Formation of a Partnership
What is a partnership?
The Uniform Partnership Act defines a partnership as an association of two or more persons to carry on as co-owners of a business for profit, including a limited liability partnership. Partnership law is predicated on the laws governing contracts and agency.
Is a joint venture a partnership?
Although courts sometimes tend to distinguish between a partnership and joint venture, which would include under its umbrella a single or limited enterprise or venture, the latter is considered to be a partnership with the same attendant legal consequences.
Formation of a partnership and the need for capacity
As a partnership is the result of an agreement, it is governed by the general rules applying to contracts. One of these rules involves capacity. A partner can consist of anyone who is capable of entering a binding contract. These are the same governing principles which dictate an agency relationship.
This requirement goes to the question of liability. A potential partner lacking capacity is neither personally liable for obligations the partnership has assumed or for breaches of the agreement. In contrast, such a person would be liable to the extent of their capital contribution to the partnership.
What are the formalities for founding a partnership?
The general rule is that a contract of partnership does not require any formalities to be fulfilled for its validity. Barring a statute which states otherwise, the conduct of the parties would be sufficient for forming a partnership, meaning this can be accomplished either expressly or through implication. Usually, there is no need that a partnership agreement be in writing.
There are instances when writing is necessitated, however. A partnership agreement that cannot be performed within one year must be in writing to satisfy the Statute of Frauds, which is a common law requirement that certain agreements must be in writing to bind its parties. Broadly speaking, the Statute of Frauds requires that a written contract be drafted to identify the contracting parties, state the subject matter and lay out the essential terms of the agreement.
However, even if the parties act upon an oral agreement which must be in writing to satisfy the requirements of the Statute of Frauds, they will still be treated as partners at will. This refers to a partnership lacking a fixed term that can be terminated by any partner giving notice.
Can a partnership exist for illegal purposes?
A partnership may only be formed for a legal purpose. Without this requirement being fulfilled, the partnership will be considered null and void. Courts will refuse to order an accounting or settling of an affairs of a partnership which was founded for an illegal purpose. An example of an illegal partnership would involve one which was formed for wagering on horse racing in contravention to law. Were the profits from this venture to be deposited in the name of one of the partners, the courts would refuse to grant injunctive relief on grounds of illegality in an action requesting that he distribute his winnings with the other partners.
Must there be consent?
Unless otherwise provided for in a partnership agreement, no one can become a partner in a partnership, either through an express or implied act, lacking the unanimous consent of all its partners.
What is the status of a Subpartner?
A subpartner who shares with a partner of a principal partnership profits that are derived from that partnership is not thereby deemed a partner of the principal partnership. Let us illustrate this provision through an example. Let’s say Allen and Bob enter into a written partnership agreement providing that they will equally share their business profits. At this point, Bob enters an agreement with Caleb providing for the two of them to share the profits of Bob’s partnership with Allen. Caleb would not be deemed a partner in the partnership between Allen and Bob even though he will effectively be receiving the profits from their partnership. At most, he would be considered a member of a partnership between himself and Bob.
Does sharing losses make a partnership?
The statute does not require that the parties agree to share losses for a partnership to exist. However, the absence of such an agreement would be considered strong evidence of the parties lack of intent to form a partnership.
Partnership by estoppel
As mentioned, express or implied agreement between parties to form a partnership is sufficient for this to occur. Yet, even in the absence of such an agreement and the parties involved not being partners, they may, nevertheless, be held liable to third parties as if they were. This is known as partnership by estoppel and it can assume two forms.
One form involves the liability of a person who is held out to be a partner. If a person, through words or conduct, represent themselves or allow themselves to be represented by another as a partner, they will be held liable to third parties who extend credit to the actual or apparent partnership on the faith (ie. in reliance on) the representation.
One who holds another out as a partner may also be liable. When one, through their words or conduct, holds another out to be their partner, they effectively makes this alleged partner their agent, with the power to bind them to third parties as if they were their partner in actuality.
Contact a corporate law expert:
Whether you need help formulating a partnership agreement or require legal aid due to the actions of one or more of your partners, our company law experts are at your service:
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