Business Associations Outline

Partnerships

Generally governed by Uniform Partnership Act, which proposes the following problems:

A partnership can be formed by conduct, rather than conscious decision
If you share risk and share control can be treated as partner absent explicit agreement.
Once a partnership is created, each partner shares losses with unlimited liability.
So, best to have partnership agreement

Textbook pp.91-101, 109-115, 132-135, 140-142, 179-183

Partners Compared with Employers

ü A partnership is not formed by merely agreeing to share business profits

Fenwick v. Unemployment Compensation Commission
Facts: Clerk is given bonus if business makes a profit. Terminated after three years and sought unemployment compensation.
Issue: Whether woman, who had worked as a cashier and reception clerk at a beauty shop, and then when wanted a raise, entered into a “partnership” agreement, which fixed compensation to include 20% profits as well as weekly salary, leaving Fenwick, the operator, with complete liability, should be considered a partner or an employee for purposes of unemployment compensation law? (Fenwick wanted her to be a partner, so that he did not have pay in unemployment compensation for his business). Lower court decision found that a partnership existed because they referred to each other as “partners.”
Holding: Crt found no p’ship because D was in sole control of the business. A partnership has not been established, and the agreement between these parties in legal affect, was nothing more than one to provide a method of compensating the girl for the work she had been performing as an employee.
Reasoning: When a person has no control in the operation of the business, did not contribute any capital, and is not subject to losses, and the agreement, for the most part, does nothing more than provide a method of compensation, they are an employee. She got nothing by the agreement but a new scale of wages. Essentially the agreement lacked the element of co-ownership.

NOTE: COURTS WILL LOOK BEYOND THE LANGUAGE OF THE AGREEMENT TO DETERMINE THE TRUE NATURE OF A BUSINESS ASSOCIATION.

NOTE: Sharing of profits is not legally essential, b/c 3rd parties don’t care

Profits: à capital contribution is NOT required to make partnership (distinguish from corporation) à and there is no law on how to share profits, presumably there is an equal split unless otherwise mentioned (401(b)).

Risks:Divided according to each partners assigned shares of the profits (401(b)).

In determining whether a partnership exists, courts look at

1. Intention of Parties (in Fenwick, the agreement was seen as evidential, not conclusive, based on testimony that suggested the agreement was intended to secure that clerk would not leave, basically it was a written raise)
2. Right to Share in Profits (This clearly existed here, but this element alone is not considered exclusive in Fenwick)
3. Obligation to share in Losses (did not exist here)
4. Ownership and Control of Partnership Property and Business (held that Fenwick contributed all capital and Ms. Cheshire had no right to share in capital upon dissolution).
5. Community of Power in Administration (agreement gave exclusive control to Fenwick).
6. Language of Agreement (although the term “partner” is used, the agreement held to exclude Ms. Cheshire from most ordinary partner rights and responsibilities).
7. Conduct of Parties towards third persons (here, did file partnership income tax and held themselves out as partners to Unemployment Compensation Commission, but otherwise, they held themselves as partners to no one else, such as registration of trade name, etc). “if you act like a partner, you may be treated as one”
8. Rights of Parties on Dissolution (here, Ms. Cheshire has the same rights as if she would have quit employment, everything reverted to the way it was prior to when she had started).

If no express agreement, default rule is to look at profits. If no profit agreement, then we assume equal allocation.

UNIFORM PARTNERSHIP ACT (§ 202) (1997)

(a) Excepts as otherwise provided in (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership. FORMED BY CONDUCT NOT BY INTENT
(b) An association formed under statute other than this Act, a predecessor statute, or a comparable statute of another j° is not a partnership under this Act
(c) In determining whether a partnership is formed, the following rules apply:

1. Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.
2. The sharing of gross returns does not by itself establish a partnership even if the persons sharing them have joint or common right or interest in property from which the rights are derived.
3. A person who receives a share of profits of a business is presumed to a partner, unless the profits were received in payment:

i) of debt by installments or otherwise;
ii) for services as independent contractor or of wages or other compensation to an employee;
iii) of rent;
iv) of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner;
v) of interest or other charge on a loan, even if amount of payment varies with the profits of a business
vi) for the sale of the goodwill of a business or other property by installments or otherwise.

Partners Compared with Lenders

Analysis for bank as partner:

1. if only sharing profit in receipt of something owed, than not a partner [§ 202(c)(3)(i)]

2. Does bank share risk? Maybe if biz fails

3. Does the bank share control? Look at case by case basis because maybe some control but also might have some expertise to offer small business

à If sharing some control, could be held to be a partner, but unusual to do so for policy reasons.

· Generally, we don’t consider lenders as partners
· § 202(c)(3)(i): A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment of:
(i) of a debt by installment or otherwise
· Public Policy Banks won’t lend if they face P’ship liability for simply trying to protect their investment
· if banks are held out as partners, their liability increases and there is less incentive to lend
· A Partnership is created through conduct, irregardless of a P’ship Agmt

ü A loan agreement that allows for sharing of profits as repayment does not establish a apartnership absent intent

Martin v Peyton
Facts: Group of lenders lent P’ship a great deal of money. Gets sued by creditors, who claim that defendants are partners, and therefore liable for the debts of the firm. Defendant claims he only made investments and that they were creditors, not partners. Subject to the Note, the lenders retained the power to

retain 40% of profits
be advised as to the conduct of the business
inspect the books and veto any business transactions that may be speculative or injurious

Holding: The lenders were not considered partners because they did not retain the

ability to initiate any transaction as a partner could or
bind the firm by any action of their own
§ 9(1) & § 301(1) Partner Agent of P’ship provides partners the power to bind the P’ship

In this case, the Court found these provisions to be proper lender safeguards and precautions for their loan, not the level of control required for finding of a partnership. Additionally, their company funded life insurance policies and agreements to ensure value of securities was also deemed to be within their capacity as lenders

The risk of liability for Peyton and co. would have been avoided if the law firm had been organized as a corporation. Under that form of organization, the equity investors (the counterparts of partners) enjoy “limited liability” – that is, they are not personally liable for the debts of the firm and therefore stand to lose only the amount they have invested in it. Thus, even if the purported lenders had been treated as shareholders, they would have been shielded from the personal liability that the creditors sought to enforce. The same would