Putnam's Handy Law Book for the Layman

[198]Partnership. - There may be a partnership in a single transaction, for example, to buy and sell a load of potatoes. Persons may be liable as partners to others who had no intention of creating that relation. If A acts in such a way by speech or deeds as to create the belief in B that he is a partner, and thus believing B sells goods to the partnership, A is liable as a partner for them. On the other hand if B knew that A was not a partner, he could not hold him as one. In many cases it is difficult to determine whether one is a partner or not. Many tests have been applied. The most general is that of intention. Simply sharing in the profits and losses will not always suffice. This was long considered a proper test but it broke down after many applications. Thus, suppose a clerk is paid by giving him a fixed percentage of the profits as a compensation, is he a partner? He was so regarded on one occasion, and the firm having failed he was made liable for all its debts. That is one of the consequences attending the relation, every partner is liable for the entire indebtedness of the amount he may have contributed. The clerk contributed nothing, nevertheless he was liable like the others. Today the courts would decide such a case differently. It would inquire whether the partners intended to make him a partner, or only gave him a share of the profits as a mode of paying him for his service. The recent Partnership Act contains this test.

A partnership may usually hold any kind of property, real and personal, and not infrequently is formed to cultivate or deal in land.

A partner is a general agent. Hence the risk of creating the relation. Being a general agent he can bind his partnership for any acts within the [199]scope of his authority. Yet there are limitations. If a partnership was engaged in selling dry goods, a partner could hardly bind his partners by making a contract with a person for a quantity of iron, unless it was needed in rebuilding the store, or in some other connection with the business. He can make and indorse negotiable paper that is used in connection with the business. Suppose he borrows money on his own note and he gives the money to his firm, is it responsible for the amount? This has proved a hard question for the courts. If the money though loaned on his note was for the benefit of the partnership, and it was known at the time that it was to be used in that way, the partnership would be liable; but if the money was to be used by the borrower and this was known and believed by the lender he could look only to the borrower for payment.

The receiving of a new member constitutes a new partnership. It may reorganize the old partnership and become responsible for its debts, or it may not. Unless recognized in some way by paying interest on them and the like, the new member does not become responsible for them.

A partnership is formed usually by a definite agreement that is put in writing. Yet it may be simply an oral agreement with very general terms about the contribution of capital or skill of the respective partners and their division of profits. They may and usually do have distinct fields of employment, each doing the thing for which he is, or supposed to be, best prepared. By reason of their general liability, in the olden days persons who wished to thus engage and yet not be responsible, were kept in the background, and were known as secret and dormant partners. If found out they [200]were liable because they were to share in the profits. The fact that they were unknown when credit was given to the partnership at the time of selling goods to the concern did not shield them from liability after the discovery of their relation.

The difficulty has since been removed in two ways, by incorporating the partners into a corporation whose powers and liabilities are fixed by law and therefore known to all, and by forming limited liability partnerships. These consist of two or more general partners, also special partners who contribute an amount of capital, of which the public is publicly informed. If such an association is unsuccessful, the special partners may indeed lose all, or a part of the capital they have contributed, but are liable for no more. This is a great improvement over the secret and dormant methods of getting the capital needed for partnership purposes. One of the matters that should be carefully guarded in forming a limited liability partnership is to contribute the full amount of capital advertised. If any deception is practiced, or mistake made, whereby a smaller amount is contributed, should the partnership not succeed, the special partners become liable as general partners for the full amount. Once such a partnership was formed with three special partners who contributed each $100,000, and at the end of two years were told that their profits individually were $60,000. Each was asked to contribute $100,000 more, and feeling happy over his venture, he put in $40,000 more, which, added to his profits, made up the required amount. When the concern failed a few years afterwards the books showed that neither special partner was ever entitled to $60,000 as profits. Though innocent, for they had never examined the books, they were [201]held as general partners for the entire indebtedness of the concern.

An illegal contract made by a partner will not bind his partnership, for all parties are supposed to know the law, and an illegal bargain cannot be enforced, for example, an agreement to pay usurious interest.

How may a partnership be dissolved? Unless the time is fixed by agreement, it may be dissolved by any member whenever he pleases to do so, though he cannot act wantonly to the manifest injury of the others without making himself responsible for their loss. And if a partner should attempt to transfer his interest before the time fixed for ending the relation without good reason, to the manifest injury of the other partners, he can be legally restrained from taking such action.

The death of a partner causes a dissolution. Nor can executors or administrators succeed to his place, though they often do so for a short period to prevent the interruption of the business and to enable all parties to fare better than they would by its sudden ending. Yet it is awkward for these officials to thus act, and in so doing they incur an unpleasant personal responsibility. To relieve them from this some states have passed statutes permitting them to thus act with the other partners under the direction and orders of the court having charge of the estate.

A partner who retires should give notice of his retirement to relieve himself from future liability. For, should he neglect, and persons continued to sell on credit to the firm, supposing he was a member, he would be liable as before. The statutes in some states regulate his duty in this regard; it is one that he cannot safely omit.

[202]Should a partnership fail, the general rule with respect to the assets is the partnership property must be used to pay partnership debts, and the individual property of partners to pay their individual debts. If a partner has anything left after paying his individual debts, it must be devoted to paying the partnership debts. If the partnership has anything left after paying its debts, this belongs to the partners in accordance with their agreement in contributing it and the earnings, and must be devoted to the payment of their individual debts.

Lastly concerning the authority of a liquidating partner. He can do many things, give renewal notes, make indorsements, collect debts due the partnership, and even revive an outlawed debt. Of course the affairs of a partnership may be settled by some other person than a partner; not infrequently a receiver is appointed who acts under the order of the court that appointed him.

An agreement between a liquidating partner and the other partners, to take all the property and pay all the debts, is limited in its effect to themselves and does not affect others. After the partnership assets have been transferred to a liquidating partner, or to any other person for liquidation, a debtor who has notice of the transfer is not justified in making a settlement with any one else. And if he should do so, the liquidator could require him to pay again to himself.

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