Forming a General Partnership in Texas

When Is a General Partnership Formed Under Texas Law?

There is much confusion over the law governing the formation of general partnerships in Texas. The Texas Revised Uniform Partnership Act, which was codified in the current Texas Business Organizations Code, attempted to provide a fresh, simple, and ultimately practical approach. However, Texas courts continue to mess up the analysis by reading the statute through the lense of the old common law. A recent Fifth Circuit opinion, Derrick Petroleum Services v. PLS, Incorporated,  659 Fed.Appx. 748 (5th Cir. 2016), is a case in point. If the opinion accurately describes the record, then the conclusion reached that no partnership was created seems profoundly wrong.

History of Partnership Formation Law

Historically, Texas common law recognized two virtually identical legal entities: general partnerships and joint ventures. The creation of these entities was determined by the presence of four elements: (1) mutuality of interest, (2) mutuality of control, (3) sharing of profits, and (4) sharing of losses. The elements were the same for both business forms, and all four had to be present. The distinction between the two was usually given as a practical, not legal, difference. General partnerships were usually thought to involve the entire business relationship of all partners, while joint ventures were usually for a limited purpose. The distinction only became significant when the dispute involved usurpation of opportunities. Joint venturers were owed each other no duties with regard to opportunities outside the scope of the joint venture, while general partnerships were usually held to encompass a broader scope of duties. The Texas legislature passed the Texas Uniform Partnership Act, which expressly rejected the common law as to the requirements for a formation of a partnership. Afterward, courts reasoned that the formation of a general partnership was governed by the Act, but that the four common-law elements determined the existence of a joint venture. However, in practice, courts continued to rely on the four elements for the determination of the formation of a partnership.

Next, the legislature adopted the Texas Revised Uniform Partnership Act. The intent of the current law was to get away from the elements altogether and focus on the nature of the relationship. The definition of a partnership under the current law is "an association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether: (1) the persons intend to create a partnership; or (2) the association is called a 'partnership,' 'joint venture,' or other name." Tex. Bus. Orgs. Code Ann. § 152.051. A fair reading of the statute would be that the law of joint ventures was completely subsumed into the new partnership statute. A joint venture is a partnership, and the question of whether a partnership exists is whether the parties associated to carry on a business for profit as co-owners of the business. The intent to create a "partnership" is immaterial. What the parties named the entity or how they characterized it is immaterial.

Derrick Petroleum Services Opinion Gets Partnership Formation Wrong

In Derrick Petroleum Services v. PLS, Incorporated, Derrick Petroleum services had created a database of oil and gas transactions. That company entered into a "joint venture," pursuant to a written memorandum of understanding (MOU), with PLS, Incorporated. The two companies associated to carry on a business for profit, namely the joint marketing of subscriptions to the jointly branded "Derrick/PLS Oil & Gas Mergers & Acquisitions Database." Derrick contributed the existing database and its services in maintaining and continuing to compile the database. PLS contributed its services in marketing the database and selling subscriptions. The MOU called for the creation of a limited liability company to be owned by the two joint venturers after certain milestones were reached. However, the relationship deteriorated, the milestones were not reached, and the LLC was never formed. Both companies then sued each other claiming that the other had breached the MOU and to determine the ownership of the database. After a bench trial, the district court held that no partnership had been formed and that Derrick owned the database, while PLS had no rights in the database. The Fifth Circuit, in an unpublished per curiam opinion, affirmed--notwithstanding the court's repeated reference to the arrangement as a "joint venture."

Existence of the Partnership

The reasoning of the court was based on Section 152.052 of the Business Organizations Code governing "The Rules For Determining If a Partnership Is Created":

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