Jonah Patel
The term partnership is a catch-all term for a wide range of working relationships, and it is often unclear whether a particular relationship constitutes a partnership. An express agreement is not required for a partnership to form, and they can arise accidentally or by implication, where one party has held themselves out as a partner and another has relied on that representation. The law recognises an implied partnership where the parties' behaviour objectively manifests an intention to create a partnership, such as shared profits and control. However, it is important to note that a partnership is distinct from a joint venture, and legal separation between entities is crucial to avoiding an unintended implied partnership.
Characteristics and Values of "Does Not Constitute a Partnership, Whether Express or Implied"
| Characteristics | Values |
|---|---|
| Express agreement | A partnership is known to exist when there is an express agreement. |
| Implied partnership | A partnership can be implied when the parties' behavior objectively manifests an intention to create a relationship that the law recognizes as a partnership. |
| Informality | Partnerships can be created accidentally and informally, without any formalities. |
| Working relationships | The term "partnership" is a catch-all term for a wide range of working relationships, and uncertainties may arise regarding the exact nature of the relationship. |
| Flexibility | Reducing legal uncertainty about the nature of the relationship may restrict the flexibility of people to associate. |
| Statutory origin | Unlike partnerships, corporations and other business associations are typically created by statute. |
| Number of parties | A partnership involves two or more parties associating as co-owners to carry out business for profit. |
| Contractual association | A partnership is a voluntary, contractual association where partners are agents who can enter into contracts on behalf of the partnership. |
| State law | Partnerships are often governed by the laws of the state in which they are primarily located. |
| Taxation | Partnerships are not taxable entities; instead, each partner includes their distributive share in their personal income tax return. |
| Litigation | In litigation, partnerships may be sued in their common name, but each partner must be named and served individually. |
| Implied authority | In some jurisdictions, partners have implied authority to bind the firm with their actions in the usual course of business. |
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What You'll Learn
Implied partnerships can be created accidentally
Implied partnerships, also known as de facto partnerships, can be created accidentally. This happens when two or more people carry on a business as co-owners for profit without registering their partnership or setting up a formal agreement.
According to New York Partnership Law, a partnership is a "voluntary, contractual association between two or more parties to carry out business for-profit as co-owners". However, an express agreement is not needed to form a partnership. This means that partnerships can be formed simply by people associating themselves as co-owners to carry out a business for profit.
For example, if two people, Person A and Person B, discuss opening a business together but never establish a formal agreement, they may still accidentally form a partnership. If Person A starts building the business and Person B occasionally helps or provides ideas, a partnership may be implied. This is because the law states that if two people are working in business together for profit, they are in a partnership, regardless of whether they intended to form one or not.
In the case of the Big Easy Companies, they were technically separate corporations with paperwork stating their independence. However, they were argued to be an implied partnership due to their shared profits and control. This case demonstrates how implied partnerships can be created accidentally, even among seemingly independent corporations.
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Express agreements are not needed to form a partnership
An express agreement is not needed to form a partnership. According to New York Partnership Law, a partnership is a voluntary, contractual association between two or more parties to carry out a business for profit as co-owners. This means that partnerships are formed simply by persons associating themselves as co-owners to carry out a business for profit.
The law recognises a partnership when the parties' behaviour objectively manifests an intention to create a relationship. This means that it does not matter if the parties never intended to become partners – courts will evaluate the formation of partnerships without considering the parties’ subjective intent.
Partnerships can come into existence quite informally and without any formality. They can even be created accidentally. This is in contrast to a corporation, which is a creature of statute. A partnership is a catch-all term for a large variety of working relationships.
The three elements that define a partnership are: the association of persons, as co-owners, for profit. An example of an implied partnership is when one person has held themselves out as a partner and another has relied on that representation.
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Partnerships are not taxable entities
A partnership is not a taxable entity under federal law. This means that there is no separate partnership income tax, as there is a corporate income tax. Instead, income and losses from the partnership are divided among the partners, and each partner reports and pays taxes on their share on their individual tax returns.
The IRS treats partnerships as "pass-through tax entities". This means that all of the profits and losses of the partnership "pass through" to the partners, who pay taxes on their share of the profits or deduct their share of the losses on their individual income tax returns. Each partner's share of profits and losses is usually set out in a written partnership agreement. As a pass-through business entity owner, partners in a partnership might be able to deduct 20% of their business income with the 20% pass-through deduction established under the Tax Cuts and Jobs Act.
Although the partnership itself doesn't pay income taxes, it must file Form 1065 with the IRS. This form is an informational return the IRS reviews to determine whether the partners are reporting their income correctly. The partnership must also furnish copies of Schedule K-1 (Form 1065) to the partners. This form reports each partner's share of income and loss.
For example, suppose Andre owns 60% of a partnership and Jenya owns the other 40%. Andre will be entitled to 60% of the partnership's profits and losses, and Jenya will be entitled to 40%. Partners can deduct half of their self-employment tax contribution from their taxable income, which lowers their tax bill. They report their self-employment taxes on Schedule SE, which they submit annually with their personal income tax returns.
Partnerships can be expressly created or arise by implication or estoppel. An express partnership is a partnership intentionally created and recognized, orally or in writing. A partnership agreement may include the name of the business, the capital contributions of each partner, profit sharing, and decision-making. An implied partnership arises when the behaviour of the parties objectively manifests an intention to create a relationship that the law recognises as a partnership. For example, the Galleria argued that shared profits and control with other Big Easy Companies made them an implied partnership.
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Tests exist to determine whether a partnership exists
The existence of a partnership is a complex question that can be difficult to answer. While most partnerships are expressly created, they can also arise by implication or estoppel, where one has held themselves out as a partner and another has relied on that representation. This means that partnerships can come into existence quite informally and even accidentally.
The law recognises a partnership as a catch-all term for a large variety of working relationships, and uncertainties often arise about whether a particular relationship constitutes a partnership. The chief drafter of the Uniform Partnership Act (UPA, 1914) explained that:
> All other business associations are statutory in origin. They are formed by the happening of an event designated in a statute as necessary to their formation.
To reduce uncertainty, tests have been established to determine whether a partnership exists. These tests are important because they clarify the nature of the relationship and the associated rights and responsibilities of the parties involved. For example, in litigation, the Uniform Partnership Act requires that lawsuits to enforce a partnership contract must be filed in the name of all partners, and to sue a partnership, each partner must be named and sued.
The three elements of a partnership are:
- The association of persons;
- As co-owners;
- For profit.
The true test of a partnership examines the relevant facts to determine the real relationship between the parties and identify the presence of a partnership. This includes looking at:
- Agreement: There must be a specific agreement between the partners.
- Profit-sharing: While this is not conclusive evidence of a partnership, it is a strong indicator.
- Mutual agency: This means that the actions of any partner will bind all the other partners.
Courts will also consider various other factors that signify collaboration between individuals in a business venture, including:
- Sharing of profits and losses: This is a critical indicator of a partnership.
- Sharing of management responsibilities: Joint decision-making and operations reinforce the idea of a partnership.
- Monetary investment: The amount each partner invests indicates their level of commitment and interest in the business.
- Type of business: The nature of the business itself and the relationships and expectations between the parties are important considerations.
- Contribution: The contribution of money, property, knowledge, skills, or other assets used in the business.
- Joint property interest: A mutual right of control or management of the enterprise.
In summary, determining the existence of a partnership is a complex question that requires a consideration of multiple factors. The most important factor is the real intention of the parties, as determined by their conduct and the substance of their relationship.
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Implied partnerships can be suggested by actions
For example, in the case of Loomis v. Whitehead, the failure to comply with the statute meant that the business was unable to file a suit to enforce its contracts. This suggested that an implied partnership existed.
In another case, BEC Dallas was sued by the Galleria, which claimed that BEC Dallas and its related corporations were operating as an implied partnership. The Galleria argued that profits of individual restaurants were funnelled into two of the corporations under the guise of management and license fees, and then paid out as dividends to the major shareholders of the corporations. The court found that the individual restaurants received specific administrative services in return for their management fees.
In a case involving a law firm partnership, the court held that based on the conduct and implied agreements among the partners, one partner was bound by the Lerner David Partnership Agreement (LDPA) despite having refused to execute it. The trial judge found that the partner's actions, such as making pleas to have the LDPA changed and attempting to exit the firm prior to the commencement of the LDPA, demonstrated his understanding that he would be bound by the terms of the final document.
To determine whether an implied partnership exists, courts will evaluate the formation of the partnership without considering the parties' subjective intent. Factors that may be considered include:
- Receipt or right to receive a share of profits of the business
- Expression of an intent to be partners in the business
- Participation or right to participate in control of the business
- Sharing or agreeing to share losses of the business or liability for claims by third parties against the business
- Contributing or agreeing to contribute money or property to the business
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Frequently asked questions
An implied partnership is a partnership that is not expressed but suggested or implicated. It can be apparent from the actions of the parties but not written or spoken.
An express partnership is formed through an explicit agreement between two or more parties. In contrast, an implied partnership does not require an express agreement and can be created accidentally or informally.
In an implied partnership, each partner is considered an agent of the partnership, with the authority to bind the firm through their actions within the usual course of business. This means that the firm can be held liable for the actions of its partners, even if they were not expressly authorized.
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