Business Associations Week 4: Partnerships Review

Totality of the Circumstances Test For Partnerships: Southex Exhibitions, Inc.

1. The existence of a partnership normally must be determined under a totality of the circumstances test. 2. Here the parties agreed to share profits, and also both put time and money in. 3. Just because the parties called themselves partners does not mean a partnership if an agreement says otherwise.

The Basic Rights and Obligations of Partners in a Partnership include:

1. The partners' ownership interest in specific partnership property; 2. The partners' ownership interest in the partnership profits; and 3. The partners' right to participate in the management of the partnership 4. The debts of the partnership are the debts of the individual partners, and any one partner may be held liable for the partnerships' entire indebtedness.

The Legal Requirements for a Partnership: Testable Issue 3

The lack of formalities means that proof of the informal partnership existence will not occur until partners litigate their rights and obligations.

Business Management and the Existence of Informal Partnership:

The more actively that a person manages a business without employee compensation, the more strongly it raises the presumption of a partnership.

The Legal Requirements for a Partnership: Testable Issue

The parties do not have to label their relationship a "partnership" as long as they mutually agree to promote their common business objectives through co-ownership and effort.

The Legal Requirements for a Partnership: To share losses

To share losses, unless they agree otherwise, each partner is entitled to an equal vote in partnership matters.

Informal partnerships

a. All informal partnerships are the result of the intent of the parties to form a partnership business relationship. b. The parties mutual consent is required to create a partnership

Statutory Registration of the Partnership Name

a. Many jurisdictions require even informal partnerships to file the partnership name with the Secretary of State. b. These registration statutes are designed for public notice, and not to confirm the existence of the partnership.

Proving the Existence of an Informal or De Facto Partnership

a. Partnership law uses the intent of the parties to determine the existence of an informal partnership. b. An informal business agreement may or may not be a partnership. c. The UPA and RUPA apply certain tests to the conduct and the acts of the parties in making a determination whether the intent to form a partnership exists. 1. Sharing Profits, 2. Sharing Losses, 3. Business Management, 4. Joint Ownership of Property.

Sharing Profits and the Existence of Informal Partnership: RUPA 202

a. The right to share profits is the essential element necessary to prove the existence of a partnership (RUPA §202(c)(3). b. Sharing the profits of a business is prima facie evidence under UPA that a person is a partner in the business. c. Gross returns are not relevant to this analysis, ONLY profits. d. The contribution of money, property, services or labor to a business, without compensation or wages would raise the presumption of a partnership.

Sharing Business Losses and the Existence of Informal Partnership

a. Unless agreed otherwise, the UPA and RUPA require the sharing of losses among partners in proportion to their share of the profits. b. Therefore, the sharing of losses could raise the presumption of shared profits and therefore a partnership.

Bank Loans Are Partnerships or Not?

1. In exchange for a loan, a bank has the right to enact banking controls on a business, like prohibiting bonuses, without becoming a business partner. 2. If the bank vetoes something they are not partners. 3. But, if a bank requires the loanee to buy something, they would be partners. 4. If a bank has an option to buy the company, the bank is not a partner until the bank exercises the option.

8 Factors to Determine Whether Partnership Exists (IPLPBLCD)

1. Intent of the parties, 2. Right to share profits, 3. Agreement to share losses, 4. Partners share ownership and control of the property, 5. Partners maintain the right to tend to business affairs, 6. The language of the business agreement, 7. The parties' conduct toward 3Ps, 8. The parties' rights to dissolution. - One element alone is not conclusive; always analyze both sides.

The Creation of a Partnership: "Partnership"

A "Partnership" is defined as an association of two or more persons to carry on a business as co-owners for profit. A "Partnership" is defined as an association of two or more persons to carry on a business as co-owners for profit.

Formal written partnership agreements allow for 6 things

A formal written partnership agreement allows, but does not require, the parties to: 1. Modify their respective roles, 2. Create rules to add or expel partners in the future, 3. Alter voting rights of partners, 4. Alter the unanimous vote requirement, 5. Adjust the profit and loss percentages for the parties, AND 6. Enlarge or restrict management roles of partners.

A partnership is

A partnership is consensual, and it may be created by any writings, words or conduct that proves the parties; intent to transact business as co-owners

6 Profit Sharing Exceptions to the Informal Partnership PRESUMPTION

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 of: 1. Of a debt, by installments or otherwise, 2. For services as an independent contractor or of wages or other compensation to an employee, 3. Of rent, 4. Of an annuity or other retirement or health to a beneficiary, representative, or designee of a deceased or retired partner, 5. 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 collateral, 6. For the sale of the goodwill of a business or other property by installments or otherwise.

A partnership is the default form of ownership for businesses.

As long as a business is owned by two or more persons and no other form of business organization has been chosen, the courts will declare the business to be owned as a partnership.

Who may be a partner?

Generally, a partner may be any natural person with general contract capacity as well as other partnerships, corporations and other entities.

Joint Ownership of Property and the Existence of Informal Partnership:

Joint ownership of property does not raise the presumption of a partnership by itself, because joint property profits belong to the owners and must be shared simply because of the joint nature of the ownership.

The Legal Requirements for a Partnership: Testable Issue 2

Partners may contribute different amounts of capital to the partnership, but unless they agree otherwise each partner has an equal vote.

The Legal Requirements for a Partnership

Partnership law has no formal requirements for creating a partnership. Partnerships may be formed formally or informally.

Rebutting the Informal Partnership Presumption

Sharing profits plus possession of control greater than what is normal is likely to result in a relationship being found to be a partnership.

Oral partnerships are subject to the Statue of Frauds

The Statute of Frauds will apply to any partnership agreement that last longer than one year

Formal Written Partnership Agreements: Testable Issue 1

Under these statutes the duties owed to third parties cannot be changed by the partnership agreement.

Formal Written Partnership Agreements vs. Partnership Statutes

a. A formal written partnership binds partners both in contract and the law of partnerships. b. Many default partnership statutory provisions are meant to be changed by the partnership agreement. c. Under these default statutes, the duties owed to 3P CANNOT be changed by the partnership agreement.

A formal written partnership agreement binds the partners

both in contract and the law of partnership.

Informal partnerships may still be modified

by express agreements between the partners. a. The partners could agree differently than they share profits. b. The amount of profit and loss sharing could be modified from the requirement of equal profits and losses.

The UPA and the RUPA provide that

unless the partners agree otherwise, partnership profits are divided equally among partners. Unless otherwise agreed, losses are divided in the same proportions as profits.