Agency Relationship Between Partners in a Partnership
The issue is whether Violet and Sonny are partners in, rather than creditors to, Busy Bee as represented by Rose and Mary to Friendly Bank and if they are determined to be partners, whether they would be liable for Busy Bee’s debts to Friendly Bank because of the agency relationship between partners in a partnership.
In determining whether there is a partnership, the essential elements of a partnership must first be satisfied, that is:
a business is being carried on;
the business is carried on ‘in common’; and
there is ‘a view to profit’.
If these definitional elements for a partnership are met, one can next consider the rules for the determination of the existence of the partnership:
co-ownership of property, …show more content…
The terms of the loan agreement between Rose and Violet confer rights on Violet that are consistent with the type of rights of a limited partner. Therefore, Violet would be inclined towards a partnership status.
Sonny having a share of the net profit or losses of the business as interest on his loan may constitute an exception to a partnership. However, the qualification that such a loan contract is in writing and signed by the parties is not fulfilled, rendering this provision void.
In addition to the interest, Sonny would receive his salary for his services as an employee in the business. This aspect is significant as partners would not receive remuneration for acting in the business. Therefore, Sonny is justifiably an employee and a creditor to the partnership but not a partner. There was no intention on Sonny’s part to form a partnership.
Determining the status of Violet and Sonny enables the identification of their liabilities. As a creditor and employee to the business, Sonny, like Friendly Bank, has the first priority in the event of a termination of the business and distribution of the assets, to receive his salary and loan from Busy Bee. He owes no liability to Friendly Bank.
Violet as a limited partner would be bound by the debt contracts of the business as the debts were incurred by