharing and control of business

[1] May arise from an actual agreement of partners
[2] May be implied from conduct of a partner
[3] May be imposed by court through doctrine of estoppel

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When Statutes Govern

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[1] There is no actual agreement
[2] Where agreement is silent
[3] When there is ambiguity as to particular rights or powers of a partner or the business

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Capacity--minors
• Contract principals apply

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• Voidable by minor
• Although minor can elect to avoid persona liability, courts are split as to whether a minor’s investment in partnership remains subject to creditor’s claims

[a] Kelly v. Halox
• RULE – a minor who disaffirms a contract need not put the other party thereto in status quo before beginning an action for the recovery of what he has parted with
• RULE – the minor’s interest in the funds of the partnership is said to be subject to the claim of firm creditors

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Capacity--Insane or mentally incompetent

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• No capacity to contract – void
• However, until judicial determination of insanity, contract is voidable
• If partner becomes insane, other partner(s) can petition court for dissolution
• Until declared void, insane person’s personal property is subject to same liabilities as other partners

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Capacity--Corporation/LLC

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in most states can join and form partnerships

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Capacity--Trustees

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• Can join and form partnership
• However, trust subject to liability for losses of all partners – trustee can be held liable for breach of fiduciary duty since trustee is held to higher standard

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Partnership Agreement

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• Absent express or written agreement, rights and duties of partners in relation to each other and 3rd parties are governed by statutes

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PA-] Express Agreement: Statute of Frauds

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• Express agreement can be oral as long as the subject matter or duration of the agreement doesn’t violate SOF
• Doesn’t apply in most cases
• If partnership is one of unlimited/unspecified duration, it is characterized as a partnership at will and no writing will be required (b/c it can possibly be performed within 1 year)
• If partnership attempts to assume debt of another, will fall within SOF
• Sale of land or goods (over $500) also within SOF

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PA--Implied Agreement

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• Partnership agreement can be implied by law or from parties’ conduct
• Look to whether conduct evidences an intent by parties to form partnership
• Evidence of joint ownership, profit sharing, and powers of management are important determinations.

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PA--Consideration

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• Must have valid consideration (same as any other contract)
• Could be mutual promises by parties to give capital or services

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PA--Consent of Partners

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• Unless agreement says otherwise, no person can become member of partnership without consent of all partners (can be express or implied)

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PA--Name of Partnership

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• Adoption of firm name is not necessary
• Most states have statutes that require filing of names and addresses of partners where name of partnership doesn’t include names of partners (so 3rd parties know who to sue)
• Failure to comply will not void contracts entered into by partnership, but may subject partnership to a fine or prohibition from suing in state courts until compliance

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PA--Term of Existence

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• Agreement may fix term of existence, which may be for period of time or completion of specified project
• Upon expiration of term, partnership is dissolved unless agreement to renew or extend
• If no such limitation, partnership will exist until contrary intent shown by partners
• Continuation of limited duration partnership by consent manifests intent to continue indefinitely (at will and treated as any other partnership)

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PA-Beginning of Partnership

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• Initial agreement marks point when legal existence begins

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PA--Capital Contribution

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• Only required capital contribution is that agreed upon by parties
• Can be money, property, or services

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Powers of Partnership

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• Unless agreement or statute say otherwise, can enter contract, sue and be sued, etc.
• Each partner is agent of partnership
• Partnership can also hire agents and servants – scope of power determined by agency principles

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Determining Whether A Partnership Exists

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• Created when parties intend to establish a partnership
• Court determines intent
• Existence of partnership is a matter of law
• Where agreement is oral or no agreement, must be investigation to determine intent

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Determining Whether A Partnership Exists--tests

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[1] Test
• No clearly defined test for determining intent
• Profit sharing is prima facie evidence (a presumption) of existence of partnership
• Since no one can be a partner without right to share profits, courts usually focus on this factor
• 5 Other Factors That Influence Courts:
1. Control
2. Agreement to share losses
3. Contributions of property to business
4. The Extent to which the Profit Share Constitutes the Recipient’s Only Compensation from the Business
5. Parties’ Own Characterization of Their Relationship

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Determining Whether A Partnership Exists--Intent

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• If written contract attempts to avoid liability, individuals still held to be partners if objective elements of partnership exist.

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Determining whether partnership exists--Joint Ownership of Business

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• Co-ownership of business is requirement for finding partnership
• However, co-ownership of property not necessarily evidence of partnership

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Determining whether partnership exists--Joint Ownership of Business--community of interest test

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[a] Community of Interest
• One of critical tests for finding co-ownership of a business is whether there existed a “community of interest” for a business purpose
• Community of interest had to exist among the partners regarding (a) profits and losses (b) capital and property (c) power and admin of business
• Each party has an interest in achieving profits and is able to make contracts, manage business, etc.

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Determining whether partnership exists--Profit Sharing as Presumptive of Partnership Existence

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• Sharing of profits is presumptive evidence of partnership (net, not gross, profits)
• Presumption can be rebutted by showing existence of special relationship
• UPA makes profit sharing prima facie evidence of partnership, which places heavy burden on party claiming no partnership

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Determining whether partnership exists--Profit Sharing as Presumptive of Partnership Existence--[a] Sharing of Losses

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• Not necessary that parties agree to share losses for finding partnership
• If other tests point to partnership, partners will be held to share losses by operation of law in same proportion they share profits

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Determining whether partnership exists--Profit Sharing as Presumptive of Partnership Existence--[b] Exceptions to Profits as Presumption of Partnership

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[b] Exceptions to Profits as Presumption of Partnership

[i] Profits as Payment of Debt
[ii] Profits as Wages
[iii] Profits as Rent
[iv] Profits as Payment for an Annuity
[v] Profits as Payment of Interest
[vi] Profits as Payment of Purchase Price of Business

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Determining whether partnership exists--Performance of Services as Evidence of Partnership

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• Mere performance of services to a partnership does not make a person a partner, but if in addition there is an agreement to share profits and losses, a partnership may be found to exist
• Intent of parties will determine whether an employment or partnership relationship (from agreement or inferred from circumstances)

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] Performance of Services as Evidence of Partnership--Capital Contribution and Service

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• If party rendering services assumes a financial or monetary obligation by agreeing to make capital contributions or by furnishing credit as surety to the business, there is a strong implication of partnership.

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] Performance of Services as Evidence of Partnership--Management

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• Partnership exists where a party who renders services also has management rights
• Must involve more than ministerial duties – must entail right to establish policy
• If power to bind partnership exists, tends to show partnership

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Performance of Services as Evidence of Partnership--Service and Joint Ownership of Property

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• If one who renders services also has right in property and funds which are partnership assets, there is a strong inference of partnership as to that party
• If no participation in profits, joint ownership of property does not make an employee a partner

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Determining whether partnership exists--Partnership by Estoppel

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• When individual is held liable to partnership liabilities even when not a partner
• Liability is to 3rd parties who have relied on individual being a member of the partnership
• Individual who represents himself as partner will be liable as a partner to 3rd parties who rely on the representation
• Factors include: (a) representation or consent thereto, (b) reliance by 3rd parties

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Determining whether partnership exists--Partnership by Estoppel

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[a] Gilbert v. Howard
• RULE: (UPA) statutory test for partnership by estoppel requires that (1) credit must have been extended on the basis of partnership representations, or (2) that the alleged partner must have made or consented to representations being made in a public manner whether or not such representations were actually communicated to the person extending credit
[b] Representation (“Holding Out”)
• Representing or allowing one’s self to be represented as a partner
• Can be made to particular party(s) or to public in general
• If representation relates to existing partnership, individual is jointly liable as a partner
[c] Representation by Others
• Liability attaches where the individual consents to representation
• Where individual knows of representation and doesn’t object, consent is inferred
• If no knowledge or consent, individual not liable

[d] Reliance
• 3rd party must act reasonably and in good faith
[e] Duty of Inquiry
• Obligation on person claiming reliance to show he used reasonable efforts to ascertain whether the party was actually a partner
• Justified reliance

[i] Norman Lazarus v. Goodman
• RULE – partnership by estoppel when one holds himself out or knowingly permits himself to be held out as a partner in a particular firm. Thereby made liable upon contracts made by his apparent partners

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Proof of Partnership--

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• Burden of proof on claimant
• Factors considered in establishing proof of partnership:

[1] Writings
[2] Books and Accounts
[3] Statements

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Property Ownership

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• 2 possible forms of ownership in context of partnership: (1) individually by partners, and (2) by the business
• Distinctions have important tax and dissolution implications
• Intent of parties is ruling factor
• All property originally brought into partnership and subsequently acquired on account of partnership is partnership property
• All property contributed by partners is partnership property

[1] Title
• Title in name of partnership is proof that property belongs to partnership
• However, it is possible that partnership property title remain in name of individual partners
• Where such property is partnership property, the individual partner holds as trustee of partnership
[2] Manner of Acquisition
• Property acquired with partnership funds is partnership property unless contrary intention can be shown
[3] Use
• Use of property by partnership doesn’t prove that it belongs to partnership

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[I] Power to Litigate

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• Because UPA treats partnership as entity, some jurisdictions infer it to allow suits in partnership name
• Other UPA jurisdictions have adopted common name statutes – these statutes permit suits by partnership in its name