How to Prove a Business Partnership Exists
A partnership exists when two or more individuals or entities join together to form a business for profit. The written partnership agreement determines the existence of the partnership business. However, written documents are not required to prove a partnership exists. A partnership can be implied based upon the actions of the business partners. In fact, the actions of the partners help determine the existence of the partnership.
Create a written partnership agreement. Although this is not a requirement to form general partnerships, a written document is the best way to provide proof of the partnership. The partnership agreement should include the name of the business and other particulars such as the address and contact info, a description of what the business does, and a list of the partners.
Specify each partner’s original contribution in the partnership agreement in the written agreement. If there is no written partnership agreement, keep a record of the contributions of each partner. Most partners contribute capital to create and maintain the business. The contributions can be in the form of money, property and other assets. Alternatively, one or more partners might contribute their services or expertise to the partnership instead of money or property.
Establish a method to distribute the profits and losses among the partners. The partnership agreement should indicate the percentages of each partner’s share of profits and losses. Each partner’s share of profits and losses can be based on their capital contributions, although some partnerships choose to divide each partner’s shares equally rather than using fixed distributions. The partnership business does not pay income taxes. Instead, the partners must report their share of profits on their individual tax returns.
State each partner’s authority to manage the affairs of the business. Unless otherwise stated in a partnership agreement, all general partners have equal authority to make decisions of the partnership in the ordinary course of business. They can also examine the partnership records and are entitled to receive an accounting of the partnership’s assets. Unless otherwise stated, each partner is entitled to equal voting rights regarding specific actions of the partnership, such as changing the nature of the business, adding new partners, adding a new line of business or changing the capital structure of the business.
Let each partner share an ownership interest in the partnership’s property. Joint ownership of property helps to establish a partnership. The partners might own property as co-owners or lease property together. Joint ownership of property does not alone establish that the co-owners are in a partnership business. However, it is an important factor in determining the existence of a partnership.