Partnership Defined.—In Chapter II, reference was made to some of the features of a partnership—the purpose of its formation, advantages, disadvantages, etc. The laws of the state of New York define a partnership as follows: “A partnership, as between the members thereof, is the association, not incorporated, of two or more persons who have agreed to combine their labor, property and skill or some of them for the purpose of engaging in any lawful trade or business, and sharing the profits and losses as such between them.”

This definition brings out in a general way the reasons for the formation of the partnership and its essential features. Under this type of organization, where several persons combine their capitals, it is possible to secure a larger fund of capital than under the sole proprietorship. This opens to the partnership avenues of business usually closed to the sole proprietor. The bringing together of the man with a special aptitude or skill, or of a man with a following in the community on account of social standing and acquaintanceship, with another who has money or a plant for the operation of a business, often makes successful an otherwise unpromising undertaking.

Operating Feature and Working Organization.—Mutual agency is the essential operating feature of the partnership. By this is meant that any one of the partners can act for the others, and in the eyes of the law all are equally responsible for the management of the business. Except in the case of a limited partnership, to be explained later, each partner has an equal voice in the management and control of affairs. Unlike the corporation where for management purposes the owners’ powers are delegated to a controlling board, the essential character of the partnership is that each partner has, regardless of the amount of his investment, an equal right in the direction of its business. As between themselves, for purposes of division of duties and specialization of effort, definite power to exercise control over certain features of the business may be delegated to individual partners. But such delegation means nothing more than a method of dividing the work and is simply the working organization of the firm which may be changed at any time the majority of the partners see fit. Thus, while a partner may be limited in his actions for the firm by agreement among the partners, so that he is not a general agent for the firm, still as to outsiders who know nothing of this internal arrangement, he has power to bind the partnership by his acts, because an outsider has a right to expect that any partner has power to act as an agent for the firm. This is so because such power is of the essence of the partnership form.

Essential Characteristics of the Partnership.—Limited life is an essential characteristic of the partnership. The partnership relation is a very personal one. It can be terminated in a number of ways, but the death or retirement of any member automatically works a dissolution of the firm, even though another man takes his place. The legal theory is that the old partnership is dead and a new one, even though bearing the same firm name, has come into existence. Thus a partnership cannot be perpetual. The relationship between the partners is so intimate that the success of the undertaking depends fundamentally on the good faith and honor exercised by each partner towards the others, and therefore any addition to the personnel of a partnership can be made only with the consent of all members of the existing firm.

The partnership being the outgrowth of the sole proprietorship, certain of the aspects of its earlier form still cling to it. For suit at law it is looked upon as a collection of single owners, and action on contract must usually be taken against the individual members of the firm. Suit by or against the partnership cannot as a rule be brought in the firm name. Some states, however, allow this under recent enactments. Title to personalty can be held and transferred under the firm name, but realty must be in the name of the individual members or in the name of one member acting as trustee for the firm. Thus, while in the view of the business community the copartnership is a business entity under a firm name, in the sight of the law it is not an entity but merely a collection of single owners. This legal view accounts also for the full debt liability of every partner—except in a limited partnership. In case the firm assets are insufficient to meet the claims of creditors, any or all the partners’ private resources may be levied upon.

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:

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:

Affidavit of the payment of capital must be made and a notice of the formation of the partnership published in a paper of general circulation. The limited partnership is thus hedged about with safeguards for creditors, bankers, and other interested parties, particularly by the rule that a limited partnership cannot exist unless there are one or more general partners with full liability.

The Joint-Stock Company.—The joint-stock company is a partnership or association in which ownership, voice in the management, and profit-sharing ratio are evidenced by transferable shares of stock. Control and management are exercised through a board of directors chosen by the stockholders. If the company becomes bankrupt and the firm assets are insufficient to satisfy creditors, the members are personally liable to the full extent of their private property in the same way as in a general partnership.

The mining partnership is a form of joint-stock company which operates in mining communities. Usually the mining property itself is beyond the scope of such a partnership, only the development of this property by means of a lease being contemplated. Unlike the ordinary partnership, the members of a mining partnership may assign their shares of ownership. Upon their death or bankruptcy, their interests pass to others who take their place in the partnership without the consent of the remaining partners. Thus, the confidential relationship based on the right of selection of its members, characteristic of the ordinary partnership, is largely lacking in the mining partnership.

Partners Classified.—Finally, brief mention may be made of the following terms applied to partners to indicate varying degrees of activity within the ordinary partnership:

For more detailed information as to a partner’s rights, duties, and responsibilities to his copartners and to outsiders, a standard legal text on partnerships or business law should be consulted. The student should also read Chapter II in connection with this chapter and the next.