McBride Law Blog

General Partnerships Part II: Formation of a General Partnership

McBride Law Blog

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In the previous post of this series, we talked about general partnership and one of their most fearful characteristics.  So if general partnerships exist, how do courts and others know?

Statutes often state that a partnership is an association of two or more persons to carry on as co-owners of a business for profit whether or not it was intended.  Unlike other business entities such as LLC or corporations, which require the filing of certain forms with the secretary of state, no formalities are required to form a general partnership.  In addition, a partnership agreement need not be in writing and may be either express or implied by the conduct of the parties.  Therefore, a general partnership can be created unintentionally when the parties do not necessarily intend it to be a partnership

So if looking for a written partnership agreement or asking the purported partners if they are partners does not lead to a definitive answer, how do we know if a partnership exists?  Generally, if a person receives a share of the profits, that is usually adequate evidence that he or she is a partner in the business.  Of course, no such inference can be made where profits were received as payment, such as debts, wages, rent, interest on a loan, etc.  Likewise, not all situations where persons share profits are deemed to be a partnership.  For example, co-ownership of property is not, by itself, a partnership, even if the co-owners share profits from the use of the property; sharing of gross returns or revenues does not, by itself, establish a partnership, regardless of whether the persons sharing the returns or revenues have a joint or common interest in such property.  Instead, what matters is the intent of the parties.  And if the intent is not written the courts will look at how the parties acted.

Here are some factors to help determine whether a partnership exists:

Receipt or right to receive a share of profits;

Expression of intent to be partners;

Right to participate in control of the business;

Sharing of losses or liability for claims by third parties against the business; and

Contributing money or property to the business.

For example, in Howard Gault and Son v. First National Bank, [1] an old Texas case, the parties entered into a written farming agreement that expressly said that it was not a partnership.  At the same time, the agreement provided for a sharing of both profits and potential losses, as well as expenses, equally.  The court said that the statement denying a partnership was not enough on whether a partnership was formed, but it was the intent to do what in law creates a partnership, even with their expressed purpose.  Thus, based on the receipt of a share of profit and other factors, the court determined that the farming operation was indeed a partnership.

But didn’t the partners say they weren’t partners?  This is why it is important for business owners to understand what a general partnership is, as well as its legal effects. Stay tuned because our next post will look at some of the repercussions of forming a general partnership, starting with the liability of partners to third parties.

[1] Howard Gault and Son v. First Nat’l Bank, 541 S.W.2d 235 (Ct. App.—Amarillo 1976, rehearing denied).

 

This posting is intended to be a tool to familiarize readers with some of the issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer Thad Zajdowicz.

About the Author

Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call (214) 418-0258.

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Posted In: Partnerships, Personal Liability

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.


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