Have I formed a partnership?

Some business owners when starting up their business don’t have the capital to pay high salaries right away, so they base a portion if not most of their pay on either commission or perhaps a portion of the profits that the business makes.  This helps the employees to be more invested in the success of the business and to perform better in their duties than they would otherwise.  Others choose to find good people and make them their partners in the business by giving them stock or ownership in the company as payment for their services.

At what point is someone a partner as compared to just an employee? There are many factors that must be considered when determining if a partnership has been formed.  We will analyze these factors in the context of John and Jane working in a beauty salon together.  John would like to pay his receptionist and cashier Jane more money, but can’t do so unless the business does well.  John and Jane enter into a written partnership agreement where John invests the money, runs the business, will be responsible for the debts and losses of the business, and will get 80% of the profits at the end of the year.  Jane will not contribute money (just time) to the partnership, will not be responsible for any of the debts, and will receive 20% of the profits at the end of the year.  Each will receive a reasonable salary.   With this written agreement, are they partners?
  1. What is the intention of the parties? Here John wanted to increase Jane’s compensation, but protect himself from exposure to paying her higher wages unless the business warranted it.
  2. Do the partners share profits? Here they do share profits, though not equally.
  3. Do the partners share losses? Here they do not.
  4. Do the partners share power in administering the business?  Here, John runs it, and Jane does not have control over the operation, or direct its investments, or prevents or incurs debts in the business’s name.  So Jane does not share in its administration.
  5. Do the partners share in the ownership and control over partnership property?  Here John invested money in the business, and would still control it upon dissolution.
  6. What is the language of the agreement? Here, though they use the term “partners” in the agreement, it is not conclusive that they are in fact partners.
  7. What is the conduct of the parties towards third persons?  Here it is unlikely that Jane would ever tell anyone she was a partner in the business, and it is unlikely that any outsider of the company would consider her a partner because of her lack of authority to bind the partnership.
  8. What are the parties rights upon dissolution?  Here if Jane gave notice that she wanted to end the partnership it would be no different than her quitting a job where she was just a normal employee.
Under the circumstances describe above, even though they call themselves partners in the business, it is unlikely that a court would ever consider them partners because most of the elements of co-ownership are lacking here.
Photo By: Galt Museum