Formation Flashcards
Definition
A partnership is an association of two or more persons to carry on as co-owners a business for profit. It’s formed as soon as that happens, regardless of whether the parties subjectively intend to form a
partnership.
Subjective Intent Irrelevant
Since no formalities are required to form a partnership, it’s sometimes difficult to determine whether the relationship between parties is
a partnership or something else. To determine whether a partnership exists, courts generally look to the intent of the parties.
Factors For Deciding Whether Partnership Exists-Sharing Profits
Sharing of Profits Raises Presumption of Partnership. The most important factor in deciding whether an association rises to the level of a partnership is the sharing of profits. Sharing of profits raises a presumption of partnership unless the share was received as payment of a debt, as wages or compensation for services rendered, as rent payment, as an annuity or other retirement benefit, as interest on a loan, or for the sale of goodwill of a business.
Factors For Deciding Whether Partnership Exists-Right to Participate in Control
Another important factor in the partnership inquiry is the person’s right to participate in the control of the business (even if control is never actually exercised). To state that partners are co-owners of a business is to state that they each have the power to control the business.
Factors For Deciding Whether Partnership Exists-Rebuttable Presumption
If there is profit-sharing, and therefore a presumption of partner status, one can try to rebut that presumption with evidence suggesting the lack of a co-ownership relationship, such as no right to control or no sharing of losses (something that owners
would typically share).
Factors that do not raise a presumption of partnership
a) Title to property is held in joint tenancy or in common
b) The parties designate their relationship as a partnership
c) The venture undertaken by the parties requires extensive activity (for example, if A and B each contribute $100,000 to buy a building of rental apartments that must be managed, it is
more likely that they are partners than if they each contributed $100,000 to buy shares in a company that manages real estate)
d) Sharing of gross returns
Partnership By Estoppel
If no partnership was formed in fact, parties may still be liable as if they were partners to protect reasonable reliance by third parties
Partnership Agreement
No agreement is required to form a partnership. Nevertheless, you should be on the lookout for the existence of a partnership agreement because partnership law allows the partners to contract around almost all of the statutory provisions.
