Advantages And Disadvantages Of A Partnership

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[author: Rachelle E. Hill, Esquire]

Prior to the statutory creation of corporations, limited liability companies and limited partnerships, a partnership was a commonly employed business entity.  As a result of parties seeking to limit their liability, most entities created today employ one of the foregoing statutorily created entities. Yet, partnerships still frequently appear, whether created prior to the statutory changes or implied on the basis of the parties’ activities.  Although partnerships are often overlooked, this entity offers advantages and disadvantages, particularly when working jointly with third parties.

One unique aspect of the partnership is the ease with which it is created and/or implied.  Virginia adopted the Revised Uniform Partnership Act, which defines a partnership as "an association of two or more persons to carry on as co-owners a business for profit."  Va. Code 50-73.79. A “partnership agreement” is an agreement, whether written, oral or implied, among the partners concerning the partnership.  Virginia Code Section 50-73.79.   Notably, a written agreement is not required to create a partnership.  

Regardless of the parties’ intent, a partnership is created as soon as two or more parties associate to carry on a business.    The law presumes that a person who shares in the profits of a business is a partner of the business unless such profits are received in payment of a debt, rent, annuity, interest on a loan, sale of goodwill of a business or for services of an independent contractor.  Therefore, a partnership is presumed to have been created in some cases, whether or not the parties intended to engage in such a joint venture.

On the other hand, where parties intend to create a partnership but their activities do not meet the definition, a Court will not defer to the parties’ intent.  Virginia courts follow a minority rule which requires a partnership to be based on more than a single transaction.   The Virginia Supreme Court has expounded on the Partnership Act to make “to carry on” a defined term meaning: "the conduct of a business for a sustained period for the purposes of livelihood or profit and not merely the carrying on of some single transaction." Walker, Mosby & Calvert v. Burgess, 153 Va. 779, 787, (1930). Therefore, where parties enter into an agreement that pertains to one specific transaction – for example the purchase, renovation and resale of a single property – it is not a partnership agreement by definition.   Most jurisdictions recognize partnerships for a particular purpose that dissolve upon completion. Co-ownership of partnership property is an essential element of a partnership.

In Walker, the Plaintiff owned three lots and contracted with a second party, Senseney, to construct a house on each lot. Pursuant to the parties’ agreement, the Plaintiff was to provide the land and capital for each project, and Senseney was to provide material and labor.  The agreement provided that whichever party sold the house would receive a commission, but after all houses were sold, the profits or losses would be shared equally.  Despite the profit loss agreement, the Virginia Supreme Court held that the written agreement did not create a partnership because only a single transaction was contemplated, and there was no language indicating the parties were co-owners of the property.  The Court found that Senseney was an independent contractor who was to be paid a share of the profits.

It is also presumed that partners share profits equally.  In a partnership where one party contributes 1 percent of capital and the other contributes 99 percent, the two will share the profits equally unless a different arrangement is reached.

Parties must be careful when working jointly with a third party, as certain conduct may lead to the creation of a partnership, whether or not the parties intend to create one or are aware of the creation.  The partnership entity exposes each partner to unlimited liability, regardless of the party’s contribution.  Therefore, where a party only contributes 1 percent of the capital, he or she could be liable for 100 percent of damages attributable to the partnership.  Parties seeking to limit their liability should create a different entity, such as a limited partnership or limited liability company.

Rachelle E. Hill is an associate with Bean, Kinney & Korman, P.C. in Arlington, Virginia, practicing in civil litigation, with an emphasis on employment law and commercial litigation. She can be reached at 703.525.4000 or rhill@beankinney.com