Sharing of profits is only prima facie evidence of partnership.

Sharing of profits is only prima facie evidence of partnership.

INTRODUCTION:

Before I move into the discussion of my topic “Sharing of Profits is only Prima Facie evidence of Partnership”, I will first elaborate what is Prima facie then I will thoroughly explain and justify the above statement.

Prima Facie:

According to the dictionary meaning Prima Facie refers to “at first sight” meaning “A legal presumption which means on the face of it”. I will clarify the statement with an example.

Example: proof of mailing a letter is prima facie proof that it was delivered to the person to whom it was addressed and will accepted as such by a court unless proven otherwise.

Analyzing my topic I will further need to explain what are Partnership, then the objective of partnership and finally the purpose of it, which will eventually lead us to the point that Sharing of profits is only prima Facie evidence of partnership.

Partnership:

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.

Benefits of partnership:

If you co-own a business with one or more other people and you have not formed the business as a corporation, limited liability company, or some other business form, your business is a partnership. You can have a partnership without a written agreement, but in that case state law will determine your rights and obligations. By making a written partnership agreement, you and the other partners can spell out how your partnership will operate. Items that you might address in a partnership agreement are authority, management and control of the business, capital contributions and methods of funding the business, profit and loss allocation, salaries of partners, buyouts, and admissions of new partners.

Under most state laws it is usually assumed that all partners will share control over the business equally. Furthermore, any partner would have the authority to obligate the business and the other partners. In a partnership agreement, you can state which partners are responsible for what activities[1].

You can also specify in your partnership agreement how profits and losses will be allocated among the partners. Will they be divided equally among the number of partners or in proportion to each partner’s capital contribution?

If some of the partners will be working in the business and others will not, you will probably want to indicate what salaries will be paid to whom[2].You may want to address capital contributions in your partnership agreement as well. If additional capital is required, must everyone contribute it equally? How will an unequal contribution affect other aspects of the partnership like control and distributions? You may consider taking in additional funds in the forms of loans from one or more partners as well.

A partnership agreement can also be used to address the eventuality that a partner will need to be bought out. You may want to address the reasons or situations that will allow the partners to remove a partner, such as incapacity of that partner. You can also specify a method for determining the value of a departing partner’s share in order to avoid bickering over the price of a buyout.

You may want to decide on a process for admitting new partners to the partnership. The need to add a new partner to the business may develop at some point in the future. You can specify how much agreement among the current partners is required to take this step. You may specify 51% majority or two-thirds majority or something along those lines. Again, it is important to know, does each partner have an equal vote or are voting rights proportional to capital contributions?

I will start with a case in order to justify my thesis statement.  I will discuss my thesis referring to the example given below.

“Nora and her husband are in the process of getting a divorce. She inherited her grandmother’s business in 1998. She could not get a loan in her name to upgrade the business, so her husband agreed to co-sign with her. She paid the loan off without her husband’s help in 2006. He never paid a cent on the loan. Now, Nora’s husband is in the process of filing a lawsuit against Nora indicating he was an implied partner in the business. Nora has proof that he paid off the loan herself. Her divorce attorney could not find any information on the meaning of an implied partnership.”

Analysis:

A business partnership consists of a contract between two or more people in a joint business who agree to pool their funds and talent and share in the profits and losses of the enterprise. The first element of a partnership is a contract among the partners. This contract may be either express or implied and may be written or oral.

Certain conduct may lead to the creation of an implied partnership. Generally, if a person receives a portion of the profits from a business enterprise, the receipt of the profits is evidence of a partnership. If, however, a person receives a share of profits as repayment of a debt, wages, rent, or an annuity, such transactions are considered “protected relationships” and do not lead to a legal inference that a partnership exists.

The courts have encountered difficulty in determining whether a partnership exists and in setting forth a precise test for that purpose[3]. Each case must be decided under its peculiar facts, considering the totality of all relevant facts and circumstances. In short, substance and not form should be the controlling criterion in determining the nature of a business relationship as a partnership. The existence of a valid partnership must be proved by any competent evidence, and is not limited to direct evidence[4].

The question of whether a partnership exists between particular persons is a mixed question of law and fact[5].

The absence of a written contract of partnership is not conclusive of whether a partnership exists, but is an element for serious consideration. The lack of partnership documentation is not a critical factor. The existence of a partnership may be proved without writing by transactions, conduct, and declarations.

Partnership books and accounts or financial statements prepared on behalf of a firm are admissible as proof of a partnership, provided the party against whom they are offered authorized or ratified them, or can be shown to have been legally responsible for them. An inference of partnership cannot be drawn from bookkeeping entries which indicate that one who claims he is a partner is treated on the books as an employee but is unable to read or write, there being no reasonable basis for concluding that the party understands the significance of the records pertaining to him and the unilateral accounting practices of the other party.

A security agreement with a bank, identifying a purported partner as the named debtor, showing that he does business under the partnership name, and signed by the purported partner alone, constitutes proof of his involvement in the partnership, particularly when he similarly signs later security agreements.

Written instruments in the form of credit applications may be admissible as proof of partnership and the parties’ representations of partnership to others, if made in the course of business, but only after it is shown prima facie that there is a partnership.

A letter requesting credit on behalf of a firm and signed by both purported partners may be evidence of the parties’ partnership[6].

Insurance policies, endorsements, or applications for insurance coverage are admissible as relevant to whether a partnership exists among the parties on whose behalf the documents are prepared or issued, though not conclusive or determinative of the issue, particularly in the face of other business reasons for joint coverage besides the existence of a partnership.

Federal tax returns which show a person or entity as receiving profits from a business generally are considered prima facie evidence that the person or entity is a partner in the business to which the returns relate, as are tax returns showing a partnership filing status[7]. A partnership tax return is a significant admission against interest by one subsequently attempting to deny the existence of a partnership, since even assuming that partnership tax returns are used for no partnership ventures or firms, the formal tax treatment of business income as shared partnership income is not stripped of probative value and remains prima facie evidence of partnership.

The absence of proof that parties file partnership tax returns is indicative that a partnership relation does not exist between them, and the filing of individual tax returns by the parties to a purported partnership agreement indicates the parties’ intent not to enter a partnership.

The testimony of professionals, including accountants and attorneys with whom members of an alleged partnership deal in their business relations, may serve to indicate the true nature of the parties’ relationship and whether the parties in fact came to a meeting of the minds in forming an intention to become a partnership[8].

When the parties have not clearly indicated whether or not their business constitutes a partnership, the law has determined several guidelines to aid Courts in determining whether the

parties have created a partnership[9].

The sharing of gross revenue is itself very slight, if any, evidence of a partnership[10]. Co-ownership of property does not necessarily create a partnership. Also, sharing profits or rents from property that two or more people own does not necessarily create a partnership.

“I determining whether a partnership exists, these rules shall apply:
(1) Except as provided by section 16 persons who are not partners as to each other are not partners as to third persons.
(2) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not of itself establish a partnership, whether such co-owners do or do not share any profits made by the use of the property.
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.
(4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by installments or otherwise,
(b) As wages of an employee or rent to a landlord,
(c) As an annuity to a widow or representative of a deceased partner,

(d) As interest on a loan though the amount of payment vary with the profits of the business,
(e) As the consideration for the sale of a good will of a business or other property by installments or otherwise.”

Under Ind. Code 23-4-1-7(4) receipt by a person of a share of the profits is prima facie evidence that he is a partner in the business. . . . Lack of daily involvement for one partner is not per se indicative of absence of a partnership. Endsley, supra. A partnership may be formed by the furnishing of skill and labor by others. The contribution of labor and skill by one of the partners may be as great a contribution to the common enterprise as property or money. . . . It is an established common law principle that a partnership can commence only by the voluntary contract of the parties. . . . In Bond it was said, “To be a partner, one must have an interest with another in the profits of a business, as profits. There must be a voluntary contract to carry on a business with intention of the parties to share the profits as common owners thereof.” . . . In Bacon, supra, in reviewing the law relative to the creation of partnerships, the court said:

“From these, and other expressions of similar import, it is apparent to establish the partnership relation, as between the parties, there must be (1) a voluntary contract of association for the purpose of sharing the profits and losses, as such, which may arise from the use of capital, labor or skill in a common enterprise; and (2) an intention on the part of the principals to form a partnership for that purpose[11]. Hence, if such intent exists, the parties will be partners notwithstanding that they proposed to avoid the liability attaching to partners or [have] even expressly stipulated in their agreement that they were not to become partners.

CONCLUSION:

Reviewing my topic again, we can say that when a party having the burden of proof provides some credible evidence establishing each essential element of the claim or defense, that party has established a prima facie case, and the burden of going forward then shifts to the opposing party. Prima facie evidence is such evidence of a fact as is sufficient to establish the existence of the fact unless and until rebutted. The party having the affirmative has the burden of establishing a prima facie case before the matter can be submitted to the jury.

In a legal context, a prima facie case is one the exhibits all the requisite elements to prevail at first site. Without prima facie evidence, a case will potentially be dismissed, or at the very least, presents ample grounds for a defendant to dispute.

In most legal proceedings, one party has a burden of proof, which requires it to present prima facie evidence for all of the essential facts in its case. If they cannot, its claim may be dismissed without any need for a response by other parties. A prima facie case might not stand or fall on its own; if an opposing party introduces other evidence or asserts an affirmative defense it can only be reconciled with a full trial. Sometimes the introduction of prima facie evidence is informally called making a case or building a case.

BIBLIOGRAPHY

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[1] If one partner will manage the business, you can state that in the agreement. If one partner will be in charge of purchasing and another in charge of marketing, your partnership agreement can spell that out. You may also want to specify if the partners’ voting rights in the business are equal for each partner or if it depends on how much each partner contributes to the business.

[2] Without a partnership agreement, the assumption is that all partners are working in the business and that none are entitled to salaries. This may seem unfair to partners if some contribute significantly more effort to running the business than others.

[3] Courts applying common law as well as the Uniform Partnership Act do not recognize that no one fact or circumstance is a conclusive test of partnership, nor is it possible to state any number of facts decisive in all cases. There are no hard and fast rules, and arbitrary tests are not useful.

[4] Participation in the profits of a business is cogent evidence of a partnership, and in the absence of certain specified exceptions, the fact that one receives a share of the profits constitutes prima facie evidence that he is a partner, though an agreement to share profits alone is not conclusive evidence of the existence of a partnership.

[5] This means that what constitutes a partnership under established facts is a question of law for the court, but the existence of the facts necessary to bring the relation within the tests of partnership, or the determination whether a partnership exists under the evidence and the inferences reasonably drawn from the evidence, is a question of fact for the jury.

[6] Similarly, letters are admissible to show a party’s admission that he was promised a percentage of the business operation in question, and to indicate that he exercised control over the practices of the business on a daily basis, thus tending to establish the existence of a partnership.

[7] The filing of a partnership tax return is also characterized as creating a presumption of partnership, as pertinent to establishing its existence, or as significant evidence of partnership under state and federal income tax laws that permit a business partnership return to be filed only on behalf of an enterprise created to carry on a business.

[8] For example, the testimony of an attorney who prepared a written agreement among parties, revealing that their agreement was to create a general partnership, sufficed to help establish the partnership.

[9] The fact that the parties share profits and losses is strong evidence of a partnership. An agreement that does not provide for sharing losses, but does provide for sharing profits, is still evidence of a partnership since it is assumed that the parties will also share losses

[10] The text gives an example of a situation where a farmer rents an airplane to a pilot to do crop dusting under an agreement where the pilot would pay the farmer, as compensation for use of the plane, a share of the fees that the pilot receives from his crop dusting business. Such an arrangement would not constitute a partnership in and of itself.

[11] But it must be borne in mind, however, that the intent, the existence of which is deemed essential, is intent to do those things which constitute a partnership.

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