Partnership

A partnership is an unincorporated association of two or more persons (or other entities) to carry on a business for profit. Most states have some version of the Uniform Partnership law. The authors of the uniform law have recently recommended major revisions in the text of partnership statutes. For this reason, many states are now in the process of transitioning from their old version of the uniform law to the new. The old version is sometimes called UPA, and the new RUPA (R-for revised). Minnesota's partnership statute, Chapter 323A defines a partnership as follows:

A partnership is an association of two or more persons to carry on as co-owners a business for profit and includes a limited liability partnership....

A partnership may be formed without a written instrument. In other words, if Mabel Smith and Shandra Jones decide to start a landscaping business together and share the profits, they have a partnership, even though they never used the word "partner" and never created a written agreement. In fact, RUPA says: "Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership." Minnesota Statutes Section 323A.2-02 (a).

If they don't have a written agreement, then the basic principles of partnership law will apply. In most states this basic law will be found in that state's version of the Uniform Partnership Act, as we have said. When you start a partnership, it is wise to create a written agreement, because otherwise, you my later engage in an argument with your business associate about whether there was a partnership at all or what your respective rights and liabilities may be.

The determination whether a business constitutes a partnership arises in many different contexts. It arises in connection with federal and state taxation, of course. The determination of whether an entity constitutes a partnership has important tax consequence, and the IRS maintains its own set of rules and principles for determining whether an entity will be treated as a partnership.

Whether an entity constitutes a partnership is important also in determining who is liable for company debt. If a business fails, the partners become individually responsible for the partnership debt. (An exception arises in the context of limited partners and limited liability partnerships). If the business is very successful, then partners are entitled to a share of the profits, and sometimes litigation arises over whether participants in the businesses are partners, entitled to share in the success of the business. Sometimes, parties argue over whether an employer-employer relationship or partnership relationship exists. If a business fails, employees are entitled to be paid, but partners share the business losses. Payments made to an employee will be subject to social security and unemployment taxation and withholding. Payments made to an owner will be offset by partnership expenses, including depreciation, so there may be significant tax advantages to partnership treatment. Since partners are jointly liable for business debt, sometimes plaintiffs in injury cases will allege that the defendants are partners, in order to increase the number of persons who may be liable for an ultimate verdict.

Not every arrangement involving a sharing of the profits constitutes a partnership agreement. Leases may provide the landlord with a percentage of gross profits. Franchise agreements may charge a fee based upon a percentage of sales. Employees may receive pension or other benefits based upon a share of profits. But none of these agreements constitute partnerships, because the agreements do not contemplate joint ownership, management or control. Nonetheless, it is common when lawyers draft agreements which provide for some form of profit or receipt sharing to specifically disclaim any intent to form a partnership. RUPA says as follows:

(1) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.
(2) The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.
(3) A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment: (i) of a debt by installments or otherwise; (ii) for services as an independent contractor or of wages or other compensation to an employee; (iii) of rent; (iv) of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner; (v) of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or (vi) for the sale of the goodwill of a business or other property by installments or otherwise.

It is no small matter to be someone else's partner. Your partner may be able to borrow money for which you will be liable. If your partner does something wrong, you may be liable for the injury caused. RUPA says:

(a) A partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership.
(b) If, in the course of the partnership's business or while acting with authority of the partnership, a partner receives or causes the partnership to receive money or property of a person not a partner, and the money or property is misapplied by a partner, the partnership is liable for the loss.

Your partner may have the power to bind you to business deals or to sell partnership property. RUPA has provisions helping us to decide whether property belongs to the partnership. Property acquired by the partnership belongs to the partnership, and not the individual partners. Obviously, if property is transferred into the name of the partnership, it is partnership property. But sometimes partners hold partnership property in their own name. For this reason, RUPA provides that property belongs to the partnership if acquired by "one or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership but without an indication of the name of the partnership." If partnership assets are used to acquire property, then presumptively the property belongs to the partnership. It is better practice by far to keep all partnership property in the partnership name.

Entity Theory: One view of a partnership is that it is a collection of persons governed by a partnership agreement. Under this view, one would sue a partnership by suing the partners individually, as if they were essentially agents for each other. Under the more modern view, a partnership is an artificial entity, with its own separate theoretical existence. RUPA says: "A partnership is an entity distinct from its partners."

Duration: A partnership can be formed for a specific length of time, for an indefinite time, or until completion of a particular project. If the partnership agreement contains no specific duration then that means that the partnership can be ended by any partner

Decisions Recent Limited Liability Partnership Decisions