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When is a Partner
not Really a Partner?
Under Nevada's partnership law, NRS ch. 87, "a
partnership is an association of two or more persons to carry
on as co-owners a business for profit[.]" NRS 87.060(1).
If this was the only statute applicable to the situation, any
time two or more people co-owned any profit making enterprise,
they would be deemed partners. This would be the case even if
one party owned only a tiny percentage of the business, and did
not participate in the actual running of the business.
Fortunately, NRS 87.070 is also applicable. This
statute is entitled "rules for determining existence of partnership.''
Under this, "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." NRS 87.070(2). Furthermore,
"[t]he sharing of gross returns does not of itself establish
a partnership[.]" NRS 87.070(3). However, "[t]he 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," NRS 87.070(4), unless the profits were received in payment as: a debt;
wages of an employee; rent to a landlord; as an annuity to a surviving
spouse or representative of a deceased partner; as interest on
a loan; or as the consideration for the sale of any property.
NRS 87.070(4)(a-e).
Thus, if two (or more) people get together for
a particular money making venture, and both are entitled to a
share of the profits, a partnership will likely be found to exist.
If the intent of the parties is otherwise, such as one party owning
a tiny percentage for the convenience of the other party, yet
the minority owner wishes to receive remuneration, then the deal
should be structured in a way that the receipt of funds by the
minority owner is denominated as a debt repayment, wages to an
employee, interest on a loan, etc. In this way, the minority owner
would be receiving a share of the profits, but prima facie evidence
of a partnership would not exist. And, as stated above, the part
ownership itself does net establish a partnership.
This interpretation of NRS 87.070 is amply supported
by case law. In Las Vegas Machine & Engineering Works,
Inc. v. Roemisch, 67 Nev. 1, 213 P.2d 319 (1950), the Nevada
Supreme Court found no partnership existed where one party, Roemisch,
loaned money to the other, who was expected to perform a construction
contract with a third party. Roemisch had previously obtained
the construction contract. All three parties agreed to share in
the profits, but no contingency was made for potential losses,
which then materialized. The court found that the contracted for
receipt of profits carried no inference of a partnership, since
any payment would have been received as interest on the loan.
The court concluded that the contract to share profits was to
provide compensation to Roemisch for obtaining the construction
contract, and "when the profit sharing is mainly by way of
compensation, the partnership relationship is not created." Id. at 10.
In Shaw v. Delta Airlines, Inc., 798 F.
Supp. 1453 (D. Nev. 1992), the United States District Court for
the District of Nevada found that no partnership existed between
two airlines who had a contractual relationship. The court stated:
On its face, this section [NRS 87.070] might seem
to imply that any contractual agreement under which both parties
receive profits is a partnership. However, most jurisdictions
find that mere participation in profits does not create a partnership
unless the partners also share losses. [Citations] Also, most
authorities require that each partner have some degree and right
of control over the business.
Id. at 1456. Since the agreement at issue did
not indicate any desire by the parties to share losses or to have
joint control, no partnership existed.
Thus, besides the ways discussed above to allow
a minority co-owner to take profits from a business without being
deemed a partner, a contract which does not call for the sharing
of losses, or which denies the minority owner the right of control
over the business, should preclude a finding of a partnership.
If proper planning is achieved, a partnership
label can be avoided if the parties so desire.
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