Are You My Partner? Considerations for Structuring Business Transactions


When entering into a business arrangement where revenues are shared between two or more persons, it is necessary to consider whether those parties have become partners either for state law or tax purposes. No express intent is required to form a general partnership or joint venture; the Delaware partnership statute defines a partnership as two persons who associate to carry on a business for profit, “whether or not the persons intend to form a partnership.” Parties do not have to file a certificate with a secretary of state or enter into a written agreement to form a partnership, and consequently neither is necessary for a court to find the existence of a partnership.

Certainly not all business arrangements where there is some sharing of revenue or profit are partnerships. Leases, loans and many other types of transactions often have economic terms providing for some level of sharing in profits. Such transactions, however, should include language expressly disclaiming the partnership relationship, because the consequences of being deemed a partner can be unexpected and significant. Partners have apparent authority in the eyes of third parties to bind each other to contracts, and each partner is individually liable for the obligations of the partnership arising from such contracts, intended or not.

Even if an arrangement is not a partnership for state law purposes, it may still be a partnership for tax purposes. The tax world uses terms identical to those used non-tax areas of law, but these terms do not always have the same meaning. For federal income tax purposes, there is no single or express definition of a partnership. The Internal Revenue Code defines a partnership to “include” various types of organizations (e.g., a syndicate, group, pool, joint venture or other unincorporated organization) and the Treasury Regulations include as a partnership a joint venture or other contractual arrangement if the parties “carry on a trade, business, financial operation or venture” and “divide the profits.” This could include co-ownership of property where services are provided to the occupant.

If an arrangement is deemed a partnership by the IRS (which usually occurs long after the parties enter into the deal), then a portion of the tax code would apply that the parties never intend to be effective. Subchapter K of the Internal Revenue Code could change how income and loss from a transaction are allocated, require specific and different methods of accounting for a transaction, and generally have quite surprising and different results from those desired by, and probably recorded by, the parties.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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