A shared bank account, a handshake, and an oral agreement to split profits may feel like an informal collaboration. Legally, however, those facts can support a much more consequential conclusion — the parties formed a partnership even though they never signed a partnership agreement, or the parties agreed to become partners without observing applicable organizational formalities.
That matters because partnership status may bring management rights, fiduciary duties, profit-sharing claims, and personal exposure for business obligations.
Delaware
Under Delaware’s Revised Uniform Partnership Act, a partnership generally arises when two or more persons associate to carry on a business for profit as co-owners, whether or not they intended to form a partnership. Sharing profits can create a statutory presumption of a partnership, subject to exceptions such as payments for wages, rent, interest, or debt.
Delaware law is contractarian — sophisticated parties can define many aspects of their relationship by agreement. But the name given to an agreement or relationship does not always control. Calling someone a “consultant” or describing an arrangement as a “joint project” may not prevent a court from examining how the parties actually operated.
A prominent example of agreement by conduct is the Delaware Supreme Court’s decision in In re Coinmint, LLC, 261 A.3d 867 (Del. 2021). Although the dispute concerned a limited liability company rather than a partnership, the court emphasized that an enforceable business agreement may exist even without a fully executed formal document if the parties manifested assent to the terms. In this case, undocumented cash infusions made by company members led the court to determine whether they were capital contributions or loans under the operating agreement and whether they diluted the minority partner’s interest in the company. No company meetings were held to approve the contributions, and no company consent documents were signed to memorialize them. Nevertheless, the court concluded that the minority member had waived the operating agreement’s formal procedures and agreed to the equity dilution and the company’s redomestication. This shows how actual conduct may matter most and how courts pay attention to the parties’ true intent.
The lesson is straightforward: unsigned does not necessarily mean unenforceable.
New York
New York courts similarly examine the parties’ actual relationship. Under New York Partnership Law, a partnership is an association of two or more persons carrying on a business for profit as co-owners. Courts typically consider factors such as:
- The parties’ intent;
- The sharing of profits and losses;
- Joint control and management;
- Capital contributions;
- Joint ownership of assets; and
- The parties’ representations to customers, lenders, investors, and tax authorities.
No single factor automatically decides the issue. Profit sharing is important, but it may reflect compensation rather than ownership. Likewise, a person who receives a percentage of revenue is not necessarily a partner if that person lacks control, bears no losses, contributes no capital, and is treated consistently as an employee or independent contractor.
Recent New York litigation continues to show that partnership claims are highly fact-sensitive. In Sutton v. Houllou, 191 A.D.3d 1031 (N.Y. App. Div. 2021), the court addressed claims arising from an oral partnership and reinforced the importance of concrete evidence concerning the parties’ arrangement and performance. In this case, the defendant approached two plaintiffs asking to help him develop a retail electronics business for his company. The parties planned to form a new company, and the plaintiff brothers intended to use Damax Holdings, LLC (hereinafter — “Damax”) as their business vehicle. However, they never formally filed LLC formation documents for Damax. Plaintiffs were supposed to work as employees of Damax for the benefit of the new shared company, AMD Ventures, LLC (hereinafter — “AMD”). The agreement provided for distribution of the net profits of AMD on a regular basis. After working together, the defendant terminated the plaintiffs’ positions, and the brothers sued for breach of contract and other claims because promised profit distributions were never paid.
The court held that a party who enters into a contract with individuals acting on behalf of a non-existent corporate entity cannot use that entity’s non-existence to avoid fulfilling contractual obligations to those individuals. The court used the general rule here — a person entering into a contract on behalf of a nonexistent corporate entity may be held personally liable on the contract. New York courts also distinguish genuine co-ownership from preliminary negotiations.
Why Accidental Partnership Status Is Dangerous
If a court finds a general partnership, each partner may have authority to bind the business in the ordinary course. Partners may also face joint and several liability for partnership obligations, subject to the governing statute and the specific claim.
The internal consequences can be equally significant. Partners ordinarily owe fiduciary obligations, including duties concerning loyalty, conflicts, misuse of partnership opportunities, and accounting for benefits derived from partnership activity. A disagreement that began as a commercial breakup may therefore become a claim for profit distribution, dissolution, or breach of fiduciary duty.
A Practical Test
Before starting a shared venture, ask:
1. Who makes decisions?
2. What is being shared?
3. Who bears losses?
4. Who owns the assets?
5. What entity structure is intended?
6. What relationship is not intended?
The Bottom Line
Business relationships are judged not only by what the parties call them, but also by what they do. Delaware and New York both recognize that conduct, economics, and control can carry legal consequences even when the paperwork is incomplete.
The safest approach is simple — define the relationship before the relationship defines itself.