The Elements of Partnership
- I. UPA § 6: The Five Fingers of Partnership
- A. Association of two or more
- B. persons
- C. as co-owners
- D. in a business
- E. for profit.
- II. UPA § 7.
- A. The tests for applying § 6.
- B. § 7(4): Share of profits is basic test. Five key exceptions:
- 1. Debt repayment
- 2. Wages or rent
- 3. Annuity to deceased partner
- 4. Interest
- 5. As consideration for sale.
- I. UPA § 6: The Five Fingers of Partnership
- A. Association of two or more
- -- agreement necessary, but no written contract. Agreement is to associate, not to form a partnership.
- -- no formal partnership agreement required
- -- no governmental registration required
- B. persons
- -- corporations, not just humans
- -- can't form a partnership with yourself, but you could with a corporation of which you were the sole shareholder.
- C. as co-owners
- -- not employee/employer.
- -- profit sharing plan not enough.
- -- § 7 (3) says sharing gross returns not enough. What is that aimed at? Commissions.
- D. in a business
- -- so co-ownership of a rental property as joint tenants is not enough, unless there is another business as well (developing, managing, etc.)
- -- this is made explicit by § 7 (2).
- E. for profit.
- -- not for profits don't count.
- -- intent to make profits, not success, is the test. Problems are more likely to arise, after all, when there are no profits.
- II. UPA § 7.
- A. The tests for applying § 6.
- B. § 7(4): Share of profits is basic test. Five key exceptions:
- 1. Debt repayment
- 2. Wages or rent
- -- so a store may pay a landlord a rent based on the profits of the store without the landlord becoming its partner.
- -- The CEO of Bear Stearns may be paid a share of profits without becoming its partner.
- -- But what is the difference, then, between profit sharing and sharing profits? This test doesn't always help distinguish owners from employees.
- 3. Annuity to deceased partner
- -- apparently, if you want to retire, your payments should not be based on profits; but they may be if you are dead.
- 4. Interest
- -- again an interesting conceptual problem here: if you lend money to the partnership and take as interest a share of profits, you are not a partner.
- -- But if you invest money in the partnership and take a share of the profits, you are.
- -- What would you look to to tell the difference (control becomes very important here, as in the gas station cases).
- 5. As consideration for sale.
- -- like 4, the distinction between allowing in a new investor and selling the business is going to be tough to make if the seller still receives a share of profits.