PARTNERSHIP DEFINED.—We shall have occasion, in the chapters on bills and notes, and personal property, to refer to the movement to codify certain branches of the law. This movement was begun by the Commissioners on Uniform Laws proposing the Uniform Negotiable Instruments Act, which has now been adopted in all of the States except Georgia. One of the most recent codifications is the Uniform Partnership Act which has been adopted in a number of the States, and which will undoubtedly follow the same course as the other acts drawn by the same Commissioners. We shall make frequent reference to the Uniform Partnership Act in this chapter. Although some of the writers on the law of partnership state that no satisfactory definition of the term partnership can be given, the Uniform Act defines it as follows: "A partnership is an association of two or more persons to carry on as co-owners a business for profit." It is undoubtedly true that even with this definition, a considerable amount of further explanation will be necessary to determine with any degree of certainty, just what is meant by partnership.
THE DIFFERENCE BETWEEN A PARTNERSHIP AND A CORPORATION.—While we may be anticipating our chapter on corporations, it is well, at the very outset, to understand the fundamental differences between a partnership and a corporation. We may mention six differences:
(1) When a partner dies, the partnership is automatically dissolved. If a partner sells or transfers his interest in the business, this works a dissolution of the firm. On the other hand, the situation is precisely the opposite in the case of a corporation. The death of a shareholder has no effect upon the corporation. In fact, if all of the shareholders of the United States Steel Corporation should die at once, the corporation would still exist. So also the transfer of stock from one owner to another has no effect upon the corporation's existence. Many thousand shares are dealt with on the exchange each day without the slightest effect upon any corporation.
(2) The doctrine of individual liability for the debts of a firm is a fundamental characteristic of partnership law. Each member of the firm is absolutely liable for all the debts of the firm. Thus, if the firm consists of A, B, and C, and the firm goes into bankruptcy and owes $50,000, and B and C are both individually worthless, and A has his own private fortune, A will be obliged to pay all of the debts, although, according to the arrangements that the partners made when forming the partnership, each was to share the profits and losses equally. Theoretically, A has the right to contribution from his fellow partners, and should they later acquire property, he will be able to enforce this right in a court of equity. In a corporation, a shareholder is liable only for the value of his share. If he subscribes to a share of stock, par value $100, and has paid only $50 on his subscription, and the corporation goes into bankruptcy, its receiver can compel him to pay the balance of his subscription, $50, but that would be the extent of his loss. If I buy a share of United States Steel Common, at $79, on the exchange, and the company goes into bankruptcy, my loss will be only $79. I would not be obliged to make up to the receiver the other twenty-one dollars. The only noteworthy exception to this rule as to the liability of a stockholder is in the case of a shareholder in a National bank, (this is true of some of the State banking laws also), where a shareholder is liable to an extra assessment equal to the par value of the stock he owns.
(3) In a partnership each member of the firm is a general agent for the partnership, and his acts bind the firm. In the case of a corporation, a shareholder, by virtue of the fact that he is a shareholder, has no power to bind the corporation. The position of a shareholder is very similar to that of a voter. The corporation is run by its board of directors. They are elected by the shareholders just as we elect a governor or president. If we are dissatisfied with the conduct of a governor or president, all we can do is to vote him out of office at the next election, except in unusual cases where a governor or president might be impeached. The same is true in the case of a board of directors.
(4) A partnership may be created by a formal contract, or a simple contract, in writing or by word of mouth; in fact it may be created in almost any way. A corporation, in order to do business, must comply with the corporation laws of the State in which it is incorporated. A regular formality must be observed. A certificate of incorporation must be filed, generally with the Secretary of State, and with the county clerk of the county in which the corporation's principal place of business is located in the State.
(5) A partnership may do anything that is legal and which the members decide to do. A corporation exists by virtue of a charter, granted by the State. The sum total of the powers given in that charter gives the total of all of the activities the corporation may undertake. Engagement in activities not authorized in the charter may result in the forfeiture of the charter by the State.
(6) In legal theory, a corporation is looked upon as a separate entity. Most States require at least three persons to incorporate. A, B and C form a corporation under the laws of the State of New York. There are then four legal persons in existence: A, B, and C, and this separate person, or legal entity, the Green Corporation, if that is the name given the company. In the case of a partnership, the law does not, as a rule, consider the partnership as an entity distinct and separate from the members who make up the firm. Of course, the business man does, in a way, look upon the partnership as a separate commercial entity. The very fact that the members of the firm are all general agents for the firm, and that the members are individually liable for all of the debts of the firm, shows that the law does not carry the entity theory into practice in partnerships as it does in corporations.
DIFFERENT KINDS OF PARTNERSHIP.—What we have said applies to the ordinary partnership. There are certain forms of partnership which we can only mention. One of them is the limited partnership. Limited partnerships are created under the law of the State in which the business is to be conducted and in a general way, these limited partnerships are a combination of the principles underlying ordinary partnerships and corporations. The members may limit their liability to a certain amount, and in that sense, the limited partnership is like a corporation. On the other hand, the general principles of partnership, as we shall discuss them, apply with almost equal force to the acts of a limited partnership. A person should not undertake to give an opinion as to a legal problem relating to a limited partnership until the law of the State in which the limited partnership is organized has been consulted.
JOINT STOCK COMPANIES.—Occasionally we meet with organizations—joint stock companies—which occupy a sort of "No-man's land" between partnerships and corporations. The joint stock company issues shares of stock the same as a corporation. These shares are listed on the stock exchange, as for example, the Adams Express Company. The joint stock company, however, carries with it the individual liability of the shareholders for the debts of the company, which is technically a partnership attribute. The New York Court of Appeals in People ex rel. Winchester v. Coleman, 133 N. Y. 279, has put it this way: "More or less, they crowd upon and overlap each other, but without losing their identity, and so, while we cannot say that a joint stock company is a corporation, we can say * * * that the joint stock company is a partnership with some of the powers of a corporation."