Formation and Management of a Partnership

Question 1

What is a Partnership?

Answer 1

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: To determine whether a partnership exists, courts generally look to the intent of the parties. If they intended to carry on a business as co-owners, there is a partnership even if they did not subjectively intend to be partners.

Question 2

What Factors Raise Presumption in Favor of Partnership Formation vs. Evidence Indicative of Partnership (AKA not Presumption Raising)?

Answer 2

Evidence That Raises Presumption of Partnership

1. Sharing of profits (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)
2. Right to Participate in Control

Evidence Indicative of Partnership — The following factors may be additional evidence that a partnership has been formed. However, in contrast to the sharing of profits, these factors do not raise a presumption of partnership:

1. Title to property is held in joint tenancy or in common
2. The parties designate their relationship as a partnership
3. 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)
4. Sharing of gross returns

Question 3

What is Partnership by Estoppel?

Answer 3

If no partnership was formed in fact, parties may still be liable as if they were partners to protect reasonable reliance by third parties.

• Liability of Person Held Out as Partner: When a person by words or conduct represents himself as a partner or consents to being represented by another as a partner, he will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation.
• Liability of Person Who Holds Another Out as Partner: When a person holds another out as a partner, he thereby makes that person his agent to bind him to third parties. (If there is a partnership, only those partners who know of or consent to this holding out will be bound.)

Question 4

What Kind of Agreement is Needed to Form a Partnership?

Answer 4

No agreement is required to form a partnership. A partnership agreement may be written, oral, or implied (by conduct)

Question 5

What is the Entity Status of a Partnership?

Answer 5

Except with respect to partners’ personal liability for partnership obligations, a partnership is a legal entity distinct from its partners. Title to land may be in the partnership name. A partnership may sue or be sued in the partnership name.

Question 6

What are the Capacity requirements for a partner?

Answer 6

Anyone who is capable of entering into a binding contract may be a partner.

A would-be partner who lacks capacity is liable only to the extent of his capital contribution, but the partnership with such person is not void; it will continue to exist until steps are taken to dissolve it.

Question 7

Do all Partners Need to Consent to the Addition of a New Partner?

Answer 7

YES! Unless otherwise agreed, no one can become a partner without the express or implied consent of all partners.

Question 8

What are the Voting Rights that a Partner has?

Answer 8

All partners have equal rights in the management of the business and equal votes (one partner, one vote) unless the partnership agreement provides otherwise

• Decisions regarding matters within the ordinary course of the partnership business REQUIRE a MAJORITY vote of the partners.
• Matters outside of the ordinary course of business REQUIRE the UNANIMOUS consent of all partners.

Question 9

What are Partners Rights with Regards to Distributions?

Answer 9

Partners have whatever rights are granted in the partnership agreement as to distribution of profits. If the agreement is silent, partners share profits (and losses) EQUALLY.

Question 10

TRUE OR FALSE: A partner has NO right to compensation for their services to the partnership except for winding up the partnership business.

Answer 10

TRUE! Partners have NO RIGHT to compensation for their services to the partnership except for winding up the partnership business.