We Never Signed a Partnership Agreement. Do We Have a Partnership?

Texas forms partnerships from conduct

The first thing to understand is that the question 'did we sign anything' is not the legal question. Section 152.051 of the Business Organizations Code provides that an association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether the persons intended to create one or called it one. A written agreement is evidence of a partnership; its absence is not evidence against one. People who never used the word 'partner' have been held to be partners, and people who used it freely have been held not to be.

The five factors a court weighs

Section 152.052(a) lists the factors indicating that persons have created a partnership:

1. Receipt or right to receive a share of profits of the business.
2. Expression of an intent to be partners in the business: what the parties said to each other and to third parties, in emails, pitch decks, loan applications, tax returns and introductions.
3. Participation or right to participate in control of the business: who made decisions, signed contracts, hired, set prices.
4. Agreement to share, or sharing, losses or liability for claims by third parties.
5. Agreement to contribute, or contributing, money or property to the business.

Section 152.052(c) adds that an agreement to share losses is not necessary. In Ingram v. Deere the Supreme Court of Texas held that these factors are weighed under a totality-of-the-circumstances test. No one factor is required and no one factor is decisive. Evidence of none of them means no partnership; conclusive evidence of all of them establishes one; most real cases sit in between, and the court weighs how strong the evidence is on each.

What does not count by itself

Section 152.052(b) lists arrangements that look like partnership but are not, on their own, evidence of one. Each has caught people who assumed that sharing money meant sharing ownership:

• Receiving a share of profits as payment of a debt, as wages or compensation to an employee or contractor, as rent, as the price for selling a business or property, or as interest on a loan, even when the amount varies with profits.
• Co-owning property, whether as joint tenants, tenants in common or community property, with or without sharing the profits from it.
• Sharing gross returns or revenues, as opposed to profits, whether or not the parties have a joint interest in the underlying property.
• Owning mineral property under a joint operating agreement.

So a salesperson paid 20 percent of profits is not a partner for that reason alone, and two people who co-own a building and split the rent are co-owners, not partners, unless the other factors are present.

Example

Suppose a Dallas chef and an investor open a restaurant. The investor puts in $150,000; the chef puts in no money but runs the kitchen and the front of house. They split what is left after expenses 50/50 each month, both sign the lease, the investor approves the menu and the hires, and the investor's bank application describes him as 'co-owner.' No document was ever signed. Profit sharing, contribution, control and expressed intent all point toward a partnership, and the shared lease liability adds the fifth factor. When the investor later says the chef was 'just the manager,' the chef's claim to half of the business, and to the records and an accounting, is strong. Had the chef been paid a fixed salary plus a bonus tied to profits, with no say in decisions and no name on the lease, the same facts would fall into section 152.052(b)(1) and he would likely be an employee.

What the default rules give you if a partnership exists

The Code supplies every term you did not write. Under chapter 152, unless the partners agreed otherwise, each partner is credited with an equal share of profits and charged with losses in proportion to that share (§ 152.202), each has equal rights in management and ordinary-course decisions are made by majority of the partners (§ 152.203), each has access to the books (§ 152.212), and each owes the duties of loyalty and care described in what fiduciary duties partners owe in Texas. Equal shares is the default even where contributions were unequal, which surprises the partner who put in all the money.

The default rules also decide exit. With no fixed term, the partnership is at will: a partner can give notice of withdrawal at any time, and the others can either wind up or continue the business and pay him the fair value of his interest (§§ 11.057, 152.601, 152.602). That is why an informal partnership that has become profitable so often ends in a valuation fight rather than a liability fight.

Evidence that decides these cases

Because the test is about conduct, the proof is in the ordinary records of the business:

• Tax filings: a Form 1065 with K-1s is strong evidence of partnership; a Schedule C in one person's name and a W-2 or 1099 for the other cuts the other way.
• Bank records showing capital contributions and how money was split.
• Leases, loan documents, vendor accounts and insurance showing who signed and in what capacity.
• Emails, texts and marketing describing the parties as partners or co-owners, or as owner and manager.
• Who made the decisions, and whether the other person could veto them.

Oral testimony about what was promised matters, but documents created before the dispute carry the weight. If some of the business involves real estate or a promise that cannot be performed within a year, the statute of frauds may affect specific promises even where the partnership itself is established; see whether a verbal business agreement is enforceable in Texas.

If there is no partnership

The person who contributed work or money without becoming a partner is not without a claim. Texas recognizes recovery for the reasonable value of services and benefits conferred under quantum meruit and unjust enrichment, covered in getting paid without a signed contract. Those claims produce payment for what was provided, not a share of the business, which is the practical difference between winning and losing the partnership question.

Deadline

A suit between partners for an accounting or to settle partnership accounts must be brought within four years under Civil Practice and Remedies Code section 16.004, running from the date the partners' dealings cease. Claims for breach of fiduciary duty carry the same period. When the partnership ended, and when you knew it, should be written down now.

When to involve a litigator

Before you file a tax return or sign a document that characterizes the relationship, and certainly before you accept or deny partner status in writing to the other side. The factors are weighed on the whole record, and a single email calling yourself an employee, or a partner, can decide a close case. Tina Wysk represents people on both sides of disputed partnerships in Dallas state and federal courts. The related question of an LLC formed without an operating agreement is addressed in what happens in an LLC dispute with no operating agreement.