Joint Ventures/Partnerships

Either individual entrepreneurs or business entities can form a partnership. It is important to notice that partnership can be formed explicitly by entering in the partnership agreement, which is certainly recommended way of doing business, or by default.  When more than one person is operating a business without undergoing legal formalities, the law views such relationship as a general partnership and prescribes certain duties and liabilities to the partners by default. In other words, if two or more people run a business without taking the steps to incorporate, the law automatically views them as general partners. The legal test for determining if a partnership has been formed asks whether two or more persons associate as co-owners of a business for profit. This definition means that a partnership can come into existence simply based on the parties’ acting as partners even without a contract. Let me provide some legal precedents as examples

UPA §7(4): “Receipt of a share of profits is prima facie evidence” that a partnership exists, unless … to substitute salary or to pay interest on a loan

Fenwick v. Unemployment Comp. Comm.  - Beauty shop owner made an agreement with a secretary. Court decision - agreement was nothing more than fixing compensation. To render the decision the court considered

·                    Intent of the parties

·                    Profit sharing

·                    Loss sharing

·                    Control of the business

·                    Name of the business

·                    How the parties were holding out themselves to the public

Martin v. Peyton - friends lent money & got shares as collateral for the loan

·                    Profits sharing? Yes, but to cover the interest on the loan

·               Control? Yes, but limited, just to make sure the business doesn’t go bankrupt, such as having veto rights & inspection rights, but not controlling daily operations

Court decision – they were not partners. The court explicitly stated that there is a “significant difference between lenders and partners”

Southex Exhibitions v. RIBA - organized shows on a temporary basis

·                    Profit share-55% to Southex, 45% to RIBA

·                    Loss share-Southex only

·                    Control-Mainly Southex (dates and ticket prices were mutually determined)

·                    Holding out to 3^rd parties (including IRS) - No

·                    Name on contract - only “Agreement”, not “Partnership Agreement”

·                    Term - 5 years and then renewable with mutual consent

·                    Other - Southex said it wanted “no ownership”

Court decision – no partnership.

Young v. Jones (brokerage firms)

Partnership by estoppel (UPA § 16):  When a person… represents himself… as a partner in an existing partnership… he is liable to any such person to whom such representation has been made, who has on the faith of such representation given credit to the actual or apparent partnership….

Just as the law views a general partnership as a default category, the law establishes certain default rules for governing a partnership when it exists without a partnership agreement. Those default rules often do not reflect the best interests of the partners but legally bind them when they have not established their own. For example, the partners in a general partnership share equally in the profits remaining after all liabilities are satisfied. This means that even if one partner does ninety percent of the work and invests ninety percent of the capital in the venture, the profits of the company still must be divided on a fifty/fifty basis absent an agreement to the contrary. The parties can always overwrite these general legal principles by entering into a formal written partnership agreement. This agreement is usually a detailed all-inclusive document, which stipulates present as well as future relationships between the partners and between each partner and the business. If there is a dispute between the partners, this agreement is the first document attorneys and courts are looking into. Accordingly, it should be carefully drafted and reviewed by an experienced business attorney.

Let’s review the duties and obligations of each partner in the partnership.

1.                  Partners are co-agents of each other, meaning they owe fiduciary duties to other partners as well as to the partnership;

2.                   Partners are co-principals, meaning they decide jointly how to run the business, are jointly & severely liable for partnership debts

3.                  A duty of loyalty to the partnership and the other partners, but it is limited to the following (a) to hold as trustee any property, profit or benefit derived by the partner in the conduct of the partnership business or derived from a use of partnership property, including the appropriation of a partnership opportunity; (2) to refrain from acting against the partnership on behalf of an adverse interest; (3) to refrain from competing against the partnership.

4.                  A duty of care, but it is limited to refraining from engaging in grossly negligent or reckless conduct.

5.                  A partner shall discharge the duties to the partnership and exercise any rights consistent with the obligation of good faith and fair dealing

And now the rights partners have (the default rule, can be overwritten by the agreement).

1.                  The proceeds should be fairly distributed between all partners after all obligations are met; and all partners must contribute towards the losses sustained by the partnership according to his share in profits.

2.                  All partners have equal rights in the management and conduct of management business

3.                  No person can become a member of a partnership without the consent of all the partners

4.                  Any difference arising as to ordinary matters connected with the partnership may be decided by a majority of the partners; but no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners

Dissolution

Dissolution sounds like the end of business, but it’s not…

Merely the end of the particular arrangement between the partners

Business can continue if:

·                    Bought by a partner or third party

·                    Dissolution was “wrongful” and business continued by other partner

Effect of dissolution – partners have no authority to act for the partnership (other than acts to wind up the business), but can still bind partnership in certain circumstances (e.g. a 3^rd party didn’t know about dissolution)

Possible causes of dissolution:

·        End of definite period or completion of undertaking (no violation of agreement)

·        At will if no definite period or particular undertaking (no violation of agreement)

·        Mutual agreement (no violation of agreement)

·        Bona fide expulsion (no violation of agreement)

·        Event making the carrying on of business unlawful (no violation of agreement)

·        Death (no violation of agreement)

·        Bankruptcy of partner or partnership (no violation of agreement)

·        Court order under § 32 (lunacy, incapacity, prejudicial conduct, willful or persistent breach (or really bad conduct), business a loser) (no violation of agreement by petitioner)

·        At will even if definite period or particular undertaking (violation of agreement)

Does it matter whether dissolution was wrongful, i.e., in violation of agreement? Yes, because

·        Non-wrongful dissolver can have damages for breach

·        Non-wrongful dissolver has right to continue business (but must cash out wrongful dissolver for the value of its share less damages caused by wrongful act)

What distinguishes a partnership from a corporation? Unlimited liability, taxation, limited lifetime, centralization of authority, transferability of claims, standardization vs. tailoring.