(13) The Creation of a Partnership

What is the mnemonic for the elements of a partnership?

Aliens Took Captain Big Pants! (Association, Two or more persons, Co-owners, Business, Profit)

What is the default form of ownership for businesses?

A general partnership.

When will a court generally declare a business to be a partnership?

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

Are formalities required to create a partnership?

No. Partnership law imposes no formal requirements for creating a partnership.

May a partnership be formed informally?

Yes.

May a partnership be formed formally?

Yes.

How do the UPA and RUPA define a partnership?

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

What is the first element required to create a partnership?

Association.

What does "association" mean for partnership formation?

Legal persons must voluntarily consent to work together.

What is the second element required to create a partnership?

Two or more persons.

Who qualifies as a "person" for purposes of partnership formation?

A natural person, corporation, partnership, or other legal entity.

What legal capacity must an individual partner possess?

General contractual capacity.

What is the third element required to create a partnership?

Co-ownership.

What does co-ownership mean in a partnership?

Each partner has management rights, shares profits, shares losses, and contributes money, property, labor, services, or a combination thereof.

Must every partner contribute something to the partnership?

Yes. Each partner contributes money, property, labor, services, or a combination.

What is the fourth element required to create a partnership?

A business.

How broadly is "business" defined under partnership law?

It includes every trade, occupation, and profession.

What is the fifth element required to create a partnership?

Profit.

How is profit defined for partnership purposes?

Revenue minus costs.

What happens if business costs exceed revenues?

The partners share the losses unless they agree otherwise.

What creates an informal partnership?

The parties' intent to form a partnership business relationship.

Must the parties call their relationship a "partnership" to create one?

No.

What is required to create an informal partnership?

The mutual consent of the parties.

How may mutual consent to form a partnership be shown?

By writings, words, or conduct demonstrating an intent to carry on business as co-owners.

Why are informal partnerships frequently litigated?

Because the lack of formalities often requires a court to determine whether a partnership exists.

Are oral partnership agreements valid?

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 roles, establish management rules, govern future changes, allocate profits and losses, and alter many default statutory rules.

Does a written partnership agreement control over default statutory rules?

Yes, as to the partners' internal rights and obligations.

May partners modify statutory duties owed to third parties?

No.

Testable Issue: What body of law also governs written partnership agreements?

Contract law.

Why do many states require registration of a partnership name?

To provide public notice.

Does filing a partnership name create the partnership?

No. Registration provides public notice but does not establish the partnership's existence.

What ultimately determines whether an informal partnership exists?

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

Does calling a business a "partnership" conclusively prove that a partnership exists?

No. It is merely evidence of intent.

What is the single most important factor in proving the existence of a partnership?

The right to share profits.

Under the UPA, what is the effect of sharing business profits?

It is prima facie evidence that a partnership exists.

Under the RUPA, what is the effect of receiving a share of business profits?

The recipient is presumed to be a partner unless an exception applies.

Under RUPA, what payments do NOT create a presumption of partnership?

Payments received for a debt, wages or services as an employee or independent contractor, rent, retirement or health benefits, loan interest, or the sale of business goodwill.

Does contributing money, property, labor, or services without wages support the existence of a partnership?

Yes. It raises the presumption of a partnership.

How are losses generally shared under the UPA and RUPA?

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

Why is sharing losses evidence of a partnership?

Because it suggests the parties also share profits.

How does active participation in management affect the partnership analysis?

Active participation in management without employee compensation strongly supports the existence of a partnership.

Does joint ownership of property alone create a partnership?

No.

Why doesn't joint ownership alone establish a partnership?

Because co-owners naturally share profits generated by jointly owned property without becoming partners.

Essay Rule: What elements must be proven to establish the existence of a partnership?

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

Essay Rule: What evidence is most persuasive in proving an informal partnership?

Profit sharing, contribution of capital or services without wages, sharing losses, participation in management, and the parties' intent to act as co-owners.

Master Synthesis: How should you analyze whether a partnership exists on an essay?

First apply the statutory definition (association, two or more persons, co-owners, business, and profit). Then evaluate the parties' intent, profit sharing, contributions, loss sharing, participation in management, any written agreement, and finally determine whether any statutory exception rebuts the presumption of partnership.

Master Synthesis: What are the highest-yield indicators that a partnership exists?

Profit sharing, co-ownership, management rights, contribution of capital or services, sharing losses, and an intent to operate a business together for profit.