Are you a sole proprietor simply conducting business with another person? Or, is that “person” actually your partner in a legally recognized partnership? While you may not believe you are a partner in a partnership with that “person,” surprise, a court may find you are indeed partners. And as partners, albeit unknowingly and/or inadvertently, you may owe additional duties to that partner; including, fiduciary duties (click here to learn more about fiduciary duties).
On December 21, 2011, the Iowa Court of Appeals published an opinion that addresses such partnership issues and how individuals may inadvertently become partners. In Hillman v. Cannon (click for opinion), the plaintiffs, who were injured in a motorcycle accident, sought to establish the defendants, two different parties conducting business together, had formed a partnership. Defendants responded to plaintiffs’ position and argued they (defendants) were not partners in a partnership. The trial court agreed with the defendants and concluded a partnership did not exist; finding instead, that defendants were two distinct sole proprietorships. The plaintiffs appealed.
On appeal, the Iowa Court of Appeals held that in order to establish a partnership, the plaintiffs were “required to show: (1) an intent by the parties to associate as partners; (2) a business; (3) earning of profits; and (4) co-ownership of profits, property, and control.” In Hillman, the court of appeals stated the second and third elements were uncontested; therefore, the court simply addressed the first and fourth elements.
Addressing the first element (intent), the Iowa Court of Appeals acknowledged:
- Iowa Code Section 486A.202(1) states that a partnership is formed when “two or more persons … carry on as co-owners of a business for profit … whether or not the persons intend to form a partnership.” The court, citing the Uniform Partnership Act Section 202, cmt. 1, acknowledged that the italicized language demonstrates a partnership may exist “regardless of the subjective intention to be ‘partners.’ Indeed, [persons] may inadvertently create a partnership despite their expressed subjective intention not to do so.” Consequently, the defendants in Hillman may be partners despite a possible subjective understanding that they were not partners.
- The court further stated that Iowa case law on partnership formation demonstrates “an intent to associate is the crucial test of partnership.” The Iowa Court of Appeals did not state an intent to associate as partners is the crucial test of partnership, just that an “intent to associate” is the test. To this end, the court of appeals acknowledged, “[t]he ‘focus is not on whether individuals subjectively intended to form a partnership, but on whether the individuals intended to jointly carry on a business for profit.'”
- Finally, the court also acknowledged that the requisite intent may be gleaned from the conduct of the parties and the circumstances surrounding the transactions.
Addressing the fourth and final element (co-ownership), the Iowa Court of Appeals acknowledged:
- When parties share “gross receipts, rather than profits,” a partnership may not be formed. And “[t]he distinction between ‘a contemplated sharing of gross receipts and a sharing of profits is commonly drawn and recognized as valid.'”
- “The ‘sharing of excess receipts over disbursements, without proof of separate individual operating expenses attributable to either partner, in effect constitutes a sharing of profits,” which is consistent with the formation of a partnership.
- Citing the Iowa Supreme Court opinion in Chariton Feed & Grain, 369 N.W.2d at 786, the court of appeals stated: “[c]o-ownership of control, or a community of interest in the administration of the business, is a key element in determining the existence of a partnership.” When determining whether co-ownership exists, the court recognized that objective evidence of co-ownership “usually focuses on acts such as holding licenses, assuming a firm name, keeping books that show a capital account for each party, or filing federal partnership tax returns.”
The Hillman opinion provides colorful insight on two (2) of the factors that an Iowa Court may consider when determine whether a partnership exists. While the Hillman court concluded a partnership did not exist, it is clear that if the facts had differed slightly, a different outcome may have likely occurred. If you are curious or have concern as to whether you are a partner in an inadvertently created partnership, an attorney with experience in this area of the law should be able to provide guidance based upon the unique facts of your business arrangement(s).
Innovative Litigation, L.L.C., as owner and host of this site, and Matthew McKinney as the author (acting on behalf of and through Innovative Litigation, L.L.C.) cannot and does not warrant the accuracy or reliability of the information presented on or through this site. The law can and does change over time and the information contained herein may not reflect the most recent laws – whether statutory law, administrative law, case law, constitutional law, or otherwise. The information on this website does not constitute legal advice and readers should not rely on it to solve problems or other matters. Further, you should seek licensed counsel in the appropriate legal jurisdiction before taking any action. Any information provided on this site is presented “As Is” for your personal curiosity and enjoyment. It is not meant to be relied upon for legal advice, counsel, or for any other purposes. Such information does not take the place of a lawyer. Rules and laws differ by jurisdiction and the information contained within this website may not apply in your jurisdiction. The appearance of articles, listings, or ads, by or for professionals, on this site, does not constitute an endorsement. In all cases, you are responsible for determining the quality of services, information, and/or advice provided by professionals through, or as a consequence of, your use of this site. Neither liability nor responsibility shall arise to any person or entity with respect to loss or damage caused (or alleged to be caused), directly or indirectly, by information posted on this website, or by reason of contact with a professional listed on, or posting information to, this site. No attorney-client relationship is formed by viewing this website and practice is limited to jurisdiction where lawyers are admitted. The information furnished on the website is only general and not a substitute for personalized legal advice. Legal advice cannot be given without full consideration of all relevant information relating to the individual(s) situation. Laws can change daily and new laws may, and likely will, affect the accuracy of the information herein. The information herein may be outdated and replaced by new law.
If you are seeking representation, please read the following notice before sending an e-mail:
Sending an e-mail will not make you a client. Until an agreement regarding representation is reached with you, anything you send will not be confidential or privileged. Before representation can occur, a lawyer will first take you through the conflict of interest procedure and see that you are put in touch with the lawyer best suited to handle your matter.
If you proceed with an e-mail, you confirm that you have read and understood this notice.