Co-ownership of the profits of a business is another feature essential to the copartnership. No sharing in the profits on any other basis than that of co-ownership will constitute a partnership. When the question comes before the courts, the intention of the parties governs, and evidence showing that each acted as principal for himself and as agent for the others, and has shared profits as profits, would be sufficient to constitute the relationship.
The Partnership Contract.—A partnership being a contract relationship, all the requirements governing legality of contracts, such as agreement, consideration, lawful object, competency of contracting parties, etc., apply to the copartnership. The contract may be oral or in writing. In case of dispute an oral contract, on account of the difficulty of proof, is of little force in regulating the relations of the partners, and the general law of partnership would usually govern. Inasmuch as there is so great an opportunity for disputes in a relationship of this sort, it is imperative, if efficient working relations are to be maintained, that very carefully drawn articles of copartnership be agreed upon before active business is begun. These articles should contain, at least, the following:
1. The name of the firm and of the partners.
2. The kind and place of business.
3. The duration of the partnership.
4. The method of terminating it.
5. A detailed statement of the relations between the partners, such as duties and powers, capital contributions, withdrawals of capital, salaries, division of profits and losses, interest on capital, and the time of closing the books to secure a definite determination of the partners’ interests.
Even when the utmost care is exercised in drafting the articles of partnership, it almost always happens that some portion is not understood alike by all or that some contingency arises not specifically provided for. Nevertheless, it is the only way in which a comparative avoidance of misunderstanding and dispute can be obtained.
Partnerships Classified.—As to the scope of their business operations, partnerships are usually classified into general and special. The general class embraces those for the conduct of some general or ordinary lines of business. The special class comprises those formed to undertake a definite task or some particular line of business. Joint ventures would come under this latter class.
As to the liability of their members, partnerships may be classified as general and limited. The general partner has the full liability, referred to above; the limited partner’s liability never exceeds the amount of his investment. In a limited partnership one or more, but not all, members may limit their liability. This class of partnership can be formed only under direct authority of statute law. A limited partner is not active in the management of the business, being more in the nature of a lender of money to the firm, who gets his return in profits instead of interest. Should he become active in the firm’s management, he will constitute himself an ordinary partner with full liability. The New York statute governing the formation of the limited partnership is as follows: