When there is no express partnership agreement, what governs the operation of the partnership?
What is a partnership?
The Partnership Act of 1890 defines a partnership as the relation that exists between persons carrying on a business with the common aim of acquiring profit. Subsequently, the existence of a partnership is a matter of fact not law. The mere labelling of certain transactions as a partnership does not establish a partnership in law if there is no business being carried out with the aim of gaining profit. More importantly, a partnership comes into existence through a continuous relationship. The courts will thus consider the substance of the arrangement and not the basic intentions outlined by the parties when considering whether a partnership exists.
It is also important to note that a partnership is not a separate legal identity. Hence it is a collection of its partners. Further, partnership contracts are made with the partners that have joint and several individual responsibilities for the partnership’s liabilities. The acts of one partner, in the name of the partnership, are also binding on all of the partners.
Unincorporated partnerships
The law that relates to unincorporated partnerships could be complex and may be problematic if one does not have the chance to draft a current partnership agreement. When there is no express partnership agreement, what governs the partnership is the law in place, for instance the Partnership Agreement 1890. However, it is unlikely for it to reflect the terms that the parties want to apply to their partnership. For example, the Partnership Act:
- Assumes the equality of the capital contributions and sharing of losses and profits when there is no express partnership agreement.
- Assumes that all the assets of the partnership have been contributed to by and are property of all the partners equally. The preceding is often not the case in practice but one needs a partnership agreement to prevent the application of such terms.
- Contains various provisions regarding the operation of the partnership that will be implied when there is no express partnership agreement.
- Is restricted in scope and treats all the partners as equals when there is no express partnership agreement.
- Is outdated and thus does not meet the modern-day needs of business practices often used in today’s partnerships.
Creation of a partnership in general
The common ways of forming partnerships are in writing and orally. Such partnerships are referred to as express partnerships. When there is no express partnership agreement, the applicable law is the existing law governing partnerships. For instance, there are three persons that have decide to establish a partnership to run a certain car dealership. Dan contributes $ 250, 000. Baker contributes space and building where the business operates. Caleb contributes his services and offers to manage the dealership.
The main question will be whether there exists an express partnership agreement or not. From the discussion, an agreement is not necessary to spell out the duties and rights among themselves. Nonetheless, there has to be an agreement to spell the duties and rights among themselves.
The agreement itself is a contract and should follow the principles and rules outlined. The preceding id unlike when there is no express partnership agreement. Further, since an express partnership contract is intended to govern the relations of the partners toward themselves and their business, every partnership contract should set forth clearly certain terms that include:
(1) the name under which the partners will do business
(2) the names of the partners
(3) the nature, scope, and location of the business
(4) the capital contributions of each partner
(5) how profits and losses are to be divided
(6) how salaries, if any, are to be determined
(7) the responsibilities of each partner for managing the business
(8) limitations on the power of each partner to bind the firm
(9) the method by which a given partner may withdraw from the partnership
(10) continuation of the firm in the event of a partner’s death and the formula for paying a partnership interest to his heirs
(11) method of dissolution.
Written versus oral agreements
If a business transaction cannot be performed within one year from when the agreement is entered into, the agreement should be in writing. The preceding aids in avoiding invalidation under the statute. This mostly happens when there is no express partnership agreement. The majority of the partnerships even lack a fixed term. However, the same applies to partnerships that are formed at will hence there is no express partnership agreement.
Creation of implied partnership
An implied partnership exists when in fact there are two or more persons carrying on a business as co-owners for profit. They especially apply when there is no express partnership agreement. For example, Ken decides to paint houses during his summer break. He gathers some materials and gets several jobs. He hires Kandy as a helper who decides what jobs to do and how much to charge. Eventually Ken and Kandy split the profits. They have an implied partnership, without intending to create a partnership at all. Hence the Act will apply since it falls under instances when there is no express partnership agreement.
Tests of the existence of partnerships
There has been a question on how one knows whether an implied partnership has been formed when there is no express partnership agreement. Partnerships can exist informally without any formalities. They can also be created accidentally hence falling under instances of when there is no express partnership agreement. Unlike a company which must be established based on the existing statute, a partnership relates to many transactions. Hence uncertainties on its formal existence especially when there is no express partnership agreement. The law comes in handy ins such instances and reduce uncertainty to the price of severely restricting the partner’s flexibility.
All other business associations are statutory in origin except when there is no express partnership agreement. They are formed based on an event designated in a statute as necessary to their formation. In corporations, the preceding act may be a charter problem. Hence can only be solved by the proper officer of the state. More often in limited partnerships, the filing by the associates of a specified document happens in a public office. The preceding is unlike when there is no express partnership agreement.
On the other hand, various combinations of circumstances may result in co-ownership of a business. Partnership serves as the residuum, including all forms of co-ownership, of a business except those business associations organized under a specific laws or regulations.
Aspects governed by statute in the absence of partnership agreement
- Co-ownership
When there is no express partnership agreement, statute governs the operation of the partnership. If two or more people own a business, including assts, contracts with agents and employees, debts, and income streams, then a partnership exists. Some of the businesses remain ungoverned since no express partnership agreement is drafted. Hence the need for the Partnership Act in place to govern such transactions.
Co-ownership comes in various forms such as joint tenancy, tenancy in common, tenancies by entireties, and community property. Some of the aspects that statue governs when there is no express partnership agreement include joint tenancy and tenancy in common. In joint tenancy, the parties own the property in question under a single instrument, such as a deed. If one of the owner dies, the others automatically become owners of the deceased’s share, which does not descend to his heirs. The preceding is a clear expression of instances when there is no express partnership agreement.
On the other hand, in tenancy in common the surviving tenants do not take the deceased’s share. Every tenant in common has a distinct estate in the property. The tenancy by the entirety and community property forms of ownership are restricted to spouses, and their effects are similar to that of joint tenancy. This is thus a demonstration that statute fills in when there is no express partnership agreement.
- Sharing of profits
When there is no express partnership agreement, statute governs the transactions. Hence in instances where a partnership exists and there is no express partnership agreement, statute takes over. Hence the applicable statute governs instances where partnerships’ business demand the sharing of profits. However, when there is no express partnership agreement and a partnership exists, statute may intervene of or not.
- Other Factors
When there is no express partnership agreement, statute may fill in in various aspects. Such include the right to participate in decision-making and the manner of operations and transactions of the partnership. Further, when there is no express partnership agreement, statute in pass-through entities demand that the ta returns be submitted by partnerships that are bound to report their incomes. The statute may also require an information return. Hence an agreement between people to carry on business for profit purposes.
References
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