The Elements of a Partnership

The Elements of a Partnership

 

A recent decision from the North Carolina business law court considered whether a partnership had been formed. Finding that the partners had never contributed assets to the venture for the purposes of coownership, and as well not engage in other activities that would be expected of a partnership including the filing of tax returns and the opening of bank accounts, the court found no partnership to come into existence. La Familia Cosmovision, Inc. v. The Inspiration Networks, 2014 NCBC 51, 2014 WL 5342583 (Sup. Ct. N.C. Oct. 20, 2014). 

 

The parties had entered into a written letter of intent outlining the terms of a partnership that LOI provided in part that “nothing in this agreement shall be construed to constitute a joint venture.” That LOI was repeatedly amended, and ultimately included a revenue sharing agreement pursuant to which certain subscription fees up to a particular threshold would be for the benefit of one of the two parties, while subscription income above that amount would be shared between the parties. When one side withdrew from the LOI, the other brought suit after the withdrawing party launched a venture similar to that anticipated by the LOI.

 

Under the North Carolina adoption of the Uniform Partnership Act, as elaborated by that Supreme Court in Johnson v. Gill, 235 N.C. 40, 44-45 (1952):

 

To make a partnership, two or more persons should combine their property, effects, labor, or skill in a common business or venture, and under an agreement to share the profits and losses in equal or specified proportions, and constituting each member an agent of the others in matters appertaining to the partnership within the scope of its business.

 

In other cases, the courts have:

 

[C]onsidered a variety of circumstances as indicative of a partnership, including, among other things, the filing of a joint tax return, establishment of a partnership bank account, obtaining state licensing as a partnership, and capital contribution by members of the alleged partnership.

 

In re Brokers, Inc., 363 B.R. 458, 469 (M.D. N.C. 2007).

 

The North Carolina courts had identified as an “indispensable” requirement to the formation of a partnership the “co-ownership of the business.”,  McGurk v. Moore, 234 N.C. 248, 252 (1951),  and the sharing of the actual profits. Wilder v. Hobson, 101 N.C. App. 199, 202 (1990).

 

In this particular instance, the LOI outlined a transaction in which certain income streams would go to one or other of the partners. Parsing the various components of these agreements, the court found that they did not constitute a partnership but rather a mere profit splitting arrangement with respect to a particular venture.

 

Turning to the question of co-ownership of property, in that neither party contributed any property to the venture, the argument that a partnership existed failed as “[T]here is no evidence that the parties ever combined assets or co-owned partnership property or any common legal entity.”

 

After dismissing as “casual” references amongst the parties to one another as partners as evidencing a partnership, the court noted as well:

 

[T]he absence of a variety of traditional indicia supporting the existence of a partnership.  For example, there is no allegation that the parties ever filed a partnership tax return or established partnership bank accounts.

 

In that there was no partnership, the court dismissed the claim for an accounting.