CHAPTER XLIII

INTRODUCTORY

§ 286. Definition

Partnership is the result of a contract between two or more competent parties to combine their money, property, skill, or labor for the transaction of some lawful business for profit.

Essential Elements. Mere representation that parties are partners, or their passive acquiescence in such representations by others, will, as to third parties, be sufficient to establish partnership liabilities. To form a partnership as between the parties themselves is less simple and requires the following essential elements:

5.

A lawful business

6. Profit-sharing as a motive

Unless expressly stipulated otherwise, as in the case of dormant and special partners, each member of a partnership has an equal right to assist in the management of the partnership business and property, and has equal power to contract regarding it. This right may be restricted by agreement among the partners.

The business or undertaking must be lawful, and the association must have been formed for the purpose of charing profits. An association that does not share profits is not a partnership.

Distinctive Features.

The partnership relation is char

acterized by certain distinctive features.

I.

2.

Each partner is an agent for the others in the transaction of any business within the scope of the partnership purposes.

Each partner shares, either equally or in an agreed proportion, in the net profits of the business and usually in the losses also.

3. In case of insolvency each partner is personally liable for all of the firm's obligations.

4. The property, the business, firm name, good-will, and

any trade-marks or other intangible possessions are firm property and form part of the common fund. 5. A partner is entitled to good faith and fair dealing

from his associates, and on dissolution of the partnership may have an accounting to ascertain his interests in the business.

6. The partnership relation is a purely personal one and the partnership is terminated if any one of the

partners dies, retires, or sells his interest in the firm. 7. Unlike a corporation, the partnership has no entity distinct from its membership. It cannot sue nor be sued in the firm name. It cannot contract with nor bring suit against its members, nor can they bring suit against it.

§ 287. Partnerships Distinguished from Non-Partnership Organizations

Co-ownership in either land or personal property does not involve any partnership between the owners.

Associations not formed for profit are not partnerships. The many unincorporated clubs, churches, societies, associations, and fraternal organizations are not partnerships and do not

involve mutual agency nor partnership liability. Co-operative societies which buy goods and distribute them among their members are not partnerships unless formed for the purpose of making a profit. In some states business organizations designated as partnership associations are authorized by law. These are neither partnerships nor corporations, though they partake of the characteristics of both. (See § 293.)

Contracts That Are Not Partnership Contracts. Contracts are frequently made for a share of profits as compensation for services, for the use of property, or for the loan of money. In the first two cases, if the agreement was made in good faith and not to evade the law, the contract will not be held to create a partnership. Where money is loaned, and an agreement is made in good faith to give the lender a share in the profits as compensation for its use, and he does not participate in the management of the business or hold himself out as a partner, the contract will not in most states be considered one of partnership. It is safer to have the agreement expressed in writing, as under the old rule of law the parties became partners under such an arrangement, and in some states it is necessary to have a written agreement to prevent this effect.

A contract of the above nature should provide for the return of the money loaned without reference to profits. Where such a contract concerns the use of property, the title to the property should be carefully reserved to the owner. In all cases where profits are taken without partnership intent, it is prudent to specify in the contract that the party shall receive as compensation “an amount equal to" the proposed share of profits.

If in any of the cases of profit-sharing discussed, the agreement is made for a share of the "gross returns," this wording shows conclusively that the arrangement is not a partnership. The usual arrangement for renting land for a share of the crops raised is an example of this form of contract, and

neither as between the parties themselves nor as to third persons would the relation be one of partnership.

Liability to Third Parties. In dealing with this question it is to be emphasized that as to third parties it is the apparent intention of the parties rather than their expressed or declared intention which controls. If the acts of the persons under consideration are such as to mislead third persons into believing them partners, they will have to assume the liabilities of partners to such third parties. As between the parties to the agreement, however, the true rule is that "the agreement and intention of the parties themselves should govern in all cases.” (See §§ 295, 299.)

Notes:

I.

A contract for a share in the profits not intended to create a partnership should always be in writing and provide either for "an amount equal to❞ the agreed share of the profits, or for a share of the "gross returns," and not for "a share in the profits."

2. Such a contract should also provide that the person with whom the profits are to be shared is not to be a partner, and is to have no control of the business nor liability for its debt.

REVIEW QUESTIONS

1. What is a partnership? What are the essential elements?

2. What may cause a person to be held liable as a partner by third parties?

3. How is a partner an agent?

4. Must each partner have an interest in both profits and losses? 5. What is meant by partnership liability?

6. Distinguish between the legal character of a partnership and a

corporation.