Sharing profits does not make a partner: PA 1890 s. 2
Under PA 1890 s. 2, joint ownership and sharing gross returns do not create a partnership. Profit sharing is evidence, but employee pay or loans do not.
Official text
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PA 1890 s. 2 — United Kingdom
In determining whether a partnership does or does not exist, regard shall be had to the following rules: Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof. The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived. The receipt by a person of a share of the profits of a business is primâ facie evidence that he is a partner in the business, but the receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business; and in particular— The receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him a partner in the business or liable as such: A contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such: A person being the widow , widower, surviving civil partner or child of a deceased partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such: The advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such. Provided that the contract is in writing, and signed by or on behalf of all the parties thereto: A person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.
Section 2 supplies the tests for the question section 1 poses. Rule 1: joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held, whether or not the owners share profits from using it. Two people who own a rental property together are not partners merely because of that. Rule 2: sharing gross returns does not of itself create a partnership - so an arrangement to split takings, as opposed to profits, points away rather than towards.
Rule 3 is the important one. The receipt by a person of a share of the profits of a business is "primâ facie evidence" that he is a partner, but receipt of such a share, or of a payment contingent on or varying with profits, does not of itself make him a partner. The section then lists five relationships that are expressly not partnership despite involving a share of profits: repayment of a debt by instalments out of profits; remuneration of a servant or agent by a share of profits; an annuity to the widow, widower, surviving civil partner or child of a deceased partner; a loan on a contract that the lender receives interest varying with profits or a share of profits - but only if the contract is in writing and signed by or on behalf of all parties; and an annuity paid to someone who sold the goodwill of the business.
The written-contract condition on the loan exception is the trap. A friend who lends money on a handshake in exchange for a share of the profits does not get the benefit of the exception, and the prima facie evidence in Rule 3 stands - with the joint liability in section 9 attached to it.
When it applies
Someone who lent money to a business in exchange for a share of the profits.
A staff member paid a percentage of profits who is now said to be a partner.
Two people who jointly own a property and share the rent from it.
The family of a deceased partner receiving an annuity from the continuing business.
A seller of a business receiving payments out of future profits.
What this section does not say
×It does not make co-owners partners. Rule 1 excludes joint and common ownership from creating a partnership by itself.
×It does not treat a share of gross returns as a share of profits. Rule 2 distinguishes them.
×It does not protect an oral profit-sharing loan. The lender exception requires the contract to be in writing and signed by or on behalf of all parties.
×It does not make profit-sharing conclusive. Rule 3 makes it prima facie evidence, which can be displaced by the whole of the evidence.
×It does not decide the shares. The default sharing rules are in section 24.
Worked examples
Invented situations, written to show how the wording bites. They are not real cases, not judgments and not precedent, and nothing here predicts what would happen in yours.
Illustrative example
Someone lends twenty thousand pounds to a friend's business in exchange for a quarter of the profits. Nothing is put in writing. The business fails and suppliers begin chasing the lender for the debts.
How the wording applies
Rule 3 makes receipt of a share of profits prima facie evidence of partnership, but says receipt of such a share does not of itself make the recipient a partner, and lists the relationships that are excepted. The fact that decides this case is the condition attached to the lender exception: it requires the contract to be in writing and signed by or on behalf of all parties. Without writing, the exception is unavailable and the prima facie inference stands to be displaced by the rest of the evidence.
How the parties settled it
They sign a written loan agreement recording the original terms and the date, and agree the lender takes no further profit share and is repaid from asset sales after the trade creditors.
Illustrative example
A long-serving employee is paid a fixed salary plus a percentage of annual profits. When the business runs into trouble, the owner says the arrangement made them a partner and they must share the losses.
How the wording applies
Rule 3(b) expressly excepts remuneration of a servant or agent by a share of profits from making that person a partner. The fact that decides which side of the line this falls is the substance of the relationship - control, working hours, whether they bore any risk, whether they held out as a partner to customers - because a profit share is evidence of partnership, not proof of it.
How the parties settled it
They agree the arrangement was employment throughout, confirm it in an exchange of letters covering the last three years, and settle the outstanding profit share for the final year at an agreed figure.
Say what is happening. A neutral mediator hears your side and the other party's, and walks you both to a written agreement. In the advanced settings you can ask for the decision to be reasoned on the Acts of Parliament that apply in England and Wales.
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This page reproduces the text of PA 1890 s. 2 in force at the date shown and explains it in general terms. It is not legal advice and takes no account of the circumstances of your case, which can change the answer completely. For a live dispute, for limitation periods, and before taking any step in court, consult a qualified lawyer in England and Wales.