The Accidental Partnership
A recent conversation on the listserv for the American Agricultural Law Association focused on what were called “accidental partnerships.” Many people do not realize that a legal partnership can be formed merely by two peoples’ actions, even when they have a specific agreement between each other that they are not a partnership. Because so many farm and ranch operations involve several people, usually various family members, it is important to understand the basics of joint operations.
According to the North Dakota Century Code: “the 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.”
A hypothetical example is useful to explore some of the unexpected issues that might arise with an “accidental partnership.” In our example, two brothers each own land individually, and also own a parcel of land jointly. They farm the jointly owned land together under the name 2B Farms, and share profits and expenses from that land 50/50. They each farm their individually owned parcels themselves under their own names, and do not share profits or expenses.
In our example, the brothers actually operate a partnership. It is possible that two brothers who do not operate a partnership at all could find themselves in an “accidental partnership” without intending to do so. This can happen when they help each other farm, split the cost of inputs, and share profits. If one brother calls a custom sprayer to spray both brothers’ fields, for example, it’s possible the sprayer could assume they are partners and both could be held liable to the spraying on the others’ fields. Usually the problems are more complicated, however.
For example, assume one of the brothers purchases a new combine, and unintentionally uses the partnership account to purchase the combine. He speaks to his brother about the error, and they agree to “true-up” at the end of the year, and even sign a written agreement stating that the brother who purchased the combine is solely liable for the payments. Unexpectedly, the brother who purchased the combine can no longer make his payments. If a loan provider decides to foreclose on the combine, both brothers will be liable for the debt as partners.
Another example illustrates a less obvious potential for unintended consequences. The partners have a combine that is owned by the partnership. One of the brothers is buying a new combine for his individual operation, and his brother gives him permission to trade in the partnership combine, and says they can just square up later. According to the Century Code, “Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership.” The new combine will likely be considered partnership property.
These scenarios may never be a problem assuming the brothers continue to get along. As an attorney, I am unfortunately typically faced with the situations that arise when people are no longer getting along. And whether it’s brothers, cousins, or neighbors, relationships can break down, and splitting up (or arguing about what in facts is) partnership property can be a contentious business. Although certain facts could change the outcome of my examples, my goal is to point out that the intent of the farmers is not always what determines whether or not a partnership exists, or what becomes partnership property or liabilities. Keeping accurate and detailed records of partnership business is the best way to avoid problems, but you should also consult an attorney if you are farming or ranching with other people.