In the business world, individuals and companies that work together are often referred to as “partners.” But is every such collaboration also a partnership in the legal sense?
This question has become particularly relevant following warning letters sent by the Registrar of Partnerships to businesses that had not registered as partnerships, demanding registration within 45 days. If you run a joint venture, distribute another company’s product, or work with a “business partner,” you should consider whether your collaboration constitutes a partnership as a matter of law, and whether you are required to register it.
The Israeli Partnerships Ordinance requires a partnership established “for the purpose of conducting business” to be registered within one month of its establishment. This obligation is not new, but the Registrar recently began acting to enforce it. Before rushing to register a partnership, it is important to understand that not every business collaboration requires registration. Even if the parties refer to each other as “partners,” their arrangement may legally be a different type of commercial engagement.
Indications a Business Collaboration is Actually a Partnership
A partnership exists when two or more persons or legal entities conduct business together for the purpose of generating profits. To determine whether a partnership exists, the key consideration is the nature of the activities in practice, and not just the terms used by the parties. Calling someone a “partner” does not, by itself, create a partnership. Conversely, an agreement stating that the parties are not partners will not necessarily change the legal outcome if they are running a business together. A partnership can be formed even without a written agreement.
One indication of a partnership is the sharing of business profits. The Partnership Ordinance states that receiving a share of the profits constitutes prima facie evidence of a partnership, although this evidence may be rebutted. The Ordinance also specifies exceptions in which profit-sharing does not necessarily indicate a partnership. Other factors to consider include how business decisions are made, the extent of each party’s involvement in managing the business, and how the parties present themselves to others.
“Prepare a Partnership Agreement for Me” – But Is It Really a Partnership?
We often hear this request from clients, but the nature of the arrangement must be examined before drafting the agreement begins. A client recently approached us and said enthusiastically, “Prepare a partnership agreement for me. I found an amazing partner to run the business with me.” He explained that the two companies would jointly market the product, present themselves as partners, and even share profits. These features may indicate a legal partnership with an obligation to register, and exposure to liability for the partnership’s debts.
However, a closer look revealed an entirely different picture: the other company had merely agreed to buy our client’s product, resell it to its customers, and receive a percentage of each transaction. In this case, the arrangement was consistent with a reseller agreement, under which two separate businesses contract with each other to sell products without necessarily running a joint business or sharing its profits and losses.
The picture may be different, however, if the parties share net profits rather than just sales revenues, jointly bear expenses, make decisions together, or present themselves to customers as a single entity. The more of these features that are present, the more important it is to assess whether a partnership has been formed, even if the agreement describes the relationship differently.
Why Is It Important to Register a Partnership?
Where registration is required, failing to register a partnership is an offense, but it does not negate the partnership. Obligations and liabilities arising from the partnership may therefore apply even if it was never registered. In a general partnership, one partner’s actions may bind the other partners, and each partner may be personally liable for the partnership’s debts. In addition, anyone who presents themselves as a partner may be liable to a person who relied on that representation.
Recommendations for Entrepreneurs
Therefore, prior to the formation of a joint venture, or if you are already working together, make sure the arrangement reflects how you work in practice and that you understand your responsibilities. Parties should carefully consider allocation of profits and losses, governance and decision-making mechanisms, the division of operational responsibilities and liabilities, and the joint venture’s external presentation to customers and suppliers.
Businesses that have received a warning letter from the Registrar of Partnerships should review the true nature of their arrangement and assess whether a statutory registration requirement applies, rather than assume that receipt of the letter alone mandates partnership registration. A legal review of their operational structure and existing agreements can help determine the appropriate legal framework, address any registration obligations where applicable, and mitigate the parties’ legal exposure.
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Adv. Inbar Gorelick, Partner, and Adv. Diana Sattarov Koffman are attorneys in the firm’s International Commercial Department