Partnership, in law, exists when two or more persons combine their property, labor, or skill, or one or more of these, for the transaction of business for their common profit. It may be confined to a specific purpose or a single transaction; but when not so limited by the words of the partners, or by acts which imply limitation, it is general. All persons competent to do business on their own account may enter into partnership. Generally, the partners own the property and the profits jointly; but one or more of them may own exclusively the property or capital, leaving only the profits to be owned jointly. So all kinds of property may be owned by a partnership. But when real estate is so owned, the laws of record title, of transfer by deed, of inheritance, and of dower, have still an important operation. Generally the rule is this: Real estate is partnership property when it is bought with partnership funds, for partnership purposes, and is used for these purposes. Then it will be treated as part of the capital of the firm, and just as personal property is treated, so far as liability for the partnership debts is concerned, and until the remaining balance is ascertained and divided among the partners; but then its character as real estate is restored with all the incidents of dower and the like.
The legal title must always be traced through the records. But if the property be, for example, in the name of one partner, he will be regarded as holding it in trust for the partnership; and if he die, his heir will be held as trustee, and only so much as is not wanted to pay the debts of the firm, or satisfy the claims of the other partners, will he permitted to remain in his hands, as his own and free from the obligations of the trust. So, the widow has her dower in the real estate after debts and claims are satisfied, and not before. - The good will of a partnership is, for many purposes, a part of its property, and may be transferred by sale or assigned for the benefit of creditors; and it would undoubtedly pass to the assignees under insolvency, by operation of law. - No partner, and no majority, can introduce a new partner without the consent of the others. A partner may sell out all his interest in a partnership, or may assign it as security for a debt; but the purchaser or assignee only acquires a right to have the balance due paid to him, and cannot acquire merely by the transfer a right to become a partner. - A partnership may be formed by an instrument under seal, which is perhaps the most common, or by a written instrument without seal, or by oral agreement, without any writing.
In general, a partnership is formed by an agreement that the parties shall enter together into a certain business, and share the profits and losses. In the absence of special stipulations, the partners share equally, but may stipulate about this as they will. So the agreement may provide for its duration, but if the period appointed for its termination arrives, and it continues in fact, and without a new bargain, it will be held to continue upon the former terms. - Persons may be partners as to third persons who deal with the firm, while they are not partners as between themselves. Thus, A may agree with B and 0 that A shall render certain assistance to the firm of B and 0, either of capital, credit, or skill, and not be held out as a partner, nor be a partner, and own a certain proportion of the profits, and not be liable for any share of the losses. Then, if the firm be not insolvent, A may claim of B and 0 his share of the profits, and, if obliged to pay any debt or loss of the firm, may claim compensation from B and 0. But nevertheless, he will be just as liable to the creditors of the firm as B or 0; and all his property will be as liable as their property.
There have been many cases turning on this point, but the principle of law is clear and certain, however difficult it may sometimes be to apply it. This principle is, that whether a person is a partner in the firm in regard to the rights and obligations among the partners, depends upon the agreements they have made; but, whatever these agreements are, he is a partner as to third persons, that is, he incurs as to them all the responsibilities of a partner, in two ways, and on two grounds. One is, that he was, by his own consent, or by his own fault, held out to the world as a partner, so as to justify the creditors of the firm in dealing with it as if he were a partner; and the second is, that, without being so known or held out, he participates in fact in the profits of the concern. For it is a nearly universal rule, that one who participates in the profits as such is liable for the losses. The principal and most difficult question which has arisen on this subject, relates to clerks or salesmen who are paid by a share in the profits.
Formerly it was held, that if such a person was paid, for example, " one twentieth part of the profits," this made him a partner, and liable as such; but if he was paid " a sum equal to one twentieth part of the profits," this was only a payment of wages, which was indeed measured by the profits, but did not make him a partner. But this technical and irrational distinction has passed away; and now the question in every such case would be: Does his bargain with the partners merely provide that his compensation shall be measured by the profits? for then he is only a person employed by the firm and not a partner; or does the bargain give him a property in the capital or in the profits? for this would make him liable as a partner. In other words, if the alleged partner has a right and property in one twentieth (or any other proportion) of the profits, while they remain undivided, he is a partner and liable as such; but if he has no such right or property, but only a claim against the firm for so such money as, upon a settlement of the firm's profits, one twentieth of them shall amount to, he is not a partner, and has none of the liabilities of that relation. - It is a general rule, both in England and in the United States, that no partner can sue another at law on any matter growing out of and connected with the transactions of the partnership business, and dependent for its determination upon the partnership accounts.
The principal reason for this is, that whether one partner owes another or has a claim against him must depend upon a settlement of all the business and an adjustment of all the accounts. This a court of equity can direct and supervise by its machinery of masters, receivers, and the like, although a court of law cannot; and therefore it is now settled, as a general rule, that questions between partners about partnership affairs must go before a court of equity and not a court of law. But a partner may sue a partner at law in any matter not involving the partnership accounts; and so if a distinct part thereof is severed from the rest, and especially if a separate promise is made about this, a common action at law is maintainable for the balance. If, as is not unfre-quently the case, a man is a member of two firms, one of those firms cannot sue the other at law, because the same person cannot be plaintiff and defendant. But if one of the firms holds the negotiable paper of the other, it may indorse it to a third person, who may sue the other firm. - Partners are of various kinds.
They may be open or secret, active or dormant, retiring or new-coming. A secret partner is just as liable for the debts of the firm, when he is discovered, as an open and declared partner; so a dormant partner who only lends his capital or his name, and takes his profits, is just as liable as an active partner; for the one rule, which lies at the foundation of the whole law of partnership, is, that each partner, and the whole of his property, is liable for the whole of the partnership debts. This rule was until recently universal, and would be so now but for the special partnership recently introduced into this country from Europe. (See Partnership, Limited.) A retiring partner who continues to receive a share of the profits continues to be liable for the debts of the firm, but is not made liable by receiving a certain definite sum, annually or otherwise, independently of the profits. He should give notice of his retirement; for those who deal with the firm in ignorance of his retirement, without their fault, may deal with it on his credit, and are authorized to hold him responsible.
But a new customer, who had no dealings with the firm before the retirement of this partner, cannot hold the partner after retirement without notice, unless it can be shown that he came to the firm on the credit of this partner, and that he was justified in trusting to this credit. So if a creditor of a firm, knowing of such retirement,, receives for bis debt the negotiable paper of the firm, the presumption of law is that he intended to discharge the retiring partner; which presumption can be refuted only by evidence of an honest and actual intention to the contrary. A nominal partner, who lends his name to a firm without any interest whatever, is, in general, just as liable as if he were actually interested. If one purchases goods separately, and owes for them, those who become subsequently interested in the goods jointly with the first purchaser are not thereby made liable for the debt, unless the purchase was made originally by their joint authority, and for the purpose of bringing it into the partnership; for then the partnership existed at the beginning. - Throughout the commercial world, it is a universal rule, that each partner has full power and authority to act for the others and represent the whole firm in all matters appertaining to the partnership.
There is perhaps no exception or limitation to this rule, other than by the principle that either partner's powers may be restrained by agreement, and all persons to whom this agreement is communicated are bound by it. Hence, on the continent of Europe, it is very common for the circulars or cards announcing a firm to specify which of the members is authorized to make purchases in one place or in another, or to draw or accept bills, and the like. "Where there is not this agreed and declared limitation, each partner may make purchases, sales, loans, assignments, pledges, or mortgages of the partnership property, and give or receive notes or bills or money therefor; and any such transaction, done in reference to and within the scope of the partnership business, and with honest intent on the part of the person dealing with the firm, binds the firm and all the partners in regard to that person, however fraudulent the transaction may be in reference to the other partners. But if a partner, who has borrowed money in his own name, brings that money into the partnership, the partners are not thereby made liable for the debt; the firm owes the borrowing partner, and he alone owes the lender; and one who lends money to a partner, for the very purpose of enabling him to contribute the same to their capital, cannot hold the other partners without their assent. - Some partnerships are carried on in the name of an individual, who may also use his own name in his own business.
In that case, paper bearing his name will be supposed to relate to his private and individual business, unless direct evidence or circumstances show it to have been on the firm's account. A release by or to one partner is a release by or to the firm, if there be no fraud; so a notice by or to one is notice by or to all. - The question sometimes arises, how far a new-coming member is responsible for a former and existing debt. The general answer is, that he is not so liable without his adoption of the debt; but this adoption may be shown by his express agreement, either with the firm or with the creditor, or it may be inferred from circumstances which distinctly indicate it; and it has been held that a payment by the firm, after he enters it, of the interest on an old debt with his knowledge and without objection by him, implies his adoption of the debt as due from his firm. But the liability of a new-coming partner for the existing debts of the firm cannot be presumed from the mere fact of his entering into the firm. - Whether a majority of the partners can bind a minority, and conduct the business of the firm at their pleasure, may not be quite settled; but the later authorities seem to confine this- power of a majority to what may be called the domestic affairs of the firm, as the hiring a room or store, keeping clerks or books, and the like.
At the same time it seems to be now well established that a partner who dissents from an inchoate and incomplete transaction, and distinctly expresses his dissent to the outside parties concerned in the transaction, giving them notice that he shall not be bound by the action of the firm, may in this way protect himself from liability. It should be added, however, that the recusant partner, after such denial and notice, may-waive it, and will be considered as doing so if he permits the proceeds or avails of the transaction to be brought into the common account and the common fund for the common benefit. - The dissolution of a partnership, however caused, has no effect upon its existing debts, or upon the liability of the partners for them; but it entirely prevents the contracting of any new debt by the firm, because that has ceased to exist. Hence the former partners can in no way bind one another by any new contracts. Thus, no partner can indorse a note of the firm, either with the firm's name or his own, even if it be to pay a debt of the firm; and even authority given by the firm to one partner to settle the affairs of the firm would not, generally, carry with it the power to make such indorsement.
Dissolution may take place in many ways. 1. By the expiration of the time when it is to terminate by the articles; but if it goes on as before, although nothing be said, the law will presume an agreement to continue it on the former terms. 2. It may certainly be dissolved at the pleasure of any partner, if there be no limited term in the articles; and if there be, and even if there be a mutual covenant not to dissolve, we should say that any partner might dissolve the copartnership at his pleasure, always being liable to respond in damages for any injury he may inflict by his breach of contract. But a court of equity would probably interfere to prevent a causeless or fraudulent dissolution, especially if it were obvious that injury would be done which could not be adequately compensated by damages. So a court of equity would always decree a dissolution at the prayer of any partner, if he could show good cause, of sufficient magnitude; and in any such case the court would appoint a receiver if that were necessary, and do or order all other things which the interests and equities of the parties required. 3. An assignment by a partner of his whole share and interest in the copartnership property and business would of itself work a dissolution; and it would be so even if one partner assigned his whole share to another partner, because this would be equivalent to this partner's going out of the firm. 4. Any departure from a firm or copartnership by any partner dissolves that firm, however it be caused.
The firm may go on as before, taking in or not new partners, but it is in law a new firm, for the simple reason that a partnership is in no sense or measure a corporation. Hence, the death of any member of a firm dissolves that firm. Even if the articles provide for that casualty, and it is agreed that the firm shall go on with unchanged name, and that no account shall be taken, but the share of the deceased be paid to his representatives by cash or notes to a certain amount, still in law the old firm ceased when the partner died, and a new one began. 5. Bankruptcy of the firm, or perhaps of any partner, dissolves the firm at once. Whether the insanity of a partner has that effect may not be certain, but we should say that insanity which would probably be permanent would unquestionably be a good ground for dissolution by the court or by the parties, but that it would not of itself, and by its own force, effect a dissolution. - If a partnership is dissolved by the death of a partner, the whole property and business pass to the survivor or survivors, but only for the purpose of settling up the business and closing the concerns of the partnership as soon as this can be done in a proper way.
The surviving partners and the representatives of the deceased may come to some agreement about this, or the articles may provide for such an event. But in the absence of any such agreement or provision, the survivors take everything, with the powers necessary for the speediest and best settlement, and no more; nor can they, even for the purpose of settlement, make new contracts binding the estate or representatives of the deceased. "When the settlement is finally and fully made, the survivors must pay over to the representatives of the deceased the share due to the estate; but until then the representatives cannot interfere with the management of the property, although a court of equity will interfere, on their petition, to prevent waste, delay, or other injurious conduct by the survivors. - The rules of law in regard to the rights of creditors over the funds of the partnership, and the property of the partners, are very important, but in some particulars they are not quite settled. It is certain that the joint funds of the partnership are, in the first place, to be applied and appropriated to pay the joint debts, that is, to pay the partnership creditors; and the private creditors of the individual partners cannot touch the partnership funds in any way until these have paid in full all the partnership debts.
It is also certain that the private creditors of an individual partner may reach by any proper process of law the private and separate property of the partner who is their debtor. So, too, it is certain that the creditors of the firm may, at some time, resort to the private property of the partners. The uncertainty is involved in this question: While the creditors of the firm have an exclusive right to the property of the firm, have the private creditors of the partners an equally exclusive right to the private property of the indebted partners? Upon this it can only be said that the rulings of courts are greatly at variance. - What right a creditor of a partner in a solvent firm has, and how he may effectuate his right, is a matter of much uncertainty. The prevailing principle may be stated in this way. The creditor can take only what his debtor has. This is not a several and distinct right to or property in any part of the partnership funds; for it is only an ownership of the whole in common with the other partners, and thence a right to have the accounts settled, and the debts of the firm paid, and then his share of the balance set off or paid to him in severalty.
This right or interest his creditor may acquire by attachment or levy; and if it be done by attachment, a frequent, and generally speaking the better way, is to summon all the partners as trustees or garnishees under the process of foreign attachment.