(12) Law of Partnership - Overview and Creation

What are the original sources of partnership law?

Contract law and agency law.

How does contract law apply to partnerships?

It governs the agreement creating the partnership and the partnership's transactions with third parties.

What is the default form of business organization?

A general partnership.

Are formalities required to create a general partnership?

No.

How does agency law apply to partnerships?

Every partner is an agent of the partnership.

What primarily governs partnership law today?

Statutes.

What are the two primary partnership statutes?

The Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA).

What do the UPA and RUPA regulate?

The rights and liabilities among partners (internal rules) and duties owed to third parties (external rules).

May partners modify the internal rules of a partnership?

Yes, by agreement.

May partners modify the duties owed to third parties?

No.

What role does the common law play in partnership law?

It fills gaps not covered by statute.

Under UPA and RUPA, what is every partner?

An agent of the partnership.

What is the Aggregate Theory of partnerships?

The partnership is merely the sum of its individual partners rather than a separate legal entity.

Under which law is the Aggregate Theory primarily applied?

Common law and the UPA.

Under the Aggregate Theory, who is liable for partnership debts?

All partners are jointly liable.

What effect does adding a new partner have under the Aggregate Theory?

It creates a new partnership.

Why can adding a new partner create legal problems under the Aggregate Theory?

The new partnership may not be able to enforce claims belonging to the old partnership.

How are creditors protected under the Aggregate Theory?

By the partners' joint and several liability.

Under the Aggregate Theory, how are lawsuits against the partnership brought?

Against the individual partners by name.

What is the Entity Theory of partnerships?

The partnership is treated as a legal entity separate from its partners.

Under which statute is the Entity Theory adopted?

RUPA § 201(a).

Under the Entity Theory, may the partnership sue or be sued in its own name?

Yes.

Are partners still liable for partnership debts under the Entity Theory?

Yes.

Testable Issue: How do all jurisdictions treat partnerships for agency purposes?

As entities, with each partner acting as an agent and the partnership acting as the principal.

How does RUPA define a partnership?

An association of two or more persons carrying on as co-owners of a business for profit.

What is the defining characteristic of a general partnership?

Each partner may be personally liable for partnership obligations.

What modern business entities provide limited liability?

Limited Partnerships (LPs), Limited Liability Partnerships (LLPs), and Limited Liability Companies (LLCs).

What is the mnemonic for the elements of a partnership?

Aliens Took Captain Big Pants.

What does the mnemonic "Aliens Took Captain Big Pants" represent?

Association, Two or more persons, Co-owners, Business, Profit.

What is the default ownership form for businesses owned by two or more persons?

A partnership.

When will courts generally find that a partnership exists?

When two or more persons own a business and have not chosen another business form.

Does partnership law require formalities to create a partnership?

No.

May partnerships be formed informally?

Yes.

How do UPA and RUPA define a partnership?

An association of two or more persons carrying on as co-owners of a business for profit.

What is the first element of a partnership?

Association.

What does "association" mean in partnership law?

Legal persons voluntarily consenting to work together.

What is the second element of a partnership?

Two or more persons.

Who qualifies as a "person" capable of becoming a partner?

Individuals, corporations, partnerships, and other legal entities.

What is the third element of a partnership?

Co-ownership.

What does co-ownership require?

Equal management rights, sharing profits and losses, and contribution of money, property, labor, services, or a combination.

What is the fourth element of a partnership?

Business.

How broadly is "business" defined?

It includes every trade, occupation, and profession.

What is the fifth element of a partnership?

Profit.

How is profit defined?

Revenue minus costs.

What creates an informal partnership?

The parties' intent to form a partnership business relationship.

Must the parties call themselves a partnership?

No.

What is required to create a partnership?

The parties' mutual consent.

How may mutual consent be proven?

By writings, words, or conduct showing an intent to operate as co-owners.

Why are informal partnerships often difficult to prove?

Because their existence is usually determined only after litigation arises.

Are oral partnership agreements subject to the Statute of Frauds?

Yes.

When does the Statute of Frauds apply to an oral partnership agreement?

When the agreement cannot be performed within one year.

What advantages does a written partnership agreement provide?

It allows the partners to modify management rights, profit sharing, loss allocation, future changes, and other internal rules.

Does a written partnership agreement control over statutory default rules?

Yes.

May a written partnership agreement change duties owed to third parties?

No.

Testable Issue: What additional body of law applies to written partnership agreements?

Contract law.

Why do many jurisdictions require registration of a partnership name?

To provide public notice.

Does registering a partnership name establish that a partnership exists?

No.

What determines whether an informal partnership exists?

The parties' intent to associate as co-owners of a business for profit.

Is calling a business a "partnership" conclusive proof that one exists?

No. It is merely evidence of intent.

What is the most important factor in proving a partnership exists?

The right to share profits.

How did the UPA treat profit sharing?

As prima facie evidence of a partnership.

How does RUPA treat profit sharing?

As creating a presumption of partnership unless an exception applies.

What payments do not create the presumption of partnership under RUPA?

Payments of debts, employee or independent contractor compensation, rent, retirement or health benefits, loan interest, and payment for the sale of goodwill.

Does contributing money, property, labor, or services to a business support finding a partnership?

Yes.

How are losses shared under UPA and RUPA absent an agreement?

In proportion to each partner's share of the profits.

Why does sharing losses support the existence of a partnership?

It suggests the parties also share profits.

Does active participation in management support finding a partnership?

Yes.

Does active management without employee compensation strongly suggest partnership status?

Yes.

Does joint ownership of property alone establish a partnership?

No.

Why does joint ownership alone not create a partnership?

Because co-owners naturally share property income without necessarily intending to operate a business together.

Testable Issue: What is the strongest evidence that a partnership exists?

The right to share business profits.

Testable Issue: What factors commonly support finding an informal partnership?

Intent, profit sharing, contribution of capital or services, sharing losses, and participation in management.

Testable Issue: What facts alone do not establish a partnership?

Merely labeling the relationship a partnership or jointly owning property.

Essay Rule: How should you analyze whether a partnership exists?

Determine whether two or more persons intended to associate as co-owners of a business for profit by examining profit sharing, management participation, contributions, loss sharing, and the parties' conduct while recognizing that formalities are unnecessary.

Master Synthesis: What is the framework for analyzing partnership formation?

Begin with the statutory definition of partnership, analyze each required element (association, two or more persons, co-ownership, business, and profit), then evaluate the evidence of intent through profit sharing, management participation, contributions, and loss sharing while distinguishing facts that merely suggest ownership from those that establish a true partnership.