This blog post covers the basics of partnership agreements in Ontario and what you should know before you decide to do business with a partner.
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*Disclaimer: this guide is for informational purposes only. It does not constitute legal advice nor create a solicitor-client relationship between the author and reader. As with all legal matters, a lawyer should be properly retained and consulted where legal advice may reasonably be considered necessary.
This blog post covers the basic rules governing business partnerships in Ontario including:
- What Is a Partnership?
- How Do You Form a Partnership?
- What Are the Indicators of a Partnership?
- Do You Need to Register a Partnership?
- What Is a Partnership Liable For?
- What Are the Default Rules Governing Partnerships in Ontario?
- What Is the Difference Between a General Partnership and a Limited Partnership?
- What Is the Difference Between a Partnership and a Joint Venture?
- How Do You Dissolve a Partnership?
- What Happens When a Partnership Is Dissolved?
All of these questions will be answered below.
Ready? Here we go!
1. What Is a Partnership?
Legally speaking, a partnership describes the relationship between two or more persons carrying on business together with the view of making a profit. This is a very broad definition which means a partnership can result from multiple people carrying on business together regardless of their trade, occupation, or profession. When partners carry on business together the partnership is called a firm and the business name they operate under is called the firm name. A partnership may be formed for an undefined amount of time or for a single venture or business opportunity the parties want to exploit together. Unlike a corporation, a partnership is not a separate legal entity from its founders meaning that a partner cannot be an employee of the partnership.
2. How Do You Form a Partnership?
No matter how you describe the relationship with the people you do business with, there is an argument that a partnership has come into existence as soon as the above definition is satisfied. This is true whether you and intend to create a partnership or have taken any additional steps towards describing the relationship as a partnership such as signing a formal partnership agreement or registering the partnership in accordance with Ontario’s Partnerships Act. Because partnerships can arise automatically, and without the intention of creating this type of business relationship, a partnership may be deemed to have arisen through other contractual arrangements such as an independent contractor agreement or between two corporations doing business together. This is why it is important to always have properly drafted contracts in place between you and the other people (or entities) you do business with.
3. What Are the Indicators of a Partnership?
When a dispute arises between two or more parties about whether a partnership exists, the courts will look at the agreement between the parties’ and their conduct to determine whether the relationship as a whole can be described as a partnership. The indicators of a partnership include:
- combining resources such as money, property, effort, knowledge, skill or other assets;
- sharing of profits and losses (strong indicator);
- mutual control or management of the business;
- shared bank accounts; and
- how the parties file their taxes.
To decide if the above indicators result in the creation of a partnership, the court will look at all of the available evidence such as any written agreements between the parties, documents, advertising, correspondence, and witness testimony. The court will look at the evidence as a whole and no single factor will determine whether a partnership has formed.
4. Do You Need to Register a Partnership?
Under the Business Names Act, no one can do business under a name other than their own unless the business name has been registered in accordance with the Act. As such, all of the partners must register the firm name unless the firm name is the full names of all the partners. Failure to properly register the firm name will mean you cannot take legal action to enforce the rights of the partnership and could subject you to a fine of $2,000 for an individual that fails to comply with the Act and $25,000 for a corporation that fails to comply. The business name registration for a partnership must be renewed every five years.
5. What Is a Partnership Liable For?
Every partner is an agent of the firm they are a part of. As a result, they have the power to bind the firm through entering contracts with third parties on the firm’s behalf. This is true whether or not the partner actually has the authority to enter into any agreements, as long as the third party is not aware that the partner cannot bind the firm. The firm will be liable for any act or omission of any of the partners incurred in the course of regular business activities. This includes any property or money a partner receives in the course of doing business that is misappropriated by that partner.
6. What Are the Default Rules Governing Partnerships in Ontario?
There are default rules under the Partnership Act or Limited Partnership Act that will govern the relationship between the partners. These rules provide for the rights and duties of partners such as how profits will be distributed and what happens if the partnership is dissolved (brought to an end). Most of these default rules may be varied by written agreement or the parties’ conduct. In the absence of an express or implied agreement otherwise, the default rules under the Partnership Act include:
- partners share equally in profits and losses;
- partners will indemnify each other for payments and personal liabilities incurred through the ordinary activities of the firm;
- additional payments made by partners beyond their initial contribution will earn interest at a rate of 5%;
- all partners will be responsible for managing the partnership and will not be entitled to remuneration for their services;
- any dispute over regular business activities will be decided by a majority of the partners and those activities outside of regular business activities must be consented to by all partners; and
- no partner may be removed from the partnership by a majority of the partners unless expressly agreed to.
However, there are numerous other rules which will govern the partnership by default. This is another reason why it is important to have a properly drafted partnership agreement tailored to your needs.
7. What Is the Difference Between a General Partnership and a Limited Partnership?
A partnership can also take the form of a limited partnership. In a limited partnership the partners are comprised of at least one “general partner” and one “limited partner”. The general partner is responsible for the management of the partnership while the limited partner contributes capital or assets. Because the limited partner is only liable for the value of the money or property they contribute to the partnership, this partner’s liability is said to be “limited”. Unlike regular partnerships, a limited partnership does not arise automatically. In accordance with the Limited Partnership Act, to create a limited partnership agreement, the parties must identify themselves as a limited partnership and file a declaration that the partnership is limited under the Business Names Act. If they do not, the partnership will not be limited, and the limited partner may be liable to the same extent as any other partner.
8. What Is the Difference Between a Partnership and a Joint Venture?
Despite partnerships arising automatically, the parties may avoid the finding of a partnership by entering into a joint venture agreement instead. A joint venture agreement is a business relationship (usually for a single transaction or undertaking) where the participants combine their resources such as capital investments, knowledge, and skills to carry on business together without creating a partnership. For a joint venture to exist, the parties must have entered into a joint venture agreement through a contract (but not necessarily a written contract). The law is unsettled as to whether a joint venture is a type of partnership or distinct type of legal entity. For this reason, parties that wish to enter into a joint venture agreement should do so explicitly and even still there is no guarantee that a standard partnership will not be found.
9. How Do You Dissolve a Partnership?
A partnership can be dissolved in several different ways depending on the nature of the partnership agreement and the circumstances that may arise throughout the business relationship. For a fixed term partnership, the partnership will dissolve automatically when the term expires. For a single venture or undertaking, the partnership will dissolve when that undertaking is complete. If no time limit is set, any of the partners may dissolve a partnership by giving notice to the other partners. In this case the partnership will be dissolved as of the stated date of dissolution. Absent any agreement to the contrary, the death or insolvency of one of the partners will dissolve a partnership. The partners may collectively agree to dissolve a partnership at any point and a partnership may be dissolved by court order in a variety of circumstances including when the court considers it “just and reasonable” to do so.
10. What Happens When a Partnership is Dissolved?
When a partnership is dissolved the partners are entitled to have the firms assets sold and applied to the debts and liabilities of the firm. Any surplus after the partnership’s debts have been settled will be paid to the partners respectively, factoring in any individual debts the partners may owe to the firm and any agreement between the partners regarding how the surplus is to be distributed. If a fixed term partnership is dissolved prior to the end of the term, the court may order the repayment of any premiums paid by a partner unless the the dissolution is a result of that partner’s misconduct. If the dissolution of a partnership is caused by the death of one of the partners, the default rule is that the deceased partner’s share becomes a debt of the partnership which begins to accrue on the date of dissolution. It is the duty of the surviving partners to wind up the firm and they may be liable for continuing business after the firm has been dissolved.
Because a partnership can arise automatically, it is important to understand when a partnership will be deemed to have arisen and the consequences that could result from an application of the Partnerships Act. Again, because most of the default rules governing partnerships may be amended by written agreement, it is essential to have a properly drafted partnership agreement to avoid any business interruptions or unfairness that could result from the application of the default rules.
If you need legal advice from a small business lawyer, book your free legal consultation with Supply Law today.