Business owners can choose from several legal entities when beginning their endeavour, and these entities will be the topic of a legal entity review series. This series will begin with a comprehensive review of general partnerships. This blog post will unravel the complexities surrounding the formation of a general partnership, the responsibilities of partners, liability risks, and dissolution of these entities in the context of Ontario law. This blog post will allow you to consider all the implications of forming a general partnership and whether it is suitable for your needs.
In Ontario, general partnerships are governed by the Partnerships Act and the common law (as specified by section 45 of the Partnerships Act). The Partnerships Act outlines the legal foundation for general partnerships and defines partners’ rights, responsibilities, and liabilities, addressing critical aspects like profit sharing, decision-making, and dissolution procedures. This blog post will outline the basic requirements for general partnerships below, as contained in the legislation and supplemented by the common law.
There are three requirements for a partnership to exist, per the Partnership Act, namely:
- There must be a “business,” which includes “every trade, occupation, and profession.” The definition of broad virtually any commercial activity would likely constitute a business. Few potential partnerships would fail on these grounds;
- There must be a “view to profit,” which essentially excludes charitable, social, or cultural endeavours; and
- There must be an agreement to carry on business in common and share profits. In this sense, the rules of contract formation apply, where a contract can be written or oral, as long as it includes the essential elements of a contract.
The third criterion is the most wrought with failure, as it may be difficult to establish that the persons or entities entering the agreement intended to be partners. As with most endeavours, it is best to ensure that an agreement is made in writing, clearly setting out the terms, including the profit sharing between the partners. Obtaining legal advice during the negotiation and drafting process is important to ensure that this agreement is fair and sound.
The potential partnership must comply with the Business Names Act, which includes special rules for general partnerships. The legislation specifies that the partnership can only conduct business if its name is registered by all the partners. Failure to adhere to this requirement has severe consequences; it prevents the partnership and its partners from maintaining a proceeding in Ontario as it relates to the partnership’s business.
Needless to say, registering the partnership name should be a priority for a partnership.
Unlike other business entities, partnerships are not a separate legal entity from its partners. Partners can sue or be sued in the partnership name. This also has implications for employment law matters. A fundamental rule for contractual formation is that no person can contract with him or herself. Since the partnership is not a separate legal entity, a partner cannot also be an employee, as the employment contract would be between the same person.
Each partner in the partnership is jointly liable with the other partners to the full extent of his or her assets for all debts and obligations incurred while a partner. Reduced further, this means that each partner can be held accountable for the partnership’s debts for their personal belongings. Liability also extends beyond death, as the deceased partner’s estate also remains severally liable if they remain unsatisfied.
It is also important to note that the partner will not be liable for any losses incurred by the partnership before becoming a partner. However, retirement does not work the same way, as partners can still be liable for losses incurred by the partnership prior to retirement unless discharged by agreement. In general, business owners should carefully review all liability obligations that arise during a general partnership.
As noted above, partners can be parties to an agreement that governs their relationship, but this is not always the case. In the absence of such an agreement, the Partnership Act’s provisions will apply, a non-exhaustive and simple list of which is below:
- Partners will share equally in profits and contribute equally to losses;
- The partnership must indemnify partners for personal liabilities or preservation of the partnership;
- Partners are not entitled to interest on their contributions to the partnership;
- Partners are entitled to take part in the management of the partnership, and
- A majority vote can decide disputes for ordinary matters, but a change in the nature of the business must be unanimous.
As long as the agreement satisfies the above formation requirements, the partnership is protected by the Partnerships Act. Even so, a written agreement can avoid a myriad of disputes not contemplated by the legislation.
An agreement between the partners usually governs dissolution, but the Partnership Act includes a variety of situations when a partnership is dissolved. Generally, it expires if the term has been fixed and surpassed, if the specific purpose for its existence has been terminated, by notice of one partner to the others, and by the death of a partner. Nevertheless, these situations can be excluded by agreement between the partners.
The experienced business lawyers at Bader Law regularly help business owners organize their business structures and draft partnership agreements. Our lawyers review each client’s specific needs and work with them to design contracts that contemplate future events and set out strategies for managing a variety of potential issues. We help clients ranging from small family businesses to large corporations, and our team has the requisite knowledge to address the needs of any organization effectively.
Our business law team also regularly advises clients on corporate transactions, shareholder agreements and disputes, and business organizations. To schedule a consultation with one of our corporate lawyers, call us at 289-652-9092 or contact us online.