CHAPTER IV THE PARTNERSHIP THE ordinary partnership, or firm, is the simplest form of associative business organization that enjoys recognition in business circles as a unified and single establishment. As a modern business institution, its history may be traced back to the Italian commenda of the eleventh century. During the middle ages, it grew into the most important form of private business organization; and with slight modifications, was the form under which the great banks and big business of that period generally were conducted. It was later driven from its premier position by the need of securing greater quantities of capital for the conduct of the trading enterprises that sprang up following the period of discovery subsequent to 1492. It thus developed into the joint stock company. Today, it is no longer as important in the field of big business, but still continues to enjoy some favor as a form of organization for the conduct of small businesses. Definition. The partnership has been defined as "a relation existing, by virtue of a contract, express or implied, between persons carrying on a business owned in common, with a view of profit to be shared by them."1. At law, the partnership is simply a definite relation between certain persons, called partners. It is not a thing of itself, but merely a condition. Consequently it is not considered to be a single person at law, and all of its legal relations must be conducted and met by the individual partners. 1 E. A. Gilmore, Handbook on the Law of Partnership, 1911, p. 1. But very different is its standing in the business community. The multiplicity and individuality of the copartners are lost sight of, or at least minimized in importance. What the law does not recognize as a legal person, the business community recognizes as an economic business unit, equally as capable, and in many respects much more capable, of becoming the vehicle for conducting a business enterprise than if the individuals who compose it acted each for himself. Business must be conducted in the name of the partnership. Formation, the contract. Ordinarily, in this country, as in England, partnerships are formed by contractual agreement under common law rules between the parties affected. In most other countries, such common law rules have been codified and incorporated into commercial codes. The common law applies equally in all of the states 2 of the union; but in most of them the provisions relating to partnership agreements have been assembled and by legislative act issued as statutes. In addition to these statutes, many states have special statutes governing the formation and operation of limited, special and silent partnerships. The contract, or articles of co-partnership, that creates the organization, must be a legally valid contract; that is, the contracting parties (in this case the several partners) must be legally competent; the subject matter of the contract, and the purpose of the partnership must be reasonably possible of accomplishment and also lawful, there must be a legal consideration and an observance of the proper formalities required by law. It is advisable, but not necessary, that the contract be reduced to writing. Ordinarily, every mature person is legally competent to enter into a partnership agreement. Felons, infants and lunatics, however, are debarred. Married women are competent only in such states where the statutes have so modi 2 An exception should be noted in the case of Louisiana. fied the common law as to declare them capable of contracting in their own name. A similar rule applies to corporations and firms; that is to say, they may become parties to partnership agreements only where specifically authorized by statute. For the most part, however, the ordinary partnership is formed by natural, mature persons. The consideration must be some obligation undertaken by the parties, which ordinarily they would not be obliged to assume. This, however, is a simple matter, for it has been generally accepted by the courts that a mutual agreement with respect to a common enterprise is sufficient consideration. A partnership agreement to carry on an unlawful enterprise, such as is contrary to the laws of the land, or against the best interests of society, will not have the sanction of the courts; and the parties thereto would be denied the protection of the law. The formalities required by law in this country are generally quite simple. In most states the filing of a copy of the articles of co-partnership, or some other evidence of the creation of the organization, is required, while in others no formality, whatever, is prescribed. In Europe, under the commercial codes it is a common practice to require all partnerships to give certain information concerning the nature of the business, the amount of capital, etc., and the name under which it is to operate to a government bureau which inserts this information in the official commercial register for the benefit of the public. The latter plan is by far preferable, because this register may be introduced as evidence of the existence of a partnership; whereas, in the United States the burden of proving the existence of a partnership rests upon him who relies upon its existence. Thus, if a person enters into a contract for the sale of goods to one who represents himself as purchasing for a firm and afterwards sues the partners on the con tract he must present evidence that a partnership really exists. At what precise time a partnership is created is a question that has frequently come before the courts for decision. On this point it is now the generally accepted rule, that the mere act of signing a contract, or entering into a partnership agreement, does not of itself create the partnership. The partners must actually begin doing business in accordance with the terms of the contract. It is the legal intentions of the parties, clearly manifested by their acts, that determines whether a partnership exists, and not their secret intention. Thus, a single sale or purchase that would place a business obligation upon the partners would be sufficient. When the contract is set to writing, as is usually the case when the partnership business is a large one or the partners are numerous, the document is commonly called articles of co-partnership. Such articles of co-partnership ordinarily contain clauses on the following matters: (a) The names of the parties to the agreement. (b) The name under which the firm is to do business. (c) The amount and nature of the original contributions of capital, including real and personal property, money, etc., with which the partnership is to commence business, and the share thereof contributed by each partner. (d) The extent to which each partner shall be permitted to participate in the profits and losses and in the direction. and management of the enterprise, and whether or not all shall be actively engaged. (e) Provisions relative to the distribution of assets in case of dissolution. (f) Provisions governing dissolution and arrangements, if any, for the continuance of the business in case of withdrawal, death or bankruptcy of any partner. (g) Frequently also a section prescribing the method of accounting and bookkeeping that is to be installed and maintained. (h) Lastly, the signatures of the parties to the agreement. - Legal Nature and Legal Actions. The partnership is not a legal entity, that is, it has no standing in law as a business unit and can neither sue nor be sued as a firm. The law recognizes only the contractual relationship between the persons directly parties thereto, but does not recognize such an agreement as in any way limiting the rights of others in their dealings with the individual partners. In so far, therefore, as non-partners are concerned their legal rights lie against the partners as individuals; and the partners themselves must exercise their legal rights as individual persons before the courts. Since under the ordinary partnership agreement each partner becomes agent for the others in all business represented to be on behalf of the firm and generally within the scope of the business, it follows that a third person, not a member of the firm, may seek redress on any such contract not solely against the partner with whom he entered into the transaction, but also against any of the other partners. Consequently when suit is brought against the firm on a contract it may be brought against any partner or against all of them; but it cannot be brought against the firm in the firm's name. In practice such suits are commonly directed against the several partners individually and at the same time against all of them jointly. This applies also to other actions at law. In legal phraseology it is said that actions are by or against the partners "severally and jointly." Rights and Obligations of Partners toward One Another. The rights and obligations that ordinarily attach to partners are to participate: |