Partnership Creation

The partnership agreement is the heart of the partnership, and it must be enforced as written, with very few exceptions.  Part­ners’ rights are determined by the partnership agreement.  If the agreement is silent regarding a matter, the parties’ rights are typically determined by the UPA. As a general rule, partnership agreements do not have to be in writing.  However, it is unwise to enter into an oral partnership agreement.  A partnership agreement must be in writing if it is within the provisions of the statute of frauds, such as a contract that cannot be performed within one year.  The formal document that is prepared to evidence the partnership agreement is termed as a partnership agreement or articles of partnership.

When the parties have not clearly indicated whether or not their business constitutes a partnership, the law has determined several guidelines to aid Courts in determining whether the parties have created a partnership.

  •  The fact that the parties share profits and losses is strong evidence of a partnership.
  • An agreement that does not provide for sharing losses, but does provide for sharing profits, is still evidence of a partner­ship since it is assumed that the parties will also share losses.
  • The sharing of gross revenue is itself very slight, if any, evidence of a partnership.  Suppose a farmer rents an airplane to a pilot to do crop dusting under an agreement where the pilot would pay the farmer, as compensation for use of the plane, a share of the fees that the pilot receives from his crop dusting business.  Such an arrangement would not constitute a partnership in and of itself.
  • Co-ownership of property does not necessarily create a partner­ship.  Also, sharing profits or rents from property that two or more people own does not necessarily create a partnership.
  • A partnership may be formed even if some of its members furnish only skill or labor rather than capital to the partnership.

In some cases, persons who are in fact not partners may be held accountable to third persons as though they were partners.  This liability arises when they conduct themselves in such a manner that others are reasonably led to believe that they are partners and to act in reliance on their belief.  This is similar to the apparent agency doctrine.  For example, suppose the partnership of Able and Baker, in registering its fictitious name, states that Able, Baker and Charlie are partners, and the registration certificate is signed by all three of them.  If a creditor sees this registration statement and extends credit to the firm, relying on the fact that Charlie is apparently a partner, Charlie would have partnership liability insofar as that creditor was concerned, even if he was not in fact a partner.  However, liability would not arise if Charlie did not know of this registration certificate.  However, if he signed the registration certificate, he had knowledge of it.

Inside Partnership Creation