Before we discuss the meaning of “partnership by estoppel”, it can be helpful to know what the definition of partnership is first. A partnership is typically defined as a specific type of business organization that involves two or more persons who act as owners of a business for profit.
Although there are four different kinds of partnerships in a business context, for the purposes of this article we will only focus on general partnerships since this is the only type wherein a “partnership by estoppel” relationship would transpire. Thus, a general partnership is formed when two or more individuals wish to carry on as co-owners of a for-profit business.
Unlike the other three forms of partnerships, a general partnership does not need to be created in accordance with the law. It can occur naturally between persons who simply wish to be co-owners of a business for profit. In other words, a general partnership can be formed, regardless of whether the individuals wanted to create one or not.
For instance, suppose Person A and Person B are roadside vendors who sell coffee from the same cart. They split any profits they earn evenly and make joint management-like decisions about the coffee cart, even though they never refer to themselves as partners nor have an agreement stating as much. However, despite never referring to themselves as partners or having a partnership agreement, they have in fact unintentionally formed a partnership.
As is apparent from the above scenario, it is not difficult to imagine how this could develop into a legal issue after an extended period. For example, there are some situations (similar to the one above) where the individuals’ statements or conduct would give rise to a partnership in the eyes of the law. Thus, if there is a dispute over the business, the court will treat the individuals as if they are a partnership and hold the other parties accountable for any debts or liabilities.
This is essentially what “partnership by estoppel” means. Basically, the phrase refers to a person who is not technically a partner, but can still be held liable as one for any debts or damages incurred by a business or owed to a third party.
This is because of the guidelines provided in the Revised Uniform Partnership Act (“RUPA”), which states that if an individual permits another party to solicit business or advertise as if they are partners, then they will be viewed as such by third parties. The RUPA guidelines also provide that persons who form a partnership can be held jointly and severally liable for any incidents that occur in connection to the business.
Therefore, if you are unknowingly involved in a partnership and there is a dispute over the business, then you can be held legally responsible for the actions of the other partners. Remember, it does not matter whether you meant to form a partnership or if you did not partake in the acts that caused the damages, you will still be held liable as a general partner if the court believes that you and the other individuals represented yourselves as a partnership.
Am I at Risk of Being Held Liable as a Partner?
As previously discussed, any individual who is determined to be a partner in a business can and will be held liable for all debts, losses, and/or damages incurred by the partnership. For instance, if the partners are late on payments or are unable to make payments on debts, then all of the partners can be held liable by the business’s creditors.
Each state has adopted its own partnership statutes, which are similar to the rules found under the RUPA. Thus, while the exact elements of partnership by estoppel may vary by state, this type of relationship will generally arise if any of the following situations occur:
- The individuals held themselves out to other parties as if they were already partners (e.g., either by verbal expression or implied conduct);
- The individuals solicited business or advertised as if they were partners in a partnership;
- The person claiming estoppel has previously relied on the business arrangement created by the parties;
- The individuals have failed to correct third parties that assume they formed a partnership;
- The parties allow themselves to use each other’s names when conducting business; and
- All parties actively participate in making management-level decisions about the business.
Whether a party can specifically be held liable as a partner in a partnership by estoppel case will depend on the following factors:
- If the party represented themselves as a partner or allowed another party in the business to introduce them as a partner to an external party; and
- If the outside party relied on the representation in good faith to either extend credit, goods, or services to those associated with the business.
Since any evidence can be used to establish that the parties held themselves out as partners, the key to liability in partnership by estoppel cases hinges on the second factor in the above list. If it can be shown that a third party relied to their detriment on the individuals’ representation as partners, then they will most likely be held liable for any damages that they caused to the third party.
The original reason that the doctrine of partnership by estoppel was created was to prevent persons from defrauding and taking advantage of outside lenders or creditors who loaned them money.
Additionally, a plaintiff who files a lawsuit to recover damages for the parties’ misrepresentation, will have the burden of proving that a partnership by estoppel exists. Again, the plaintiff will do this by proving that:
- The defendant either held themselves out as a partner or allowed others in the business to hold them out as a partner;
- The plaintiff relied on this alleged partnership in good faith to either extend credit or do business with the parties; and
- The plaintiff suffered damages due to the above deceptions.
Accordingly, if these three elements can be sufficiently proven, then the defendants will be liable to the plaintiff for monetary damages. Thus, individuals that could potentially be held liable for their partners’ actions in a partnership by estoppel should contact a local business attorney for representation as soon as possible.
Should I Contact an Attorney About My Partnership Issue?
As discussed above, the doctrine of partnership by estoppel was formed by case law and eventually became part of the RUPA. While not every state has provided an exact definition of partnership by estoppel, each state has adopted similar versions of the RUPA and may hold alleged partners liable for actions like misrepresentation or deception.
Thus, if you believe that you are not in fact involved in a partnership or a partnership by estoppel and another individual or a third party is attempting to collect money from you as if you are a partner, then you should consult a local corporate attorney immediately for further advice. An experienced business attorney can ensure that your rights and interests are protected in accordance with the relevant laws.
Your attorney can also research whether there are any defenses available that you might be able to raise against the other party’s claim and/or if there are any counterclaims you can make against the opposing party. In addition, your lawyer can also assist with drafting any necessary legal documents for your case as well as can provide representation in court.