§9.3 - Nature and Formation of Partnerships in Washington

• Jurisdiction: Washington

§9.3 NATURE AND FORMATION OF PARTNERSHIPS IN WASHINGTON

Under Washington law, a "partnership" refers to "an association of two or more persons to carry on as co-owners a business for profit formed under RCW 25.05.055, predecessor law, or comparable law of another jurisdiction." RCW 25.05.005(6). A "partnership at will" means "a partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking." RCW 25.05.005(8).

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(1) Creation of partnership

For the most part, the mere association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership, unless registered as another form of business organization under the laws of the state of Washington or some other jurisdiction. See RCW 25.05.055(1)-(2).Thus, the parties may inadvertently create a partnership even if they have no subjective intent to become partners. This approach obviates the need for the courts to establish the subjective intent of the parties to determine that a partnership has actually been formed between or among the parties.

Practice Tip: Because the manifest intent of parties to create a partnership is not required under Chapter 25.05 RCW, clients may unintentionally form a partnership and thereby become subject to its provisions. Therefore, it is important to evaluate all aspects of the business relationship and discuss with your clients the implications and risks associated with this type and form of a business organization or alternative structures. Should a client inadvertently form a partnership, it is important to counsel such client as to the application of Chapter 25.05 RCW with respect to rights, obligations, and whether to convert such relationship to another type or form of business. This will involve a careful analysis of the client's situation and objectives.

In determining whether a partnership has been formed, however, the mere existence of a joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership will not in and of themselves result in the formation of a partnership, even if the co-owners share profits made by the use of the property. RCW 25.05.055(3)(a). Furthermore, the sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived. RCW 25.05.055(3)(b). And finally,

[a] person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment:

(i) Of a debt by installments or otherwise;

(ii) For services as an independent contractor or of wages or other compensation to an employee;

(iii) Of rent;

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(iv) Of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner;

(v) Of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or

(vi) For the sale of the goodwill of a business or other property by installments or otherwise.

RCW 25.05.055(3)(c).

The burden of proving a partnership rests upon the party who alleges it. Bengston v. Shain, 42 Wn.2d 404, 409, 255 P.2d 892 (1953). Thus, in proving a partnership the evidence must be stronger as between the parties themselves than when third persons assert its existence. Id. Just because the parties call their arrangement a partnership does not make it a partnership, however. DeFelice v. State, Emp't Sec. Dep't, 187 Wn. App. 779, 788-89, 351 P.3d 197 (2015) (citing State v. Bartley, 18 Wn.2d 477, 139 P.2d 638 (1943)). Instead, whether a partnership exists for purposes of Washington law is determined from all facts and circumstances, including the parties' actions and conduct. Id. Although a partnership's existence can be established by circumstantial evidence, circumstantial evidence does not tend to prove the existence of a partnership unless it is inconsistent with any other theory. Id.

Practice Tip:

Many entrepreneurs have opted for alternative forms of business organizations, including corporations and limited liability companies, due to certain perceived disadvantages of a general partnership, which may include the following:

(1) general partners are jointly and severally liable for the actions of other partners of the partnership on obligations related to the partnership business including contracts, torts, and breaches of trust (2) each partner is individually liable for the debts and obligations of the business such that if the partnership does not have sufficient assets to cover its debts, creditors can pursue the personal assets of the general partners; and (3) general partnerships can potentially be unstable because of the danger of dissolution if one partner wants to withdrawal from the business or dies.

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Tax Comment: Federal tax law contains its own criteria to determine whether an arrangement constitutes a partnership or another type of legal relationship. Although the two sets of criteria overlap, they are not the same, and each is applied independently of the other. Thus, an arrangement might be treated as a partnership for federal tax purposes but classified as a tenancy in common, loan, lease, or other type of legal relationship under state law; or conversely, an arrangement might be classified as a partnership for state law purposes but treated as an association taxable as a corporation for federal tax law purposes. I.R.C. §§761(a), 7701(a)(2); Treas. Reg. §§301.7701-1 through 301.7701-3. The Internal Revenue Code provides that a partnership "includes a syndicate, group, pool, joint venture or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not ... a corporation or a trust or an estate." I.R.C. §761(a). The Treasury Regulations define a partnership as a business entity that is not a corporation and that has at least two members. A "business entity" is defined as "any entity recognized for federal tax purposes ... that is not properly classified as a trust ... or otherwise subject to special treatment under the Internal Revenue Code." Treas. Reg. §301.7701-2. A threshold issue, therefore, is whether an organization or arrangement constitutes an entity recognized as a separate entity under federal tax law. In this regard, the Treasury Regulations provide that "[w]hether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law." Treas. Reg. §301.7701-1(a)(1). The Treasury Regulations provide that "[a] joint venture or other contractual arrangement may create a separate entity ... if the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom." Treas. Reg. §301.7701-1(a)(2). However, a joint undertaking merely to share...