PARTNERSHIP
66. In General. A party may trade and enter into contracts by himself, or he may associate with himself others. A person is not obliged by law to transact business solely by himself. He is permitted, for the purpose of having labor, capital and skill joined in one enterprise, to combine with others. Where a person joins with himself one or more persons for the purpose of transacting business as a unit, the firm composed of the two or more persons thus joined is called a partnership.
A partnership may be defined to be a contract between two or more persons, by which their labor, skill or property is joined in an enterprise for common profit, and in which each partner may act as principal. The principal features of a partnership are, the right of each partner to act as principal for the other partner, and the individual liability of each partner for the acts of the partnership. A and B agree to combine their efforts in operating a tea and coffee store. Each may bind the other by contract, made within the scope of the business, and each is liable individually to pay the debts incurred by the partnership.
67. How a Partnership is Created. A partnership is created by a contract. This contract may be oral, express or implied. Many partnerships are created by carefully drawn, written instruments, in which the rights and duties of each party are set forth in detail; while others are made by oral agreement. Any contract of importance should, for the purpose of having a record of the exact understanding of the parties, be made in writing. As between themselves, parties cannot be partners except such was their intention. Sometimes, parties are considered partners as to third persons, with whom they deal, and are liable as partners, where there is no intent to form a partnership, and when none exists as between themselves. This relationship, called partnership by estoppel, is based on equitable reasons and is discussed more at length under a separate section. As between the partners themselves, to constitute a partnership, there must be a contract to that effect. This requires an assent on the part of all the parties, based upon a valid consideration. Parties may enter into an agreement to enter into a partnership at a future time. In this event, the partnership does not exist as such until the time provided for in the contract arrives, and until the conditions of the executory agreement have been complied with.
A partnership may be created for any lawful purpose. If the partnership contract is procured through fraud or misrepresentation, it may be avoided by reason thereof.
68. Who May be Partners. Any person competent to contract on his own behalf may enter into a contract. (See "Competency of Parties," chapter on Contracts.) An infant, or person under legal age, may enter into a partnership contract the same as he may enter into any other contract. The law does not prohibit it. But contracts by infants are voidable. They may be renounced by the infant at his pleasure. For example, if A, of legal age, enters into a partnership contract with B, seventeen years of age, B may renounce his obligation to A at any time he pleases, before he has reached legal age. A, however, cannot renounce his partnership contract on account of the infancy of B. B may ratify his contract after becoming of legal age. If B, after becoming of legal age, refuses to continue the partnership, and refuses to carry out his partnership agreement, he is deemed in law to have renounced his partnership, and is not liable for the obligation of the partnership. If, however, after reaching legal age, B continues the partnership relationship for an appreciable length of time, he is deemed in law to have ratified the agreement, and is thereafter liable thereon. B may not only renounce the partnership agreement as to his partner, A but also as to third persons dealing with the partnership. A, however, is responsible individually upon the partnership contracts with third persons, and cannot take advantage of B's infancy. It is no defense for him.
Drunken persons, insane persons, and idiots cannot enter into partnership agreements. A married woman could not enter into contracts at common law, but by statute is now permitted to make contracts, with a few minor limitations, such as acting as surety for her husband, or making contracts with her husband.
69. Partnership Name. The members of a partnership may use any name they desire, so long as the name does not interfere with the fixed rights of others. The members of a partnership may use the name of one of the partners, or the combined names of all, or of a part of the partners, or a name separate and distinct from the names of any of the partners. For example, if A, B, and C form a partnership, they may use as a partnership name, "The A Co.," "The A, B, Co.," "The A, B, C Co.," "The X Co.," or any fictitious name they may determine upon. Some states provide by statute, that a partnership using a name not revealing the individual members of a partnership, must, in order to sue in the partnership name, file with a county official the names of the members composing the firm. Other states by statute prohibit the use of fictitious names.
A partnership cannot be bound by any other name than its own. Where a partnership has adopted a firm name, contracts made in the name of one of the individual members do not bind the partnership. A partnership may change its firm name. This may be done by agreement, express or implied. If the members of a partnership do not expressly agree to change the name, but a new name is used by one or more of the members, and the change is acquiesced in by the other members, they are deemed in law to have agreed to the new name. A partnership may use two firm names. This sometimes occurs when a firm has branches. One name is used for one branch and another for the second branch. In this event the partners are liable for contracts made in either name.
70. Names Applied to Different Kinds of Partners. Depending upon the nature of their relationship to the partnership, partners are said to be secret, silent, ostensible, nominal, or dormant.
A secret partner is one who keeps the fact of his membership in the partnership from the public. This does not enable him to escape liability as a partner. He is in the position of an undisclosed principal. (See "Undisclosed Principal," chapter on Agency.) So long as a secret partner keeps the fact of his membership from the public, of course he will not be sued as a member. But his liability exists in spite of this secret, and when discovered his liability may be enforced.
A silent partner is one who takes no active part in the operation of the partnership business. His name may be known as a partner, or not. He is not necessarily a secret partner. He may be well known as a member of the partnership, but if he takes no active part in the management, he is said to be a silent partner. A silent partner is individually liable for the obligations of the partnership, the same as any partner.
An ostensible partner is one who permits himself to be held out or represented as a partner, when in fact he is not a partner. He is responsible as a partner to third persons who deal with the firm, and to whom he has been held out as a partner. For example, A and B trade as the Rodway Co., A in company with C, tries to buy goods of D. D knows C but does not know A and B. A with C's consent, tells D that C is a member of the Rodway Co. C is liable as an ostensible partner. More commonly the ostensible partner permits his name to be used as a part of the partnership name when in fact he is not a member of the partnership. If A and B form a partnership and with C's consent use the name, "A B and C Co.," C is liable on the partnership obligations, in spite of the fact that as between himself and A and B, he is not a partner. If a partner is advertised to third parties as such, without his knowledge or consent, he is an ostensible partner, but is not liable as a partner.
A nominal partner is one who permits his name to be used as a member of the partnership without being a member of the partnership. Ordinarily he is paid something for the use of his name, but does not have a share in the profits. A nominal partner is liable to third persons as a partner, but as to the other partners, he does not have the rights or liabilities of a partner.
The term, dormant partner, is sometimes used synonymously with secret partner. Technically, it means that the partner is both unknown and silent. It combines the elements of a secret and a silent partner.
The terms, general and special partner, are commonly used. By general partner, is meant the one who shares equally in the profits and losses of the partnership transactions. The term, special partner, means that the partner, as between the other partners, does not share equally in the profits, nor is he responsible to the other partners for an equal share of the losses. As to third persons, the terms general and special partners have no significance; for example, if A, B and C enter into a partnership, A and B each to furnish two fifths of the capital, and each to have two fifths of the profits, and C is to furnish one fifth of the capital, and receive one fifth of the profits, A and B are general partners and C is a special partner. As to third persons dealing with the partnership A, B and C, each are individually liable.
71. Partnership Agreements as between Partners. In considering the question as to whether a partnership exists, it must be regarded from two points. First, is there a partnership as between partners; second, is there a partnership as to third persons? A partnership may exist as between the partners themselves. When a partnership exists between the partners themselves, there can be no question about its existing as to third persons.
As between the partners themselves, a partnership cannot exist unless there is a contract express or implied, by which they mutually agree or consent to the partnership. If A and B agree, either orally or in writing, to engage in a partnership enterprise, and do so engage in a joint business, a partnership exists between them. If A trades alone as the "A Co." and, desiring to obtain credit from B, tells B that C is a member of the A Co., even though C ratifies the unauthorized act of A, by stating to B that he is a member of the A Co., this does not constitute him as a partner to A. As to B, however, he is a partner and is liable as such. As to A, he is not a partner, and is not entitled to a share in the profits. If the intent of the parties to form a partnership, is clear, from their express agreement, or from an agreement implied from their acts or conduct, a partnership, without question, exists between them. Many business arrangements are made by which property, skill, or labor is combined under peculiar arrangements, as to the division of profits and losses, making it difficult to tell whether a partnership exists. It is not essential that the word, "partnership," be used to have an agreement constitute a partnership. If it is the intent of the parties thereto to create a partnership, one exists regardless of the term used. An agreement to share losses, or to share profits in an enterprise, is some evidence of a partnership, but is not sufficient of itself to constitute a partnership. A and B may agree each to furnish his own tools in drilling an oil well, and if a profit is made, to divide the profits, and if a loss is sustained to bear the loss out of their individual funds. These facts, do not show an intent to form a partnership, and do not make A and B partners as to themselves. If, however, A and B contribute one hundred dollars ($100.00) each to a partnership fund, and combine the tools possessed by each toward a partnership fund, and agree to share equally the profits and losses, the intention is clear that a partnership is intended, and these facts constitute A and B partners.
72. Partnership as to Third Parties. Where a partnership exists as between the partners themselves there is no question about its existing as to third persons dealing with the partnership as such. A party cannot hold himself out to the world as a partner, and by means of a private arrangement with his apparent partners, evade liability as a partner. It is generally conceded that a secret arrangement made between partners that one shall not be liable as a partner, if made known to a third person dealing with the partnership, will relieve the apparent partner from liability to such third person. For example, if A and B are doing business as the "A B Co.," and A lends his name to the company for a fixed consideration, B receives all the profits and is liable for all the debts. If C deals with the "A B Co.," not knowing of the private contract between A and B, A is liable individually upon the contract. If, however, C at the time he deals with the "A B Co.," is informed of the actual connection of A with the company, he cannot hold A liable as a partner.
If a third person extends credit to one of the partners, knowing that the purchase is for the benefit of the partnership, he can hold liable, only the party to whom he extended credit. If, however, he sells to one of the partners, not knowing that he is a partner of a firm, and the firm gets the benefit of the purchase, the firm is liable for the debt.
A partnership, like a principal in agency, is liable for the torts or private wrongs of the individual partners, committed in the course of the partnership business. If A, a member of the A B Co. partnership, uses fraud in purchasing goods, the A B Co., is liable for the fraud. If A, a member of the A B Co., gas fitters, carelessly connect a gas burner, thereby causing an explosion, and injury to C, the A B Co., is liable for the injury.
73. Powers and Property of a Partnership. A partnership has the power to transact business in its firm name. Unless prohibited by statute, it may sue and be sued in its firm name, regardless of the names of the individual partners.
Each member of a partnership is regarded as an agent of all the other members of the partnership, with authority to bind the partnership by any contract made within the scope of the partnership business. A partner may deal individually in matters outside the scope of the partnership business. For example, A, B and C form a partnership for the purpose of buying, selling and leasing real estate. A, B and C are authorized to act for each other, in doing all the things reasonably connected with the transaction of real estate business. If A orders groceries in the firm name, his partners may deny and avoid the obligation, on the ground that is is not within the scope of the partnership affairs. The grocer selling A groceries in the firm name cannot claim that B and C authorized A to buy groceries. The purchase is clearly outside the real estate business. If, however, A purchases a house and lot in the firm name and uses it personally, the seller can hold the partnership for the purchase price. A partnership is empowered to sign notes, only when necessary to the transaction of the partnership business. Partnerships may hold the title to personal property in the name of the firm. This does not prevent the individual members from holding property individually at the same time. As between the partners themselves, only that personal property mutually agreed to belong to the partnership is partnership funds. Even as to third persons dealing with the partnership, the actual agreement of the individual members as to what is, and what is not partnership funds governs, except in the case of fraud. A partnership cannot represent that it owns certain property, or that certain purchases are made for the partnership for the purpose of obtaining credit, and then claim that it is owned by an individual member. Property purchased by partnership funds, or improved with partnership funds, belongs to the partnership. Real estate purchased with partnership funds is regarded as belonging to the firm, even though title is held in the name of one of the partners. The partner in whose name the property is held is said to be the legal owner, but the partnership is the equitable owner. Firm creditors may subject it to pay firm obligations.
74. Liability of Persons Held Out as Partners. If a person permits himself to be held out as a partner, he will be bound as a partner, as to third persons dealing with the partnership with this in view. It matters not that the party held out as a partner is not a partner in fact. The real relation will protect the apparent partner, as against the other partners, but not as against third parties who deal with the firm, relying upon his being a partner. What amounts to being held out as a partner is a question of fact, which must be determined by the circumstances surrounding each particular case. If A, without authority of B, tells C that B is his partner in the shoe business and that they are trading as the "A B Co.," and C sells them an order of shoes, without investigating whether B actually is a partner, B is not liable as a partner for the obligation. The authority to hold a person out as a partner must come from the partner so held out. It may come from his assent or his neglect in denying the relationship when he learns that he is being advertised as a partner. For example, suppose A borrows five hundred dollars ($500.00) of B and promises to give B a one-half interest in his grocery business, if B so desires, on condition that B spend his afternoons working in the store, and B, not considering himself a partner, permits C to tell third persons that he is a partner. As a result, B cannot deny partnership liability as against third persons who consider him a partner in dealing with the partnership.
75. Duties and Liabilities of Partners as to Each Other. The relation of partners to each other is a contract relation. Each partner must carry out the terms of the contract. Ordinarily, partnerships require the devotion of the entire time and attention of each partner to the partnership business. Partners are not permitted to engage in any business for themselves which will interfere with the partnership business, or take their time and attention away from the partnership business. Each partner owes that duty of fidelity to the other members of the partnership. A partner as an individual may deal with the firm, and may act as agent for others in dealing with the firm, if it is with the consent and knowledge of the other partners. A partner cannot sell his interest in the firm to another, and have the new partner take his place as a member of the partnership, without the consent of the other partners. In any event, the withdrawal of one partner and the substitution of another dissolves the old partnership and establishes a new partnership. One partner may assign or transfer his interest in a partnership but this dissolves the partnership, and gives the purchaser the right to his seller's interest in the funds of the partnership. It gives the purchaser no right to participate in the management of the business.
If by the terms of a partnership agreement, the partnership is to subsist for a specified length of time, and one partner withdraws or refuses to continue, he is liable in damages to the other partners, for breach of contract. If the partnership is organized without regard to any specified duration, a partner may withdraw at will, and thus dissolve the partnership. Partners must devote their entire time and attention to the business, unless the partnership agreement provides otherwise. Each partner is entitled to an equal share of the profits. If one partner deals unfairly with another, the latter cannot bring an ordinary suit at law for recovery of the amount due him, or for his damages, but he must bring a suit in equity, setting up the facts, and must demand an accounting. The court will then determine the rights of the partners. If a partnership is dissolved, and the partners expressly agree that a certain sum is owing by one partner to another, the latter may sue the former for this amount, in an ordinary action at law.
76. Liability of Partnership to Third Persons. A partnership is liable as such, upon its contracts to third persons. This means that the obligation is in the nature of a joint one against all the partners, and not a several one against the individual partners. There is an individual liability of each partner, called a liability of each partner in solido. This liability is discussed in this section under the title, "Liability of Individual Members of a Partnership." A third person, in commencing a suit against a partnership, must sue all the partners, or be subject to the risk of having the case dismissed at the objection of the one sued. All the property of a partnership may be subjected to the payment of partnership obligations.
77. Liability of Individual Members of a Partnership for Partnership Obligations. While a suit brought against one partner for a partnership debt may be dismissed if objected to by the partner sued, if not objected to, and judgment is taken, it may be enforced against the individual assets of the partner sued. In this event, in most jurisdictions, the other partners are discharged from liability. If the partnership is sued either in the partnership name, or in the name of all the individual partners, the individual members are still liable in solido for the debt. By in solido is meant, liable for the whole. If one partner is compelled to pay all or more than his proportion of a partnership debt, he may recover the excess of his share, ratably from the other partners.
A member of a partnership may have partnership assets and individual assets. A creditor of the partnership may satisfy his claim out of the firm assets, or out of a partner's individual assets, except where there are individual creditors. In the latter event, the partnership creditors cannot subject individual partners assets to the disadvantage of the individual creditors. On the other hand, individual creditors cannot subject a partner's share in the partnership assets to the disadvantage of partnership creditors. This means that in case of insolvency of either a partner or of the partnership, firm creditors must first exhaust firm assets, and take the balance of individual assets after individual creditors have been satisfied. It means, further, that individual creditors must satisfy their debts out of individual partner's assets, and can only subject the balance of firm assets after firm creditors have been satisfied. If there are no partnership assets at all, and no solvent partners, firm creditors are treated on the same basis as individual creditors, and the individual assets of the partners are divided pro rata among partnership and individual creditors alike.
78. Change of Membership. A partnership depends for its existence upon the continuation of the same membership. If one partner withdraws, the partnership is, by that act, dissolved. If a new member is admitted, the partnership is dissolved and a new one created. A partner cannot escape his liability as a partner by withdrawing from the partnership. By this act, he terminates the partnership, and no further liabilities can be created against him except as to those persons having no notice of his withdrawal; but he is still liable for the old partnership debts. A substituted partner is not liable for the debts incurred before he enters the firm, unless he expressly assumes such debts. If he expressly assumes them, this does not relieve the outgoing partner from liability, unless this is assented to by partnership creditors. If it is borne in mind that a change in membership dissolves a partnership, and any partnership that exists thereafter is separate and distinct from the old one, and dates from the withdrawal of the retiring partner, or admission of the new partner, the individual liability of the partners is easily determined. For example, if A, B and C are partners in a dry goods business, and B withdraws, B is still personally liable for the debts of the A B C Co. The partnership ceases at the time of his withdrawal. If A sells his interest to D, who becomes a member with the consent of B and C, A is still liable to creditors who became creditors before A's withdrawal. D is not liable for the debts incurred before his admission as a partner, unless he expressly so agrees.
79. Death of a Partner. The death of a partner terminates the partnership. The remaining partners may agree to continue the partnership, which amounts to the formation of a new partnership. In case of death of one partner, title to the partnership property is in the surviving partners. They must collect the assets and may sue on firm obligations. They cannot, as survivors, continue the business further than is necessary to wind up the affairs of the partnership. They must first pay all firm obligations, and distribute the proceeds among themselves and the representatives of the deceased partner.
80. Survivorship. Survivorship is the term applied to the relation to the partnership of the remaining partners, after a dissolution. The partners remaining after a dissolution are known as survivors. The title to the partnership property vests in the survivors, and they must collect the assets, pay the liabilities and distribute the proceeds among themselves and the representatives of the other partners. By statute, in some states, surviving partners are permitted to purchase firm assets at a fair appraised valuation. Surviving partners have the right to retain possession of the partnership property, and to do those things necessary to wind up the affairs of the partnership. They are not permitted to divide any firm assets among themselves, until all firm debts are paid. If A, B and C are partners in the grocery business, and C dies, the title to the property rests in A and B, who have the authority to sue for the debts owing, and may be sued for the debts owed by the firm. They have the right to draw checks on the firm checking account, but no right to incur further obligations. In the absence of special statute, they have no right to purchase the business for themselves, and if they choose to continue it, they do so at their own individual risk, and must account for all profits made.
81. Dissolution of Partnerships. A partnership may be dissolved by lapse of time. If a partnership is entered into under an express agreement that it is to subsist for a certain length of time, lapse of the stipulated period works a dissolution. A partnership may be dissolved by mutual agreement of the partners. A partnership may also be dissolved by any change of membership, whether it be the withdrawal of a member, admission of a new member, or death of a member. Bankruptcy of a member, or bankruptcy of the partnership itself, works a dissolution. If one party violates his duties as a partner, or if for any reason, the partnership ceases as a result of a decree of court, there is a dissolution.
82. Notice of Dissolution. Persons who deal with a partnership through one of the partners, or through an authorized agent, have the right to assume that the partnership will continue to exist. If a partnership is dissolved by lapse of time, by mutual agreement, or by withdrawal or entrance of another partner, notice must be given of such change, to protect the members of the former partnership against contracts of third persons, made subsequently to the dissolution. Business people, who have had former dealings with the partnership, must receive actual notice. These notices may be sent by mail, or delivered orally, or in writing. A public announcement in a newspaper is sufficient to protect former partners against contracts subsequently made by persons who have not previously dealt with the firm. In case of dissolution of a partnership by operation of law, such as by death of a member, bankruptcy, or decree of court, no notice is necessary. The act which causes the dissolution is deemed to be notice to everyone.
83. Distribution of Firm and Individual Assets after Dissolution. As a general rule, firm creditors are entitled to firm assets. The balance goes to individual partners. Individual creditors are entitled to individual assets. The balance goes to firm creditors. If, however, the partnership is insolvent as a firm, and there is no living solvent partner, in the distribution of firm assets, firm creditors are treated the same as individual creditors. Firm real estate may be subjected by firm creditors to the payment of their claims. After firm creditors are satisfied, firm real estate is treated as the real estate of the individual members, and descends to the heirs of the partners, and does not pass as personal property to their personal representatives.
84. Limited Partnership. Most states by statute permit limited partnerships to be formed. In general, a limited partnership differs from an ordinary partnership in that some of the members, called special partners, are not individually liable for the obligations of the partnership. The statutes of the different states differ somewhat as to the purposes for which a limited partnership may be formed. In general, however, a limited partnership may be formed to carry on any business except banking and insurance. A limited partnership must have at least one general partner who is individually liable for the obligations of the partnership. The special partners contribute certain fixed sums, which must be paid before the partnership starts business, and beyond which the special partners are not liable. Generally, special partners are not permitted to manage the business. A limited partnership is generally required to file with a public officer a certificate showing its membership, the purpose for which it is organized, the number of shares held by special partners, the assets, the total capital, and the names of the general partners. The purpose of a limited partnership is to enable persons to invest a certain amount of capital in an enterprise without being individually responsible beyond the amount actually invested. Limited partnerships are now largely supplanted by corporations.
85. Form of Partnership Agreement.
Articles of agreement entered into at Chicago, Ill., this ... day of ... 1909, by and between A, hereinafter designated as the first party, and B, hereinafter designated as the second party, both of Chicago, Ill. Witnesseth that:
Signed
A.......................
B.......................
Signed in the presence of
C.......................
D.......................