Only Sharing Profits Does Not Make You a Partner: A Brief on the Partnership Law

Abstract-

The topic of partnership law in various countries considers profit sharing significant in partnerships, although it is only a factor in defining a legal partnership. The article aims to discuss the legal basis for which profit sharing alone does not constitute a legal partnership by exploring the legal provisions as well as case laws from jurisdictions that follow common law systems. Using the methodology of legal research based on case laws, this thesis argues that the courts have held for additional factors necessary in legal partnerships beyond the provision of profit sharing. It also argues that although there is prima facie evidence in respect of profit sharing, it can be displaced in case the parties do not have necessary elements for the absence of a partnership situation. The topic of this thesis aims to address some of the confusions in the principles of partnership law.

Introduction-

In commercial disputes across jurisdictions, partnership claims based solely on profit-sharing frequently arise. The often-misunderstood principle is that receiving profit shares does not automatically establish partnership—a concept rooted in centuries of mercantile jurisprudence.

Modern commerce features complex profit-sharing beyond traditional partnerships: employee bonuses, profit-based loan interest, franchise royalties, and contractor incentives. Law must distinguish true partnerships—characterized by mutual rights, obligations, and unlimited liability—from other profit-sharing relationships. Though the Indian Partnership Act 1932 (Section 4), English Partnership Act 1890 (Section 1), and U.S. Uniform Partnership Act define partnership as carrying on business in common for profit, courts consistently hold profit-sharing insufficient alone.

This article examines whether profit-sharing constitutes partnership evidence per se or merely one factor among many. It analyzes legal tests used globally to distinguish partners from profit-sharers, evaluates profit-sharing’s evidentiary presumptions, and explores underlying policy rationales. The central thesis: profit-sharing provides strong partnership evidence but requires mutual agency, control, and intent to establish partnership.

Statutory Provisions on Partnership-

The Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Section 6 of the said Act distinctly discusses profit sharing. The Section provides that sharing of profits or of gross returns arising from property jointly held does not by itself create partnership, whether the persons sharing have a joint or common interest in the property. It is thus observed that co-ownership or joint interest in property, even with profit distribution, lacks the essential element of business agency that characterizes partnership.

The English Partnership Act of 1890 offers similar regulations. Under section 1 of the Act, partnership is the relationship which subsists between persons carrying on a business in common with a view of profit. Section 2(3) states that the receipt by a person of a share of the profits is prima facie evidence of the existence of a partnership. However, such an assumption can be overridden. There are several exceptions mentioned for the sharing of profits to be not treated as partnership: payment to servants and agents, payment to the widow and children of a deceased partner, a loan payable with profit-sharing interest, and a payment for the sale of goodwill.

The Uniform Partnership Act (UPA), adopted by most U.S. states, uses the following definition of partnership: “An association of two or more persons carrying on a business for profit as co-owners.” Section 202(c)(3) of the Revised Uniform Partnership Act (RUPA) says that a sharing of profits is presumed to be a partnership; however, the partnership presumption can be defeated if the profit-sharing amount is proved to be given to a supposed partner as payment for a debt, wages, rent, annuity, sale of goodwill, or interest on a loan.

Case Law Establishing Core Principles-

This underlying tenet of profit-sharing being alone insufficient was deduced through English cases. In Cox v Hickman (1860) 8 HLC 268 (UK), it was laid down by the House of Lords that where the creditors conducted business on behalf of a debtor and realized profits in discharge of their liability, they could not be considered partners, as they lacked the critical ingredient of doing business with a view to carrying on business on their own account.

Lord Cranworth made it abundantly clear in this regard that “the true test is not, merely, do they share the profits? But, do they mean to carry on business in partnership?”

The Indian Supreme Court in the case Dulichand Laxminarayan v Commissioner of Income Tax AIR 1956 SC 354 (India) has discussed the requirements of forming a partnership and held: “The true test remains whether the parties intended to carry on business jointly and share profits as principals.” The Court added that profit-sharing is not conclusive of partnership and shall be considered in relation with other ingredients such as agency and joint control.

With regards to sophisticated investment arrangements involving the lending of money and the sharing of business control and profits, the case of Martin v. Peyton (1927) deals with a complex lending agreement involving a sharing of significant control and profits. The court ruled that no partnership existed since the control and profits allocated to the lenders constituted protective interests for the loans rather than participation in the management of the business as joint owners. Cardozo described the necessity of partnership involving more than the splitting of profits and control of the business.

The English Court of Appeal decision in Nationwide Building Society v. Lewis (1998) Ch 482 (UK) reiterated the importance of assessing profit-sharing agreements holistically. Solicitors who referred mortgage-related business to a building society and were compensated on a profit-sharing fee were not partners despite splitting profit sharing since there was a total absence of mutual agency, joint enterprise, and partnership intention.

Analysis of Judicial Approaches to Profit-Sharing Arrangements–

The Primacy of Intention in Partnership Formation-

The intention of the parties is the first question that comes up when determining whether profit-sharing results in partnership. The courts have made it clear that a partnership is fundamentally a contractual arrangement and cannot be imposed on people who do not want to form one. This promotes flexibility among those involved in business dealings.

Nonetheless, courts evaluate objective indications of the parties’ intentions in a case in addition to the explicit disclaimers. In written agreements, “This is not a partnership” is taken into consideration, even though these agreements are not definitive on a matter where the parties’ objective manifestations reflect the characteristics of a partnership. In a situation like this, the objective theory of contract must be taken into account.

The Indian judiciary has also given emphasis to this method. In Sayyed Meeran Sahib v. Illachi Bi AIR 2004 Mad 283 (India), the Madras High Court held that “merely because the parties are stated in an agreement to be not partners, it does not in every case prevent the parties from becoming partners if their conduct shows the parties to be partners.” These factors included sharing of profits, joint control, agency, and objects of business to decide on their true relationship notwithstanding the parties’ non-partnership agreement.

The United States courts also give more importance to substance than form. In the case of Fenwick v. Unemployment Compensation Commission 133 NJ L 295 (1945), the Supreme Court of New Jersey determined that an employee sharing half the profits of the business was not a partner since the intention of the agreement was primarily compensation rather than ownership. It looked into the aspects of contribution of capital, control of the business, sharing of losses, and the parties’ intentions.

Essential Elements Beyond Profit-Sharing-

The courts have held a number of factors to qualify a company as a partnership after taking into account profit sharing. The most significant factor in a partnership is mutual agency, whereby each of the partners will have authority to act for and bind the partnership in commercial transactions. This is what distinguishes a partnership from an employer and employee relationship or a lender and borrower relationship or a landlord and tenant relationship where profit sharing exists but lacks mutual agency authority.

The “in common” or “co-owner” nature of the business operation requirement means more than simple investment. Partners must be able to make management decisions even if the right is not exercised. The courts differentiate between making decisions as business owners and exercising protective rights as a creditor, employee, or advisor.

Even if there is no legal requirement for a partnership, loss-sharing is a clear sign of one. As a co-owner of the company and a share of its risk, a partner typically shares profits and losses. Profit sharing without risk is a sign of a servant, lender, or employee.

In the past, a capital contribution was a clear indication of a partnership relationship; however, under current law, the contribution may take the form of services rather than capital. The crucial question in this situation, though, is whether the contribution is a portion of the company in terms of ownership or just a method of determining compensation.

Application to Modern Commercial Arrangements-

Contemporary business structures create novel profit-sharing arrangements that test traditional partnership concepts. Equity compensation for startup employees grants ownership interests with profit participation, yet courts typically find no partnership absent management authority, mutual agency, and other partnership characteristics.

Revenue-sharing agreements between businesses enable collaboration without partnership. Courts examine whether the arrangement represents joint business ventures or separate businesses transacting on specified terms. Separate entities, limited cooperation, and absence of mutual agency prevent partnership characterization despite revenue distribution.

Franchise relationships involve profit-sharing through sales-based royalties, yet franchisors and franchisees are not partners. Courts emphasize that franchisor control protects brand standards rather than managing franchisee operations as co-owners. Limited agreement scope, lack of mutual agency, and separate operations distinguish franchising from partnership.

Professional service arrangements increasingly use profit-based compensation for senior employees or consultants. Courts evaluate whether such arrangements create partnership by examining factors beyond profit-sharing: authority to bind the firm, participation in governance, representation as partner to clients, and loss-sharing. Absent these characteristics, profit-based compensation does not establish partnership status.

Judicial Tools for Distinguishing Partnerships

Courts employ three primary frameworks to distinguish partnerships from mere profit-sharing arrangements.

The multifactor test weighs profit-sharing alongside mutual agency, loss sharing, joint management, capital contribution, partnership intent, and third-party representations. No single factor determines the outcome; courts holistically assess whether the relationship exhibits partnership characteristics.

The business purpose test examines whether parties pursue a common business objective as co-owners or engage in separate transactions involving profit distribution. Partnerships involve joint ventures sharing both risks and rewards, while profit-sharing without joint business purpose typically indicates employment, lending, or rental relationships.

The control test evaluates the degree and nature of control exercised by profit recipients. Partners control the business as owners with authority to make decisions and bind the partnership. Non-partners exercise only limited, role-specific control—employees manage tasks, lenders impose protective covenants, landlords maintain properties—without the comprehensive business authority characterizing partnership.

Courts also apply partnership by estoppel, which prevents parties from disclaiming partnership after holding themselves out as partners to third parties. This doctrine protects those who reasonably relied on apparent partnership representations and ensures parties cannot selectively claim partnership benefits while avoiding obligations.

Comparative Perspectives Across Jurisdictions

United Kingdom Approach

English law emphasizes substance over form. In Stekel v Ellice [1973] 1 WLR 191, the Court of Appeal held that parties cannot avoid partnership obligations by claiming different status when their relationship exhibits partnership characteristics including profit-sharing, loss sharing, and mutual agency. The Limited Liability Partnerships Act 2000 created a hybrid entity offering partnership flexibility with corporate limited liability, recognizing modern commercial needs for profit-sharing structures without unlimited liability.

United States Approach

American partnership law under RUPA follows similar principles but allows rebutting profit-sharing presumptions when profits constitute debt payments, wages, rent, or other specified arrangements. Courts emphasize co-ownership; in Southex Exhibitions v Rhode Island Builders Association 933 F2d 1546 (1st Cir 1991), parties sharing revenues were not partners because they operated separate businesses rather than jointly owning one. Partnership by estoppel, codified in RUPA Section 308, prevents parties from disclaiming partnership after holding themselves out as partners, protecting third parties who reasonably relied on such representations.

Indian Approach

The Indian Partnership Act 1932 defines partnership as sharing business profits while Section 6 clarifies that profit-sharing from jointly held property alone does not create partnership. In Commissioner of Income Tax v Sodra Devi AIR 1957 SC 832, the Supreme Court held co-owners sharing rental income were not partners because they lacked mutual agency and active business conduct. Indian courts examine economic substance, considering capital contribution, loss exposure, and management participation, preventing artificial partnership characterizations while protecting legitimate profit-sharing arrangements.

Lessons from Comparative Analysis-

All examined jurisdictions share core principles: profit-sharing constitutes important evidence but not conclusive proof of partnership, additional elements—particularly mutual agency and joint business purpose—are essential, and courts examine objective relationship manifestations beyond contractual labels while respecting parties’ intentions.

However, jurisdictions balance commercial flexibility and creditor protection differently. English law maintains stricter rules while offering LLP structures for limited liability. American law provides greater flexibility through RUPA’s detailed rebuttal provisions and diverse entity options. Indian law emphasizes family and cultural contexts, recognizing that family businesses may distribute profits without creating partnerships.

These comparative insights reveal that effective partnership law must balance clear characterization rules, commercial flexibility for legitimate profit-sharing, third-party protection, and party autonomy. The universal principle—that profit-sharing alone does not create partnership—achieves these objectives by requiring comprehensive relationship analysis rather than mechanical application of single factors.

Findings and Observations

Comparative analysis across jurisdictions reveals that while profit-sharing creates rebuttable presumption of partnership, it alone is insufficient to establish one. Courts consistently require additional elements, with mutual agency (authority to bind co-participants) being the most critical distinguishing factor.

Partnership determination hinges on objective evidence of intent to create business co-ownership with joint management and unlimited liability, not mere profit distribution. Modern commercial arrangements—equity compensation, revenue-sharing, franchise royalties—involve profit participation without partnership when they lack co-ownership characteristics.

Courts apply a flexible multifactor approach examining profit-sharing, loss-sharing, capital contribution, management authority, mutual agency, and holding out to third parties. This framework distinguishes genuine partnerships from employment, lending, landlord-tenant, and other profit-sharing relationships across diverse commercial contexts.

The research synthesizes common law approaches, identifying specific doctrinal mechanisms—statutory rebuttals, multifactor tests, objective intention analysis, and mutual agency requirements—that balance third-party protection with commercial flexibility in structuring profit-sharing arrangements.

Conclusion and Recommendations

This article examined the principle that profit-sharing alone does not establish partnership, analyzing statutory frameworks, judicial precedents, and comparative approaches across India, the United Kingdom, and the United States. While profit-sharing creates prima facie evidence of partnership, courts consistently require additional elements—particularly mutual agency, joint business purpose, and genuine partnership intention.

Partnership law successfully balances protecting third parties through profit-sharing presumptions while preserving commercial flexibility through rebuttal mechanisms. Courts employ sophisticated frameworks—multifactor tests, intention analysis, and mutual agency requirements—to distinguish partnerships from employment, lending, and other profit-sharing relationships.

However, modern commercial practices challenge traditional principles. Equity compensation, revenue-sharing agreements, and sophisticated financing arrangements require courts to adapt doctrinal approaches. The proliferation of alternative entities—limited partnerships, LLCs, LLPs—reflects demand for structures combining profit-sharing flexibility with liability protection.

Recommendations

For Courts: Clearly articulate factors distinguishing profit-sharing from partnership, emphasizing mutual agency and joint business purpose as essential elements. Develop specialized expertise to evaluate complex commercial arrangements, focusing on economic substance over contractual labels while respecting party autonomy.

For Legislators: Provide clear statutory guidance on profit-sharing arrangements that do not create partnership, updating provisions for modern practices including equity compensation and revenue-sharing. Consider whether profit-sharing presumptions remain appropriate or whether nuanced approaches better serve commercial certainty and third-party protection.

For Legal Practitioners: Draft profit-sharing agreements explicitly addressing partnership formation, including intent statements, management authority allocation, mutual agency limitations, and relationship purpose. Carefully delineate authority, control, and representation rights. Advise clients that express disclaimers do not conclusively prevent partnership characterization if the relationship exhibits partnership characteristics.

For Business Owners and Investors: Recognize that profit-sharing arrangements may create partnership liability when accompanied by mutual agency and joint management, regardless of labels. Seek legal counsel when structuring profit distribution arrangements. Consider alternative entities like LLCs or limited partnerships when desiring profit-sharing without unlimited liability.

Reference(S):

Cases

India:

• Commissioner of Income Tax v Sodra Devi, AIR 1957 SC 832 (India)
• Dulichand Laxminarayan v Commissioner of Income Tax, AIR 1956 SC 354 (India)
• Ladhuram Taparia v Bani Ram Taparia, AIR 2004 Cal 288 (India)
• Sayyed Meeran Sahib v Illachi Bi, AIR 2004 Mad 283 (India)

United Kingdom:

• Cox v Hickman, (1860) 8 HLC 268 (UK)
• Nationwide Building Society v Lewis, [1998] Ch 482 (UK)
• Stekel v Ellice, [1973] 1 WLR 191 (UK)

United States:

• Bay Center Apartments Owner LLC v Emery Bay PKI LLC, 2009 WL 1124451 (Del Ch 2009)
• Fenwick v Unemployment Compensation Commission, 133 NJ L 295 (1945)
• Martin v Peyton, 246 NY 213 (1927)
• Southex Exhibitions v Rhode Island Builders Association, 933 F2d 1546 (1st Cir 1991)
• Walker v Hirsch, 27 Cal App 4th 1533 (1994)

Statutes and Legislation

• Indian Partnership Act, 1932 (India)
• Limited Liability Partnerships Act 2000 (UK)
• Partnership Act 1890 (UK)
• Revised Uniform Partnership Act (1997) (United States)
• Uniform Partnership Act (1914) (United States)

Books

• Frederick G Kempin Jr, Legal History: Law and Social Change (Prentice-Hall 1963)
• J Dennis Hynes and Mark J Loewenstein, Agency, Partnership, and the LLC (West Academic Publishing 2014)
• Lindley & Banks, Partnership Law (19th edn, Sweet & Maxwell 2010)
• Pollock on Partnership (15th edn, Universal Law Publishing 2011)