Is There a Partnership? Who is a Partner?
Lewis resolves disputes over ownership of a partnership, including whether a partnership exists, whether a person or is not a partner currently, whether the partnership has ended or been dissolved, and whether the partner has ended or been dissolved, and whether or not the partner has withdrawn.
Partnerships may be created without formality. The formation of partnership creates unlimited liability of each partner for the liabilities of the partnership.
Experience shows that a dispute about whether a partnership exists, and whether a person is or is not a partner, often springs from two factors.
One factor is that absolutely no formalities are required to form a partnership with the result that there may be no definitive writing. While parties in business arrangements often do not reach a clearly stated and mutually held understanding about their legal relationship, at least some writing must be filed for record to create a corporation or LLC. None is required by a partnership.
The second factor leading to partnership disputes is that the partners have unlimited liability for the debts of a partnership. It may be very easy to join the partnership, but then very difficult to avoid the debt. Conversely, it may easy to claim to be a partner when the prospect of profits arise. Like other business disputes, money, either as profit or loss, often drives partnership disputes.
Typical partnership disputes include:
- In losing business operations, one business person or a creditor may seek to characterize a business relationship as a partnership in order to find a deep pocket to share in the loss. A personal injury tort claimant is one such example.
- Partner status may matter when a person is injured on the job, since an employee may be covered by worker’s compensation and a partner may not be.
- Tax motivations often surround ambiguous business relationships.The different tax treatment of a partner versus a stockholder may be very material.
- The lack of clarity in the relationship may spring from happenstance. For example:
- Two buddies buy a piece of property without deciding if they are joint owners or partners. A partner can bind the partnership. A joint owner cannot bind the other.
- A sole proprietor parent may go into business with his children. When the business has either exploded, imploded, or become a source of intolerable friction between them, the difference between whether the business is a sole proprietorship or a partnership may include or exclude the children from the profits or liabilities of the business.
- A husband and wife may have run a business for years and are now splitting. Who has the right to control the business until the divorce judge rules?
- Partnership ownership disputes may arrive in very sophisticated financings, including debt securitization and real estate investment partnerships.
- Some people just fall into partnerships because it was easy to do – “let’s be partners”, no lawyer was required so they could start conducting business without thinking about anything down the road other than trying to make a profit.
Partnership law developed as judge-made law but has been largely replaced by state statutes.
Partnership law developed prior to the rise of the modern corporation. In the past, substantial commerce was conducted in the form of a partnership. It was not that long ago when the largest law and accounting firms in America were partnerships.
Unlike the limited liability company, which is constantly evolving legally, partnership law tends to find its roots in the past with some gradual evolution over time. Various statutes intended to make partnership law uniform across the various states have harmonized imperfectly the laws of the various states. Alabama has adopted a variant of such a uniform law.
What is a partnership?
A partnership is an association of two or more persons to carry on as co-owners a business for profit. A partnership may be formed whether or not the persons intended to form a partnership.
How is a partnership usually formed?
A partnership may be formed whether or not the persons intended to form a partnership. There must be some agreement, express or implied, to share profits and losses.
A general partnership is usually formed by agreement, either written or unwritten. Where there is an agreement, unless otherwise prohibited by the statute, the agreement will prevail and only gaps in the agreement will be filled by the statute.
By statute, aperson who receives a share of the profits of the business is presumed to be a partner in the business unless the profits were received:
- In payment of a debt.
- For services as an independent contractor or for employee.
- As rent.
- As an annuity, retirement, or health benefit related to a deceased or retired partner.
- In turn for the sale of goodwill or property.
Any person who, by words or conduct, purports to be a partner, or consents to being represented by another as a partner, is liable to a person who, relying on the representation, enters into a transaction with the actual or purported partnership.
Withdrawal of a partner and dissolution of a partnership.
In partnership law, when a partner leaves a partnership, that is called a disassociation.
A partner may be disassociated from a partnership for any number of reasons under varying circumstances.
Often, a partner may choose to voluntarily withdraw, which he can do, even contrary to the partnership agreement, by giving notice to the partnership. The disassociation of a partner may also occur in a number of different ways including upon the occurrence of an event stated in the partnership agreement, upon expulsion pursuant to the partnership agreement, or upon expulsion by the unanimous vote of the other partners.
Disassociation of a partner may result in a forced buyout at the fair market value of the disassociated partner’s interest.
Dealing with the law in partnership disputes can be tricky territory, with many different ways partnerships come about as well as varied methods to resolve the issues. Lewis can help guide partners through the proper course of action in resolving disputes.