The risk of inadvertently forming a legal partnership

Beware the pitfalls of informal partnerships is the message as the Court of Appeal passes judgment on the high profile Llott v Williams case.

25 July 2013

A partnership is a legal concept which gives certain rights to the participants. No formality is required to form a partnership, which will automatically be created at law whenever two or more persons are carrying on a business in common with a view to profit without having put in place any other legal arrangements. It is not uncommon, particularly in family businesses such as farms, for partnerships to be formed ‘by accident.’ The consequences can be significant. For instance, each partner will obtain rights to share in management of the business and take profit from it, as well as being liable for its losses if it fails.

The Court of Appeal has been looking at the question of when a partnership is formed without formality in Ilott v Williams and others [7 June 2013]. In that case four people had agreed a business idea, had had some early meetings, obtained an internet domain name and had prepared various presentations and proposals. No-one had addressed the question of legal structure. When the relationship later broke down, one of them argued that a partnership had come into being and that he was entitled to profits.

The Court took the view that this was not enough to amount to carrying on a business with a view of profit. The reasoning was based on an evaluation of what the four had done and how they regarded each other. The limited steps they had taken towards the future operation of the business (such as acquiring a web domain name) were insufficient, they were still at the early stages of discussing where their funding would come from and had not financially committed to the business or sought to bind each other into it. At that stage, all they had was the concept, but no means of creating any profit. 

Although this case fell short of formation of a partnership, it is clear that preparatory steps to starting a business can (at the right point) be sufficient to create a partnership. The facts need to be considered in each case to decide how far along the parties were in their arrangements (even if they had never considered that a partnership had been formed). The risk of accidentally forming a partnership is particularly relevant to farming clients, given the informality that often surrounds the creation and on-going work of such businesses.

Kevin Kennedy is a partner in our agricultural disputes team. Sian Edmunds is a litigator in the group.

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Kevin Kennedy

Kevin Kennedy Partner

  • Agricultural Disputes
  • Trust and Probate Disputes
  • Estates and Land

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