CHARACTERISTICS AND DISTINCTIONS
Sec. 1. History and definition. In general, organizations for
the conduct of business are of four distinct types individual pro-
prietorships, partnerships, corporations, and business trusts. Part-
nerships are mentioned and probably have their source in the Ro-
man law. They were well known among the merchants of the
Middle Ages. Like the law of negotiable instruments, cases in-
volving questions of partnership are not found in the early com-
mon-law reports of England, because such cases were tried in the
mercantile courts. The law of partnership was introduced into the
common law from the law merchant. The Uniform Partnership
Act defines a^partnership to bejan associationjof two or
sons to carry^on, aiT co-owners^ a business^ f orjorofitj, wl
tiori has been^adoptednby somewhat less than a majority: of the
states^ In mostTespecfs the AcVIias~cbc[i5ed tEe "common law; the
attention of the reader will be directed to those instances where it
AjD^tnership^s^ agreement. As between them-
selves, the existence of a partnershlp^depends upon the intention
of the parties, manifested either by an interpretation of their words,
spoken or written, or by their conduct. 1 If the agreement is clear,
the mere fact that the parties did not think they were becoming
partners is immaterial. If the parties agree upon an arrangement
which is a partnership in fact, it is immaterial that they call it
something else or that they declare that they are not partners. On
the other hand, the mere fact that the parties themselves call the
relation a partnership will not make it so if they have not, by their
contract, agreed upon an arrangement which by the law is a part-
nership in fact.
Sec. 2. Partnership distinguished from a corporation. The
distinguishing features between a partnership and a corporation
are, first, a partnership istheresult of an agreement between two
or more parties, whereas a corporation comes into existence not by
reason of a contract, but by reason of anjict_pf the state. A part-
"Worden Co. v. Beals et al., 1926, 120 Or. 66, 250 Pac. 375; p. 659.
232 BUSINESS ORGANIZATIONS PARTNERSHIPS
nership, therefore, is a creature of contract, whereas a corporation
is a creature of the state. Second, thediability of tl^j^artners^ia
unlimited^ that is, each partner is individually liable for all the
deHs^fliie organization created in pursuit of the partnership busi-
ness; whereas the liability of a member of a corporation is limited
to the extent of a^^j^aid balajac^^^
Although a partnership comes into existence by virtue of a con-
tract, nevertheless, partnership liability may be created where no
contract exists between the parties. This liability arises from cir-
cumstances under which the parties have led third persons by words
spoken or written, or by conduct, to believe that a partnership ac-
tually exists when in fact it may not exist. Other distinctions be-
tween partnerships and corporations will become apparent as the
law of corporations is studied.
Sec. 3. Who may become partners. A partnership is com-
posed of two or more persons. A person as defined by the Uniform
Partnership Act, includes individuals, partnerships, corporations,
and other associations. The members of most partnerships
dividual human beings. Coo20ationa__cannot be
authorized by.. their cuticles of incorppratioiL or by statute. Sub-
jecTTo agreement, unincorporated associations may become mem-
bers of a partnership.
An infant's partnership agreement is voidable, and may be dis-
affirmed by him as against the other partner. An infant upon dis-
affirmance is entitled to recover his contribution to capital without
loss. Some authorities, however, subject the infant's capital con-
tribution to the claims of unpaid creditors and to whatever losses
have been sustained by the firm.
Sec. 4. To carry on as co-owners a business for profit. The
essential attributes of ji jjartnen^^ jgommon interest in the
b^jnegsjan d jiianagemen t_ and a share_in the j^rpjR^an3riosses!
The presence of a common interest in property and management
are not enough to prove a partnership; likewise, an agreement tc
share the ffiQgJL^ .ojjP^ intentipri
to form ii.paiitJierihip.^JCF all 6T these elemeiits^are present, prima
facie evidence of a partnership exists. The presumption that a
partnership exists by reason of sharing net profits may be overcome
by evidence that the share in the profits is received for some other
purpose. 2 Subsection 4 of section 7 of the Uniform Partnership
Act provides that the receipt by a person of a share of the profits in
the business is prima facie evidence that he is a partner in the busi-
ness. However, no such inference shall be drawn if such profits are
received in payment of a debt by installments, as wages of an em-
MVhavue Supply Co. v. McGowan, 1926, 213 Ky. 102, 280 S.W. 491; p. 660.
CHARACTERISTICS AND DISTINCTIONS 233
ployee, as rent to a landlord, as an annuity to a widow or represent-
ative of a deceased partner, as interest on a loan, or as the consid-
eration of a sale of the good will or other property of a business by
installments. Payment of wages to employees in amounts deter-
mined by net jproHts .does_notlnake sucE^mplbyees partjiersT Pay-
menT^Trent from profits does not change the relationship of land-
lord and tenant to that of partners. Evidence of the control by
the landlord of the tenant's business may be of such character as to
impose partnership liability for the benefit of creditors. Upon the
death of a partner the continuation of the partnership by agree-
ment for the benefit of a dependent or a widow of the deceased
partner by way of annuities derived from a share of the profits does
not create a partnership relationship. A loan to the partnership
under an agreement for the payment of interest out of profits does
not make the creditor a partner.
Sec. 5. Partnership liability by estoppel. Where a person, by
words spoken or written, or by conduct, represents himself or con-
sents to another's representing him to be a partner in an existing
partnership or a partner with other persons not in a partnership, he
is liable to any party to whom such representation has been made.
Such liability, created by estoppel, does not arise, however, unless
the third party gives credit to the firm or other persons in reliance
upon such representation.
The first essential in partnership liability by estoppel lies in the
fact that thepar^
a partner oF^nowmgly permitted others tojjojjo. Under such cir-
culnstaHces7~to relieve him would work an injustice on those who
have relied upon such representations.
The second essential consists jpf a reUance by Jhe part^jvho ex-
tends the credit. 3 If the facts ^ caseTndicate that
such partyjknew ihe_ true f acts, or should reasonably have known
them, no partnershr^ relatwn is Created.
Estoppel may arise when one of the partners in an existing part-
nershipjs acting outsidejthe^ scope of his authprit^. _ For example,
if oneTpartner, with knowledge of the other partner, uses the firm
name for the purpose of giving credit on negotiable instruments for
other persons on matters outside the scope of the partnership busi-
ness, and this course of conduct is allowed by the other partner to
continue for a long time, the firm will be bound on the indorsement
of the negotiable paper, under the doctrine of estoppel.
If less than all the members of a firm permit anotherjto hold him-
self out as a partner,any liabili^ijic^^
"Standard Oil Company of New York v. Henderson, 1928, 265 Mass. 322, 163 N.E.
743; p. 660.
234 BUSINESS ORGANIZATIONS PARTNERSHIPS
bind^nlyjthQse who assent to jjie _ holding jnit. Those who do not
participate in the holding out are not subject to estoppel.
Review Questions and Problems
1. Give a definition of a partnership. Name the features which dis-
tinguish a partnership from a corporation.
2. May a partnership arise otherwise than by the intention of the
parties? Suppose the partners, so called, stipulate that their arrange-
ment shall not constitute a partnership; what is the result?
3. May other than natural persons be members of a partnership?
4. A y Bj and C, infants, form a partnership. A, as agent for the part-
nership, purchases goods from D, creating a firm obligation of $250.
May A, by reason of his infancy, disaffirm the contract with D?
5. A is hired to operate a store owned by P. It is agreed that A shall
receive for his services one-third of the net profits. No profits result, but
losses are incurred. Must A share in these losses? Is he a partner?
6. A and B are co-owners of a large office building. Does this owner-
ship indicate a partnership? How do the rights of partners differ from
those of tenants in common of property?
7. Is an agreement to share profits and losses necessarily a partner-
ship? Is it evidence of a partnership? May the evidence be rebutted
by the introduction of competent evidence?
8. A, a grain broker, and B, his brother, a farmer, entered into an
agreement whereby each was to pay to the other annually for three years
one-half of the profits of his business, and also to make good one-half of
the losses that might be suffered by the other. The ownership of each
individual business was to be distinct, B became bankrupt. To what
extent, if any, could A be made to satisfy the claims of B's creditors?
9. A agreed to loan money to P and to indorse notes for him in order
that P might operate a lumber mill. For this accommodation, A was
to receive one-third of the profits. Was there a partnership?
10. What is meant by liability by estoppel? Can there be a partner-
ship liability by estoppel in which the one sought to be held has no knowl-
edge of the situation?