In determining whether parties are, in fact, in a partnership depends on the conduct of the parties. Titles, labels, and disclaimers are often meaningless. Consider this scenario:
In a New York City bar, two successful entrepreneurs clink glasses over an exciting new venture. They shake hands and declare that, while they are not partners, success is inevitable—after all, their AI-powered estate planning app will revolutionize the way people avoid lawyers. Both are wary of entanglements. One ― on the heels of unwinding a small family business after the death of one of the first-generation founders—is inspired to create something that assists families to cost-effectively manage family assets without a probate. The other—just finished wrangling a family trust—still flinches at the memory of a fiduciary duty debacle at the hands of his wayward uncle. At the height of their distrust, they agree from the start: No partnership. Staying independent keeps things clean.
After discussing, they determine to put their agreement in writing. A key provision, in bold, makes it crystal clear:
“The parties are not partners.”
Fast-forward a year. One of them lands a major investor behind the other’s back, cutting the other out entirely. When the aggrieved party complains, the party with the new investor responds: Not my problem. We’re not partners. I owe you nothing.
The other—shocked—struggles to process the betrayal. After all, they had built something together—contributing capital equally, splitting profits, sharing costs, making joint decisions, and celebrating wins side by side. They had shared financial risks, had joint control over the business, and had always spoken about the company as “ours” in meetings.
The aggrieved party stares at the contract, his own signature staring smugly back at him, thinking, “I can’t believe I agreed to that provision. I should have known better.”
But despair isn’t necessarily the end of the road for the aggrieved party. Courts may very well still interpret the parties as having an implied partnership based on their course of conduct— disclaimer be damned.
No matter what the parties wish or intend, partnership is not just a label—it is a legal test. In New York, for example, courts have long held that “labels don’t matter, reality does.” Martin v. Peyton, 246 N.Y. 213 (1927). And attempts to create a contract that supersedes legal scrutiny are vulnerable from the start. As Judge Andrews of the New York Court of Appeals further explained in Martin v. Peyton: “A contract may be a mere sham intended to hide the real relationship… Mere words will not blind us to realities. Statements that no partnership is intended are not conclusive.” Subsequent cases confirm this legal concept. Twenty years after Martin v. Peyton, the New York Appellate Division in Rubenstein v. Small, 273 A.D. 102 (1st Dep’t 1947) noted that: “The court is not bound by a contract’s disclaimer of partnership, joint venture, or agency. It is free to look beyond the wording to determine the parties’ true relationship.”
Establishing that a disclaimer is ineffective does not, however, help us understand when and how a court might determine whether a partnership exists as a matter of law. Ultimately, things like sharing profits and losses, joint management, ownership of assets, control over the business—even how the parties talk about the company—matter. In short, it’s not about how parties label their arrangement, it’s about what they do.
Under New York Partnership Law § 10, a partnership is “an association of two or more persons to carry on as co-owners of a business for profit.” Courts analyze several factors, including:
- Intent of the Parties – The most critical factor is whether the parties intended to form a partnership. This can be expressed or implied from their conduct. See Martin v. Peyton, 246 N.Y. 213 (1927) (noting that, aside from self-serving statements, the key inquiry is whether the parties intended to be partners or their arrangement was something else, such as a loan or profit-sharing agreement).
- Sharing of Profits and Losses – A significant indication of a partnership is whether parties share in the profits and losses. See Brodsky v. Stadlen, 138 A.D.2d 662 (2d Dept. 1988) (noting that profit-sharing created a presumption of a partnership unless rebutted). The sharing of losses is particularly critical to a court’s analysis.
- Joint Control and Management – The extent to which parties share decision-making and control over business operations is important. See Kyle v. Ford, 184 A.D.2d 1036 (4th Dept. 1992) (no partnership was found where there was no evidence of joint control or decision-making authority).
- Capital Contributions – While not required, contributions of money, property, or labor toward the business can indicate a partnership.
- Holding Out as Partners – If parties present themselves as partners to third parties, courts may find that a partnership exists based on apparent authority. See Czernicki v. Lawniczak, 74 A.D.3d 1121 (2d Dept. 2010) (partnership found when the parties held themselves out as partners to clients and third parties).
- Liability to Third Parties – Courts also consider whether the alleged partners acted in a way that created joint liability for business debts.
The lesson from this hypothetical scenario? In business, the deal parties intended is not always the deal that they made, and one cannot escape legal obligations just by declaring that a deal does not reflect a partnership. If parties act like partners, the law may see them as partners, no matter what their contract says.
So, for those who see themselves as some version of our hypothetical entrepreneurs, before you clink glasses and shake hands, ask the tough questions and consider legal advice on the front end: What are we really agreeing to? Does the way we structure this deal create legal obligations? Whether or not you are in fact in a partnership, investing in clarity on the front end can help avoid costly and unanticipated legal disputes later in the relationship.
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